There is an awful lot wrong with Aaron’s understanding, and most of his argument is just assertions - always qualified with words and phrases like perhaps, maybe, possibly. Assertions that he then treats as facts upon which he builds the rest of his narrative. I might post separately about that, because I took a lot of notes and read the transcript. But the result is quite lengthy. Too much for here.
Here I want to respond to a question @cmartenson posed near the end, when he asked Day about the funding for Tether. Chris said:
“So I’m not clear how the stable coins creates 2 trillion of additional demand. Cause that’s like new money is coming from somewhere when you would still have to, somebody has to buy those in the first place. Right. I mean, outside of tether, which mints them at the tether treasury, right? I don’t know what happens there, but I’m not clear how this creates additional demand. I’ve heard the sense say that, but the mechanism baffles me because if I have money in a money market fund, it’s already in treasuries. If I have money at a bank, it’s already in the bank reserves and those reserves are very typically already housed in treasuries.”
Isn’t it just a Peter-pays-Paul scenario, Chris asks. Day’s response is garbled. But this is something I’ve looked into.
The answer is no, from what I’ve gleaned of the plan. First of all, it’s not Tether that’s printed with no backing, as Day asserts; it’s USD. Fiat USD – stealing from the future – is the base layer for all that follows.
It’s also not true, as Aaron asserts, that “most” of Tether’s backing is “probably” in bitcoin and gold. As I understand it, the bitcoin and gold that Tether holds is from excess bottom line company profit. It is not a part of the backing of issued Tether. However, perhaps absent a formal audit, Tether has made the case that the company is well-capitalized, which means it has additional resources to prop up Tether’s peg to the dollar, should that ever become necessary. It’s another move to encourage confidence.
Tether asserts that it has 1:1 USD for every issued Tether, and holds the vast majority of it in short-term treasuries. Apparently it also hedges those holdings by diversifying some into stock and several crypto-adjacent startups, including a new bitcoin treasury company it owns the majority of, named Twenty-one (XXI). I think Tether also has some Strategy and Metaplanet. Somewhere I read something about percentages and allocations, but I don’t remember where. Having learned something about Tether founder/CEO Paolo Ardoino, I expect he’s being conservatively prudent while taking considered risk to stay above inflation.
This means that there will be no mass exodus from existing Treasuries, nor from bitcoin and gold, in order to buy Tether-backing Treasuries. It’s already backed to the satisfaction of the US government.
What the government is hoping is that by regulating Tether - so that it is assured to back minted coins with USD on the balance sheet and short term Treasuries - more global entities will adopt Tether as the digital version of the dollar that it actually is. It’s an act of formalizing what already exists to give it the stamp of US government approval, thus opening up its use to regulated entities domestically and globally. That obviously dramatically increases Tether’s potential market.
Here’s the thing: when a corporation in, say, Nigeria, buys Tether with Naira to engage in trade with, say, Singapore, that Naira ends up as new value stored in Tbills. That Singaporean merchant might cash out, of course, but as the networked system continues to build, at least some portion of the received Tether will remain as Tether so that the Singaporean can conduct transnational business with some other entity. All of the billions and (eventually, the US hopes) trillions maintained in Tether will represent more newly created US debt sequestered in Tbills that just keep rolling over.
And that’s likely to happen. After all, companies large and small all over the world keep some portion of their operating cash in USD today. It’s not a new thing taking place. All that’s happening is that Tether, because it doesn’t require the buyer to go through a bank or forex – therefore, doesn’t require that the business be bankable – will be available to many millions more people. Lower income people who, perhaps, just want to save their wealth in the most stable of fiat currencies; Tether gives them instant access with no banking privilege needed. So this plan will harvest their wealth to fund the US debt, along with the wealth of larger entities and even nation states who want seamless access to digital dollars.
Like the so-called tariffs, this is another way the US plans to get the world to pay for the restoration of the US economy.
A third target is the bitcoin sovereign fund. The well-known correlation (not uni-directional causation that Aaron posits) of bitcoin’s price rise and tether printing encourages the Administration to imagine that by helping bitcoin to increase in value they can stimulate global demand for Tether – because Tether is widely used as digital dollars for crypto traders, and as bitcoin is about 65% of the crypto universe market cap it receives about the same percent of new allocations by crypto traders.
That is what drives bitcoin’s price – good old demand outstripping supply. Our government just wants to make that as easy as possible, because as bitcoin’s value on the upcoming US balance sheet grows exponentially, it will at least offset the exponential growth in sovereign debt. Trump and company hope it will outstrip the growing debt, reducing the debt-to-gdp ratio. As the ratio drops, the US’ ability to borrow more money increases without causing run-away inflation.
Will it work? I guess we’ll see. I think: perhaps for awhile, but that, too, is going to run out of roadway – probably in a decade or two, when bitcoin saturates the global market’s demand for it as a store of value. In the meantime, I think bitcoin’s going to rip very dramatically up the vertical part of the S-curve of adoption. And apparently so does Trump’s financial brain trust. (Plus, along the way they are pumping their own bitcoin bags.)
