Written by: rick awsb

The Bai Zhihao principle is likely the only choice for financial institutions in various countries to respond to the AI industrial revolution.

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"The scale of the Federal Reserve's balance sheet may need to grow in the long term alongside the growth of the economy and financial system."

This is a signal that has been repeatedly conveyed by several Federal Reserve officials recently.

It can be said that this is unprecedented in the history of the Fed — it is clearly different from the past narrative of "expanding the balance sheet — contracting the balance sheet — returning to normal." This may be one of a series of actions taken by the Fed in response to the long-term impacts brought by the AI revolution.

What AI brings is not a new industrial cycle, but likely a superimposition of multiple (Kondratiev) cycles. In such a capital-intensive era, where infrastructure investment is highly irreversible and potentially yields great returns, the real systemic risk does not come from short-term inflation fluctuations, but from interruptions. Computing power, energy, networks, data centers — once forced to stop, the costs are exponential and often irreparable. The essence of expanding the balance sheet is to use the existing system's credit to complete those long-term investments that cannot wait.

The effects of these long-term investments related to AI will ultimately determine the fate of nations (if there are still nations in the post-AI era), and thus ultimately determine the fate of fiat currencies. Therefore, the long-term expansion of the dollar's balance sheet may be the most significant strike in the current global currency war.

Of course, this does not come without a cost. Internally expanding the balance sheet essentially exchanges credit for stability. It inevitably dilutes the credit of the dollar, but if one only sees this aspect, they will misjudge what is happening.

If we understand it through the Bai Zhihao principle, what the Federal Reserve is doing is actually not unfamiliar. The traditional concept of a "lender of last resort" is to provide support to institutions temporarily lacking liquidity during a crisis, preventing localized issues from evolving into systemic collapse. The difference in the Fed's current approach is that it is not waiting to step in after a crisis erupts, but is taking preventive measures before a crisis occurs:

AI, energy, computing power, infrastructure — these new production functions share the common characteristics of being highly capital-intensive, requiring significant upfront investment, and having impacts that are nearly irreversible once interrupted. If we wait for a "crisis" to appear in the traditional form and then have the central bank intervene, it is often too late. Therefore, the role of the Federal Reserve as a lender of last resort has been artificially advanced.

But the problem lies here: if the Federal Reserve continuously assumes this preemptive, normalized role of a lender of last resort, will the credit of the dollar be continuously consumed? The answer is obvious. However, the solution for the U.S. is something we have discussed before: to fend off external threats in order to stabilize internal conditions, embrace cryptocurrency, bypass financial regulations in various countries, and maintain the dollar's status through global financial colonization.

In the context of the great AI era, does the change in the U.S. attitude towards cryptocurrencies seem more reasonable? Thus, a seemingly contradictory but logically consistent structure is formed: on one hand, there is internal balance sheet expansion, taking on the responsibilities of a lender of last resort to stabilize the banking system, treasury market, and financial infrastructure; on the other hand, through cryptocurrencies, stablecoins, and new financial forms, it continuously expands the coverage of the dollar in new markets.

Within a core, controllable system, the U.S. accepts a certain risk of credit dilution in exchange for system stability; in the peripheral, non-U.S. financial systems, it uses stablecoins to expand the use and pricing power of the dollar to hedge against this risk. From this perspective, the Fed's balance sheet expansion is not betting on the dollar's eternal safety, but rather acknowledging the existence of uncertainty and proactively adjusting the position of risk exposure. It bears pressure within a controllable range while expanding in new markets.

Mainstream media and institutions interpret today's various phenomena as signals of the dollar's decline, overlooking the "supersonic tsunami brought by AI" that the global financial system is about to face — (Elon Musk).

The path of the dollar today is likely the most rational choice that a sovereign currency financial system can make in the face of such significant structural changes.

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