Arthur Hayes

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It turns out that Lizzo, the fat-positive diva, and the economic imbalances of Pax Americana have much in common. Don’t get it twisted, whether you believe copious rolls of human flesh are aesthetically pleasing is irrelevant. However, the metabolic dysfunction caused by obesity is sometimes beautiful but is always deadly. Similarly, the American economy benefits some more than others, but ultimately, intense social disharmony leads to revolution.

The waistline and economic situation of Pax America wasn’t always so distorted. In the mid-20th century, Americans weren’t overly fat, nor was their economy disastrously unbalanced. But over time, the sickness spread.

The food system was hijacked by Big Ag, who created fugazi nutritional guidelines to peddle their processed, delectable, lab-made creations but nutritionally defunct food stuffs. As Americans got fatter and chronically sicker, consuming food devoid of nutrients, Big Pharma stepped up to the plate, creating a myriad of drugs that treated the symptoms but not the causes of metabolic diseases such as diabetes. Unwilling to curtail the influence of the corporates who control the food supply, the narrative shifted to the “fat positive” / “big is beautiful” narratives that told sick fat people it wasn’t the fault of a corrupt system that fed them dogshit, but that they were glorious beings who should be proud of their jelly rolls. The system venerated stars such as Lizzo, an accomplished singer no doubt, but an artist preaching acceptance of a lifestyle sure to lead to a preventable, early, painful, prescription drug-filled death. Lizzo represents the obesity status quo, and the status quo is very profitable for a small set of corporate killers.

The American economy was hijacked by printed money. Before 1913, when the Federal Reserve was created, a financial panic ensued when the amount of credit expanded at a pace too fast compared to supporting cash flows. Bad businesses and some good ones bit the dust, and the economy reset. Credit was extinguished, and the system grew green shoots once again. However, since the spawn of the creature from Jekyll Island, every credit-filled bubble has been met with a torrent of printed money, and the US economy’s imbalances have never truly subsided since the 1930s Great Depression. This is the root cause of the gross trade and financial capital imbalances in Pax Americana, not the rate of tariffs.[1] While the status quo visits inequality, hopelessness, addiction etc. on those plebes that do not own the financial assets that benefit from the printed money gushing forth from the monetary spigots of the empire, it showers riches never known in such quantities ever in civilized human history upon the few masters of the universe who own stocks, bonds, and real estate.

All is not lost; change for the better is possible; however, it can be done in the hard or the easy way.

Pharmacological charlatans have peddled miracle pills that melt away fat for decades. Remember Fen-Phen? No medication has worked; thus, only complex, unpopular, expensive, and unprofitable solutions have been available. Going to the gym, removing cheap processed calories from one’s diet, and eating costly fresh produce grown or raised organically are complex ways to battle the bulge. But even those solutions are not good enough because once locked into the fat suit, your body will adjust your hunger and metabolism to ensure you stay fat. Some scientists say it may take up to seven years to change your body’s metabolism to support a slimmer you. And then the easy button appeared in Denmark.

GLP-1 agonists, which are a class of medications created for treating diabetes, were shown to reduce the desire to eat and consume addictive substances like alcohol and nicotine. Ozempic, Wegovy, Monjaro, etc. are popular drugs which, when taken, cause significant weight loss in a short period. So far, these drugs have proven to be safe enough that some believe a large subset of formerly obese folks will take them for the rest of their lives. Thanks to modern medicine, assuming you can afford it, there is an easy off switch for obesity in the form of a jab or pill. Even Lizzo finally decided dying due to preventable metabolic diseases and jabbed herself with the miracle weight loss drug. Good on you. She probably won’t be invited to stump for Kamala Harris in 2028, though … oh well ;).

Solving America’s trade imbalances have painful and painless solutions. For US politicians, pursuing policies that inflict pain or discomfort upon the median voter is a surefire way to get voted out of office. Previously, the Trump administration sought the hard and painful option. Still, very quickly, they discovered that the median voter has no stomach for higher-priced American goods that might materialize in a decade. They also have no stomach for empty shelves between now and when American-based manufacturers can produce the plethora of goods that the Chinese used to supply. This discoformat was communicated to congress people and senators, especially in Republican districts, and Team Trump backed down and now must find another way to accomplish the same rebalancing. The backtrack from maximalist tariffs is underway, as evidenced by the recently announced 90-day reduction of America-China tariffs to roughly 10% on both sides.

A successful general can backtrack from a flawed strategy and still achieve victory.

