Will Trump solve China’s checks, inflation and national debt with cryptocurrency? [한상춘의 국제경제 읽기]

U.S. President-elect Donald Trump, who was invited to the opening bell event announcing the opening of the New York Stock Exchange last weekend, unusually emphasized cryptocurrency over stocks. What is noteworthy is that, unlike the last time, which was mentioned in return for presidential election funds, this time the importance of cryptocurrency was cited as a means of keeping China in check.

Based on his reflections on his first term in office, Trump is carefully pursuing a check on China through high tariffs as soon as his election is confirmed. What matters is how effective it can be. If you look at China’s response method so far, it is in the style of Hammurabi’s lex talionis. In line with the principle of ‘an eye for an eye, a tooth for a tooth,’ we respond with ‘price measures’ and ‘quantity measures with quantity measures.’

The high tariffs that the Trump administration first intends to impose as a means of keeping China in check before its official launch is a typical price surcharge policy. However, if China responds by weakening the yuan, which is a price discount policy aimed at poverty-stricken neighbors, it has the blind spot of passing on the damage from high tariffs to the United States. Even during his first term in office, China devalued the yuan by more than 11%, offsetting the Trump administration’s high tariff burden by more than 70%.

China has been selling U.S. Treasury bonds at a faster rate as the possibility of Trump being elected increases. This is because purchasing Chinese government bonds with proceeds from the sale of U.S. government bonds can, on the one hand, induce a weakening of the yuan and, on the other hand, reduce the national debt burden. Considering that it has been decided to pursue quantitative easing (QE) equivalent to the level of the U.S. financial crisis next year, the speed of yuan depreciation is expected to accelerate.

What is important to note is that even after more than 20 financial easing measures since the 20th Communist Party Congress in October 2022, there has been no economic stimulus effect. However, this time they decided to take quantitative easing one step further. The interest rate on China’s 10-year government bonds fell below 2% per year, falling into a ‘liquidity trap’. This trap, likened to a ‘swamp’, has more severe side effects the stronger the financial easing.

This is also the point that Commerce Secretary nominee Howard Rutnick, who will oversee China affairs in Trump’s second term, is paying attention to. China sees the intention to neutralize high tariffs by causing the yuan to weaken more quickly, and is preparing the ‘Comprehensive Trade Act of 1988’ as a secondary response. This law, called ‘omnibus’, is a law that allows a specific country to artificially devalue its currency. Allows it to be designated as a currency manipulator.

Following high tariffs, China is countering the export controls on high-tech products that were introduced as a means of keeping China in check by controlling the export of rare minerals such as gallium. In game theory, the United States is at a disadvantage in export control confrontations where the outcome (pay-off) varies depending on the degree of substitution. This is because rare minerals are more difficult to replace with third countries than high-tech products.

Trump’s statement at the opening bell event that he would use cryptocurrency as a means of keeping China in check was also made after much deliberation. In order for cryptocurrency to become a means of keeping the public in check, the issue of national value, that is, stable coins, is important. U.S. Treasury Secretary nominee Scott Bessent is opposed to the most obvious plan to introduce digital fiat currency (CBDC). Rather, the position is that the status of the dollar should be strengthened to attract global funds and promote economic growth.

Ways for the country to add value to cryptocurrency without introducing CBDC are ‘reserve asset’ and ‘strategic stockpile’. The former is a plan to replace existing foreign currency assets, such as gold, with cryptocurrency, but it is not easy for the Fed to allow it. This is why ‘Project 2025,’ the guidelines of Trumpnomics 2.0, includes a plan to abolish or reorganize the Fed.

The latter can be pursued by Trump alone. Strategic reserves refer to the possession of key assets that are directly related to national security and the people’s economic life. The Organization for Economic Cooperation and Development (OECD) recommends that member countries hold three months’ worth of crude oil as a strategic reserve asset. If cryptocurrency is judged to be the most effective as a means of keeping China in check, it can be included in the strategic reserve assets.

If cryptocurrency is included as a strategic reserve asset, it can be guaranteed a value similar to that of a stable coin collateralized by the dollar, a fiat currency. If this condition is met and the current Bitcoin holdings of about 200,000 are increased to more than 1 million according to the bill by Cynthia Loomis (Republican Senator, Wyoming), the value of the dollar will rise, which will lead to inflation and national security, another challenge of Trump’s second term in office. Debt can be resolved.

The question is whether China can respond with a digital yuan. Looking at the status of the Yuan as a reserve currency, it is far from lacking the level of ‘eyes and teeth’ to counter the United States. It is on this basis that I cannot fully sympathize with the criticism that Trump’s cryptocurrency pledge will be the largest ‘pump and dump’ in history (inflating the price and then selling it all at once). There is a high probability that this will be a turning point in the trend of cryptocurrency.

2024-12-15 10:28:00