The other politically palatable, easy way to rebalance the American trade is to attack the capital account surplus by using various forms of capital controls. These capital controls will act as a tax on foreigners who buy and hold US financial assets. If foreigners, due to a high tax, abstain from buying US financial assets, they also must abstain from selling cheap goods to America. If the foreigner sells cheap goods and buys the assets anyway, then the tax revenue can be passed onto the median voter through stimulus checks or lower income taxes. In that way, Trump can proclaim that he bashed those evil foreigners and delivered lower taxes to the American public. This strategy wins mid-term and presidential elections, and accomplishes the same thing, which is less cheap foreign goods flooding the American consumer market and reshoring manufacturing capacity.

The ultimate consequence of Trump’s shift from pursuing the hard to the easy solution to America’s trade problem is that foreign capital will slowly then suddenly flee US stocks, bonds, and real estate. Subsequently, the dollar will fall relative to the surplus country’s currencies. The problem for the US and specifically US Treasury Secretary Bessent, the BBC — Big Bessent Cock, is who will finance the exponentially growing pile of dogshit US treasury debt if foreigners morph from net buyers to sellers. The problem for surplus country governments and corporations is where to “save” their surplus if they continue to run one. The answer to the former is money printing, the answer to the latter is buying gold and Bitcoin.

The meat of this essay will focus on the mathematical identities of trade, how capital controls will work — The Boiling Frog theory, how these taxes influence capital flows from surplus countries, the ways in which Bessent can overtly and covertly print money to finance the US treasury market, and ultimately why Bitcoin will be the best performing asset during this period of global monetary transformation.

Trade Accounting Identities and Geopolitical Problems

Let’s have a little fun with this satirical example that illustrates the relationship between the trade and capital account.

It’s 2025, and the Trump election reaffirmed the right of little boys to play with action figures again. Mattel is re-launching the He-Man action figure complete with an AR-15 plastic rifle. Toxic Masculinity is back, baby … the toy’s spokesperson is Andrew Tate! Mattel needs to produce one million units at the cheapest price quickly. Because the American manufacturing base is non-existent, Mattel must purchase the dolls from a Chinese factory.

Zhou owns a Guangdong province based manufacturing company that produces cheap as fuck plastic dolls. Zhou agrees to Mattel’s terms, one of which is that he is paid in US dollars. Mattel sends money to Zhou, and the dolls arrive in one month. Wow, that’s quick.

Zhou’s profit margin is 1%. China is super competitive. Because he deals in such volume, the aggregate earnings from fulfilling orders from Mattel and other companies like them are $1 billion.

Zhou must decide what to do with his dollars. He doesn’t want to bring them back into China by changing them into yuan, as there is no productive use for yuan, given the low rates of interest on government and corporate bonds. Also, the bank pays little to no interest on deposits.

Zhou doesn’t appreciate all this anti-China rhetoric, given that he didn’t feel welcome the last time he was in America. His daughter attends UCLA, and she is getting dirty looks because she rolls deep in the latest Phantom drop-top while the American plebes take the LA metro, cough, cough, I mean Uber to class. So even though the U.S. Treasury bond yields are some of the highest government bond yields in the world, he would rather not purchase those if he can help it. Zhou does have a favorable view of Japan, and the long-term government bond yields are much higher than they were. He asks his banker to help him buy Japanese Government Bonds (JGB). The banker informs him that the Japanese government doesn’t want foreigners buying their debt in large quantities because it pushes up the value of the yen, and they want to maintain export competitiveness. The yen would appreciate if Zhou sold dollars to acquire yen with which to buy JGBs.

The JGB market is one of the only markets large enough to absorb his surplus, and Japan don’t want foreigners pushing up the value of their currency. Zhou accepts reality and, begrudgingly, purchases U.S. Treasury bonds with his dollar export earnings.

What is the effect on the US trade and capital account?

US Trade Account:

$1 billion deficit

Zhou’s Bank Account:

$1 billion in cash

Buys

$1 billion treasury bonds

Because that surplus does not go back into China, Japan or anywhere else, but is recycled into American treasury bonds:

US Capital Account:

$1 billion surplus

The moral of this part of the story is that a trade account deficit creates a capital account surplus if no other countries are willing to allow their currencies to appreciate. This is the state of play right now: no market except for the US is big enough or willing to absorb the global trade imbalances. This is why the dollar is strong even though the US issues trillions of debt each year to finance the government. As an aside, many years ago, China asked Japan if it could buy JGBs. Japan said, No, not unless you let us buy Chinese Government bonds (CGB). China said, No, you can’t buy CGBs. Therefore, both countries continued dumping their surplus capital into American financial assets. Any talk about the yuan, yen, or euro replacing the dollar as the global reserve currency under the current global trade setup is nonsense unless China, Japan, or the EU are both willing to open their capital accounts and their financial markets are large enough to absorb the surplus countries’ earnings.

Next, Trump decrees that America must bring back manufacturing and flatten the trade account deficit. His tool of choice, for now, is tariffs. Let’s walk through why tariffs won’t work from a political standpoint.

Mattel sells cheap dolls to little boys. The median little boy’s parents are broke as fuck. The average American household doesn’t have $1,000 of emergency savings. Therefore, if the He Man doll is $20 vs. $10, little Jonny ain’t playing with shit. Under a no-tariff regime, Mattel can sell the doll for $10 as it is produced cheaply in China. But now Trump puts a 100% tariff on Chinese goods. Zhou cannot afford to eat the cost of the tariff, so he passes that onto Mattel. Mattel passes this cost onto the consumer because its profit margin is only 10%. Chinese goods might be cheap, but marketing the toys through TikTok, Instagram, and Google AdWords is expensive since conversion rates are so abysmal.

The doll price jumps to $20. This is too expensive for most families, and they choose to go without. Jonny is a petulant little brat and doesn’t understand why mommy and daddy won’t buy him his favorite gun-toting action figure. Mom and dad bust their ass driving uber and delivering DoorDash and they are just barely able to support the family, and now their little one is throwing a tantrum because Trump decided to make toys more expensive. Will mommy and daddy vote Republican or Democrat in the next election? … before the election they will just diagnose their little one with ADHD and stuff him full of prescription drugs so he shuts the fuck up. The Democrats’ new platform is based on making toys and other goods affordable again by going back to “free trade” policies, which allow China to dump cheap goods into the American market. The Democrats say all the smarty pants degree holding economists agree that “free trade” brings cheap goods to America and sustains the country’s way of life; the subtext is Trump and his advisors are a bunch of stupid uneducated cretins. I think the Democrats will stage a comeback in the 2026 mid-term elections, if this is the state of play.

Can Zhou avoid paying the tariff by moving production of the doll out of China and into a country that faces a lower tariff? Of course, he can.

Zhou has become very rich since the early 2000s, and he began investing in factories in Mexico, Vietnam, Thailand, etc. Zhou begins producing the He-Man doll in those locations and then shipping them into America. The effective tariff declines, and he is able to sell the doll for $12 instead of $20. Mommy and daddy can afford the $2 extra to shut their kid up and avoid addicting their little one early to prescription drugs.

Because Trump is not proposing a single unified tariff on all markets but piecemeal bilateral deals, savvy manufacturers like Zhou will be able to find a route into America that faces a lesser tariff than the headline one placed on China. Team Trump is aware of this, but for geopolitical concerns like whether a nation hosts a US military base, or sells the US critical commodities, or sends young men to fight alongside the US in its forever wars, team Trump will be loath to completely tariff an ally’s economy to death lest they decide they don’t want to play with Team American World Police any longer. Without one tariff for all, there will always be a country or countries that act as trans-shipment arbitrage points. The exact arbitrage mechanisms that allow China to obtain advanced semiconductors and AI chips from Taiwan Semiconductor and NVIDIA, for example, will enable Chinese goods or manufactures ultimately owned by Chinese nationals to avoid the crushingly high tariffs placed on goods shipped directly from China to the US.

Ultimately, the tariffs cannot achieve the goal of a meaningful reduction of America’s trade deficit. The American public won’t wait around and vote Republican for the five to ten years it will take to reshore manufacturing output to such an extent that cheap, plentiful goods return to the shelves. Also, suppose the trade deficit doesn’t dramatically narrow within the next twelve months. In that case, Trump will look silly that his policy hoisted goods inflation on a broke populace for no discernible benefit to ‘Murica.

To repeat, the problem isn’t with tariffs per se; it is that for tariffs to truly work, every nation must face the same rate. There should be no deal-making. There is only one tariff rate; deal with it. Obviously, that doesn’t work when surplus countries are not just “evil” Choyna, but staunch allies such as Japan and Germany. It’s ludicrous to expect Japan to continue hemming in China and Russia from a naval perspective, host tens of thousands of dirty gaijin American troops on the roughly 120 military bases, and have their manufacturing industry tariffed to death.

This is why the 90-day pause will become permanent.

Tax Me Baby

If attacking the trade account deficit is problematic for domestic political and geopolitical reasons, what about focusing on the capital account surplus? Is there a way to dissuade folks from accumulating US financial assets? Yes, and to rich folks educated in the glory of free markets, the method is dirty and vile … it’s called capital controls. To be specific, I am not talking about America forbidding or severely curtailing foreign ownership of financial assets like most nations globally, but rather taxing the holdings of foreigners. Foreigners will be permitted to own most US financial assets in any size, but their value will be continuously taxed at some rate. This tax revenue will then flow back to American plebes through reduced income taxes and other government handouts to ensure their support. The result will be that foreigners continue generating surpluses from selling goods to America and face taxation of their earnings, they reduce exports to the US to avoid paying taxes, or buy another stateless financial asset like gold or Bitcoin.

There are various ways in which foreign capital can be taxed, but for simplicity’s sake, in order to illustrate the effect of taxes, assume that a tax rate per year of 2% is charged on the value of all foreign capital. I’m primarily concerned with foreign portfolio assets, which are liquid stocks, bonds, and property. I am not talking about illiquid property, plants, and equipment like a factory owned by a foreign car maker in Ohio.

Foreign portfolio assets total roughly $33 trillion. Let’s examine the yearly earnings assuming constant prices and no capital decides to leave due to the tax.

I highlighted the last row because the bottom 90% of income earners in the US paid approximately $600 billion in income taxes in 2022. Therefore, Trump could eliminate income taxes for the vast majority of voters by placing a 2% foreign capital tax on stocks, bonds, and property. That is a winning political strategy if I ever saw one.

Let’s examine the effectiveness of this policy vs. using tariffs across two considerations.

Collection Ability:

The US Treasury has complete control over the banking system and financial markets. They might not know precisely who owns what, but they do know if they are an American or foreign entity. Therefore, it is trivial for a financial institution or municipality to levy this tax only on non-American entities that own stocks, bonds, and property.

With a tariff, it is difficult to know precisely where every piece of matter originated from or where the value was added across the supply chain. This is why it is easy to cheat.

One Tax for All:

The tax is meant to aid in the elimination of the net capital account surplus. There is only one rate. If a foreigner doesn’t want to pay the tax, don’t buy American financial assets. They can take their export earnings and reinvest them domestically. It doesn’t necessarily stop an exporter from selling cheap goods into America, so the effects on the amount of traded goods are not felt immediately.

It’s great that capital controls raise revenue that can be used to reduce income taxes, but does it help bring back manufacturing to the US?

Let’s assume that exporters don’t want to pay 2% each year to hold US financial assets. They decide there are better investment opportunities at home, given the net expected returns post tax. They sell their assets and receive dollars. Then sell the dollars and receive their local currency. The net effect is that the dollar weakens and local surplus country currencies appreciate. Eventually, the dollar will weaken over many years, and surplus country currencies like the yen will strengthen substantially. At that point, a product produced in Japan sold to the US will be substantially more expensive in dollar terms, even with no tariffs. This is the fucking point.

American-produced goods have become cheap, and foreign goods have become expensive over time. This process could take decades. But it doesn’t matter because the American voter benefits regardless. Either foreign capital stays, pays the tax, and revenue is used to eliminate income taxes for the vast majority of voters, or foreign capital leaves, and American manufacturing grows, hires more folks at better wages, and the vast majority of voters have better-paying jobs. But either way, the shelves are not immediately empty, nor does goods inflation spike.

Four on the Floor

I’m a global macro DJ. I take the ideas of others, then remix them by adding my own vernacular and style. The standard kick, snare, clap and offbeat hat with a bit of syncopation and swing to generate groovy movement is present in every house track. My drum line beats to the depression of the Brrr button. Hopefully, I can overlay an interesting bassline, harmony, and special effects culminating in Solomun-esque interesting breakdowns punctuated by sick drops in my written prose.

I say that to emphasize that this idea of using capital controls instead of tariffs to narrow America’s trade and capital account imbalances is not a new idea nor my own. During the Bretton Woods negotiations on how the new post-WWII global economy would be structured, Economist Maynard Keynes advocated for a “user fee” on surplus countries’ capital that was recycled into deficit countries’ capital markets as a way to balance trade and capital flows. Most recently Stephen Miran in his essay entitled “A User’s Guide to Restructuring the Global Trading System” published while he was at Hudson Bay Capital spoke about ways in which certain types of fees could be added to foreign ownership and trading of US financial assets as a way to force a rebalancing of capital flows.[2] Another very influential macro analyst who requested to remain nameless has published many essays over the past twelve months on how he believes capital controls are necessary and those who want to be America’s allies will and must pay for them. Michel Pettis, in a recent webinar, speculated that tariffs will not materially reduce the US vs. the World trade deficit and capital account surplus, and his conclusion is that capital controls are coming as the administration realizes it is the only way to actually change the flows in a meaningful way.

I am name-dropping all of these folks to prove a point that the financial intelligentsia from whom Bessent et al. draw ideas from are all advocating for capital controls, not tariffs. The benefit we investors have is watching in real time how the hardline tariff camp led by Howard Lutnick, the Secretary of Commerce, who currently has Trump’s ear, bugle the execution of a reduction of the US imbalances. It appears that the internal battle is already over due to the tariff pivot hastily executed after the financial markets meltdown in early April. The capital control lobby, led by Bessent, is now up to bat.

The picture I painted of the effectiveness of capital controls is as rosy as the investment deck our favorite fake vegan scammer white boy, Sam Bankman-Fried, painted of the financials of FTX / Alameda to a coterie of gullible investors. There are potentially dire consequences resulting from implementing capital controls within Pax Americana’s financial markets. My prediction on how the financial elites and policy makers deal with the fallout from the enactment of capital controls is what gives me confidence Bitcoin’s fiat price ascent will accelerate from right fucking now. This is the crux of my Boiling Frog Theory. Due to the negative effects on American financial assets of capital controls, they will be phased in gradually. Slowly, the global financial markets will come to accept US capital controls as normal and not some heretical idea. Just like how a frog in boiling water doesn’t know he is about to be cooked alive as the water temperature slowly rises.

The Crash That Wasn’t

Foreigners flush with dollars received by selling shit to Americans had no choice but to recycle those dollars into the US stock, bond, and property markets. Below are a few charts that illustrate the outperformance of America’s financial markets as foreign capital plowed in.

The chart directly below is the bedrock of all my analysis. A trade deficit leads to a capital account surplus if you are the reserve currency issuing nation that must open its capital account.

For the following three charts, I’m using the period 2002 to early 2025 because China entered the World Trade Organization in 2002, and early January 2025 was the height of the “Trump is going to fix the world” optimism in US markets.

MSCI US Index (white) has outperformed MSCI World Index (gold) by 148% since 2022: US stock market exceptionalism.

Total marketable US treasury debt (gold) rose by 1,000%, but yields fell slightly on the 10-year US treasury: US bond market exceptionalism.

The US 15–64 working age population (gold) rose only by 14%, but the Cash Shiller National Home Price Index (white) rose by 177%: US housing market exceptionalism. This is quite astounding because the 2008 Global Financial Crisis is included in this dataset.

If foreign capital is taxed, and at the margin they decide that investing in America is no bueno, then mathematically, stock, bond, and property prices must fall. This is a problem for several reasons. If stocks fall, capital gains taxes fall, and these taxes are the marginal revenue driver of the government. If bond prices fall and yields rise, the government interest expense rises as it must continue to issue new bonds to fund the massive deficit and roll over the $36 trillion pile of existing debt. If housing prices fall, middle-class and wealthy baby boomer Americans who own most of the real estate will see their net worth collapse just at the time they need this wealth to fund their multi-decade retirement. These folks will vote out the incumbent political party, the Republicans, in the November 2026 mid-term elections.

Pax Americana is hooked on foreign capital, and if it leaves, as it will if capital controls are hoisted, then it’s bad news bears for the economy. Is there something the politicians, the Federal Reserve, and the Treasury can do to replace foreign capital and keep the financial markets afloat?

Remember that 4/4 kick drum, the Brrr button. Y’all know what the answer is. It’s the same answer as always. If the foreigners won’t supply the dollars, the government will by using its printing press.

These are the policies that will be enacted by the Fed, the Treasury, and Republican legislators to replace foreign capital:

The Fed:

- Stop QT on both mortgage-backed securities (MBS) and treasuries.

- Restart QE for both MBS and treasuries.

- Exempt MBS and treasuries from the supplemental leverage ratio (SLR).

The Treasury:

- Upsizing the amount of treasury buybacks each quarter.

- Continuing to issue a large amount of bills (1yr maturity) over bonds (>10yr maturity).

Republican Legislators:

- End the conservatorship of Fannie Mae and Freddie Mac.

It requires no mental stretch to imagine the Treasury and Republican legislators following orders from Trump, but why would the Fed do what Trump asks? The answer to that question is it’s the wrong question. The Fed is already doing what Trump and Bessent require behind the scenes. Take a gander at this beauty that was flagged by Luke Gromen:

The Fed is reducing its balance sheet. However, it has discretion on how that is done, especially since the policy mandate is a net reduction, not an even reduction across all maturity buckets. Yellen and now Bessent need to fund the government’s gargantuan pile of stinky doo doo debt. Foreigners and the US private sector love buying treasury bills because they are short-duration bonds and pay a yield. Meaning they are a high-yielding cash substitute, preferable to low-yielding bank deposits. But no one wants long-dated, read 10-year and beyond, treasury bonds. The Fed, in order to help Yellen and now Bessent fund the government, did them both a solid by conducting 10-year bond QE. It is very disingenuous of Powell to cite government deficits as a problem but then continue to accommodate said spending by allowing yields to remain at politically acceptable low levels due to the Fed running a printing press to suppress 10-year yields.

Given that Powell is already doing stealth treasury bond QE, he will also accede to the request of the BBC and the powerful commercial banks, read Jamie Dimon, the JP Morgan CEO, to stop QT, resume QE, and grant an SLR exemption. I don’t care how obstinate he sounds at press conferences to Trump’s call for easier monetary conditions. Powell’s ass is sat firmly in the cuck chair, and he ain’t leaving. Now pass the lube.

These measures will provide printed money through various channels to replace foreign capital that will leave as a consequence of capital controls and levying stock, bond, and property prices in the following ways:

Bond prices will rise and yields collapse. The Fed will buy bonds due to its QE policy. The banks will buy bonds because they can do so with infinite leverage, and they will front-run the Fed’s purchases.

The stock market will rise in aggregate due to a lower discount rate applied to their future earnings; some sectors will benefit more than others. Manufacturing companies will benefit the most as the cost of credit falls and its availability rises. This is a direct result of government bond yields falling, and banks having more balance sheet with which to lend to the real economy.

Housing prices will increase because mortgage rates will fall. Fed QE purchase of MBS will lower mortgage rates. And the amount of credit available will increase as Fannie and Freddie rush headlong back into the business of underwriting loans using the implicit government guarantee they possess.

Don’t expect these policies to be enacted overnight. This is a multi-year process, but it must happen; otherwise, US financial markets will collapse. And given that the politicians couldn’t handle one week of financial distress post Liberation Day, they will always press the Brr button in some way, shape or form.

Will They Leave?

Before I finish with my Bitcoin price predictions, the major question one must ask is whether foreign capital will leave. And if so, is there any indication today that confirms this assertion?

My hypothesis, which is shared by many other analysts, is that the rapid strengthening of certain Asian exporter country currencies (e.g. Taiwan and South Korea) over the past few weeks’ points to a reversal of capital flows. And as such, this lends credence to the belief that capital controls are coming and prescient market participants are getting out in advance. In addition, the finance ministers in charge of setting currency policy are allowing their currencies to appreciate as this particular carry trade unwinds.

Asian private capital of corporates, insurers, and pension funds go with the flow. Ever since Asian exporters devalued their currencies post the 1997–1998 Asian financial crisis and ran a policy whereby their currencies were manipulated weaker vs the dollar, Asian private capital has been doing the following:

1. Capital that is earned abroad stays abroad
2. Domestic capital is moved offshore to earn higher rates in primarily the US financial markets

In essence, one giant carry trade is being conducted. Ultimately, either capital must be repatriated to local shareholders in their domestic Asian currencies, or domestic Asian currency liabilities must be satisfied. Therefore, Asian private capital is short in its domestic currencies. In some cases, they borrow domestically because the rates are so low due to the large amount of domestic currency bank deposits created by central banks in order to keep the currency weak. Asian private capital is long higher-yielding US dollar assets like stocks, bonds, and property. They don’t hedge their long dollar short because the state-sponsored policy is that of downward currency price manipulation.

This carry trade is unwound if either or both the yield spread narrows between US and domestic financial assets, and/or Asian currencies begin appreciating vs. the dollar.

Capital controls lower the net return on US financial assets. If the net returns are lowered, and or the market expects the trend to continue due to ever-increasing rates of foreign capital taxation, then Asian private sector capital will begin unwinding their carry trade. They will sell stocks, bonds, and property, then change dollars into domestic Asian currencies. At the margin, this will cause certain US financial assets to fall in price, and Asian currencies to strengthen vs. the dollar.

The first and most crucial battleground on the US asset side will be fought in the US treasury market, especially for 10-year and beyond maturity bonds. This market is the most susceptible to foreign selling as no one wants to own this dogshit. The corresponding battle in the currency market will be in certain Asian exporter currencies.

We got a glimpse of the future over the past few weeks as the Taiwan Dollar (TWD) and South Korean Won (KRW) strengthened in a volatile and dramatic fashion vs. the dollar. These are two bellwethers because both countries deliberately undervalue their currency to export more goods to America. And they both depend on the American security umbrella for their existence as a nation-state. As I will show, both countries’ finance ministries allowed their currencies to appreciate without intervention. They did so because Trump’s message to allies is that you must pay. And Taiwan and South Korea have no choice if they want American military support.

South Korean Won USDKRW (gold) vs. Taiwan Dollar (USDTWD) when the price falls KRW, and TWD strengthen vs. the dollar.

There are many pools of sovereign and private foreign capital that run similar carry trades. And if the Asian private capital flows are reversing, then they must unwind as well. Therefore, even before there is a coherent plan on the size and scope of US capital controls, foreigners with US assets and domestic currency liabilities must begin selling their stocks, bonds, and property and buying back their domestic reporting currencies.

What will ultimately force the Fed, Treasury, and politicians to enact some or all of the money printing measures described earlier is a slow, inexorable rise in the 10-year treasury yield. As the capital repatriation steamroll picks up steam, yields will rise. The financial dysfunction yield strike price is between 4.5% and 5% on the 10-year treasury bond due to the insane amount of leverage embedded in the system. As yields rise, bond market volatility will rise, which we can observe through the MOVE Index. Remember that when that index crosses 140, policy action is immediate and guaranteed. Therefore, even if rising yields act as a break on the stock market rally, Bitcoin will look through that weakness to the eventual acceleration of money printing.

Bloomberg Asia Dollar Index (gold) vs. US 10-year Treasury Bond Yield (white). When the dollar index rises, the local Asian currencies are strengthening, and we see a corresponding move higher in 10-year yields.

The Life Boat

As the Chi-Merica divorce slowly progresses forward, it will lead to a balkanization of the global financial markets. Nation-first monetary policies will necessitate capital controls, and this policy prescription will be implemented everywhere, including America. No matter who you are, it will not be a given that your capital can be invested in the globally highest-yielding, lowest risk asset within the fiat financial system. In the past, gold served as the only liquid linkage between different financial systems, but now Lord Satoshi hath given unto the faithful, BITCOIN!

As long as there is the internet, you will be able to sell fiat for Bitcoin. Even if centralized exchanges are banned, or banks are forbidden from processing Bitcoin-related transactions, you will still be able to exchange fiat for Bitcoin. I am confident of this because of how things work in China. China effectively banned centralized exchanges from operating central limit spot orderbooks since 2017. However, if private individuals want to send each other fiat within the banking system in exchange for Bitcoin outside the banking system, there is nothing the state can do to stop it. The over-the-counter (OTC) Bitcoin markets remain extremely liquid in mainland China. Not even China has banned the private ownership of Bitcoin because it knows it’s counterproductive and impossible. For you Euro-poor-peans, whose governments practice a less effective form of communism than China, don’t expect the European Central Bank (ECB) to learn this lesson without trying. Therefore, get your money out now! Listen to my presentation from the Crypto Finance Conference earlier this year on why capital controls are coming to the EU.

The big question is whether Team Trump will attempt to sink the gold and Bitcoin global capital lifeboats. I say no, because he and his lieutenants believe the post-1971 setup whereby US treasuries were the global reserve asset didn’t benefit the part of America that put them in power. They believe the financialization of America contributed to the fall of military readiness, manufacturing prowess, and social harmony. To rectify this, gold and/or Bitcoin will be elevated to the neutral global reserve asset. Sovereign imbalances will be flattened with Gold, and private ones with Bitcoin.

We know Team Trump views gold positively because it was exempted from tariffs at the outset. We know Team Trump views Bitcoin positively due to the changes initiated at the various regulatory agencies. I believe they may not be precisely what is needed for a true and fair expansion of Bitcoin within Pax Americana, but you cannot deny that the standing down of the alphabet letter agency goon squads isn’t a massive step in the right direction.

Given we know the total amount of foreign portfolio assets is $33 trillion, it then becomes a mental masturbation exercise as to how much of that capital decamps from America and finds its way into Bitcoin. Depending on how quickly you want to finish determines how high a percentage of said assets will flee into Bitcoin.

What if 10% of these assets ($3.3 trillion) fled into Bitcoin over the next few years? At current market prices, exchanges hold roughly $300 billion of Bitcoin. If 10x the amount of capital attempted to squeeze into the market, it would lead to a much greater than a 10x rise in price. That is because the last price is set on the margin. Of course, long-term hodlers would come out of the woodwork to sell their Bitcoin for fiat if the price surged towards $1 million, but a short squeeze of epic proportions would ensue as these portfolio assets migrated to Bitcoin.

The reason why Bitcoin is a superior vessel to move capital around the global financial balkans is because it is a digital bearer asset. To store and transfer wealth does not require an intermediary. Gold, while its 10,000-year history as a stateless capital is great, can only travel in paper form digitally. That means a financial intermediary must be trusted to warehouse your physical gold, and in turn, you trade a digital receipt. These intermediaries will be constrained in what they can and cannot do by financial regulations aimed at sequestering capital domestically so that it can be taxed to pay for nation-first industrial policies. Therefore, unless you are a state or quasi-state actor, gold cannot move fast enough as a physical bearer asset to be useful in a global digital economy. Bitcoin is the perfect and only lifeboat for global capital that must leave America and elsewhere.

Additional bull market fire power will come from the default in real terms of the US on its vast horde of doo doo treasury bonds. A $1,000 face value bond will receive $1,000 at maturity, meaning nominally you will get back your principal. But those $1,000 in the future will buy fewer units of energy. The US began defaulting on the real value of treasuries in earnest starting after the 2008 Global Financial Crisis, when they decided to print their way out of trouble. But the pace of default went into overdrive post-COVID. This trend will accelerate again as Team Trump reflates the American economy by devaluing treasuries vs. hard currencies like gold and Bitcoin. This is the real takeaway from the Liberation Day tariff melodrama. Nominal growth will spike as businesses build back better onshore; however, high single-digital nominal GDP growth will not be matched with high single-digit yields on treasuries and or bank deposits. This inflation will manifest itself in the price of gold and Bitcoin in the future, just like it has done in the past.

This is a chart of the Long-Term US Treasury ETF TLT US in gold terms (gold) vs. the same ETF in Bitcoin terms (red), indexed at 100 starting in 2009. As you can see, treasuries lost 64% and 84% of their value vs. gold and Bitcoin, respectively, from 2021 until the present.

Foreign capital repatriation and the devaluation of the gargantuan stock of US treasuries will be the two catalysts that will power Bitcoin to $1 million sometime between now and 2028. I say 2028, because that is when the next US presidential election occurs and who knows what type of politician will win and what policies they will enact. Maybe by some stroke of divine intervention, the American public is ready to accept the monetary hangover for the profligacy of the last century and extinguish the rotten credit destroying their society. Maybe, I wouldn’t bet on it, but maybe. Therefore, the time is now to make hay while the sun king takes a shine to Bitcoin.

Trading Tactics

At a macro level, I have done my job as the CIO of Maelstrom. I reduced risk, raised fiat, in late January. Then, it progressively dipped back into the market from late March to early April. We went maximum long in terms of outright crypto exposure during the Liberation Day week-long financial markets meltdown. Now is the time to decide what quality shitcoins can outperform Bitcoin in this next leg up in the bull market.

I believe this time around the market will reward shitcoins with real users, who pay real money for a product or service, and the protocol returns some of its profit back to token holders. Two projects stand out, which Maelstrom bought at the lows, they are $PENDLE and $ETHFI. Pendle will own crypto fixed income trading, which, in my view, is the biggest untapped opportunity in the crypto capital markets. Ether.fi will become the American Express of crypto, that is, a proto crypto financial institution catering to wealthy hodlers. I will comment further on these shitcoins in upcoming essays.

Just because I believe Bitcoin is going to $1 million, doesn’t mean there won’t be opportunities to take tactical short positions. Capital controls and money printing are coming, but the road from here to there is rocky. Team Trump is not all in on capital controls, and as such, expect those who believe Trump should take the empire in a different direction to reassert themselves. Trump has no fixed ideology; he responds to constraints and zigzags his way towards the accomplishment of this goal. Therefore, the trend is your friend, until it ain’t.