THE TRUE COST OF THE DOLLAR EMPIRE w/ Lyn Alden

Political speeches about trade deficits tend to need 'a clear enemy' (easy scapegoat) to blame, but trade deficits are a 'tangled mess' that resulted from 50 years of system structure, making it hard to assign simple blame ('their fault', 'our fault', 'previous administration's fault', 'nobody's fault')

“in political speeches in particular, you generally want to have a clear like enemy kind of like it's their fault, therefore we're going to fix it. Whereas if you have this kind of tangled mess, it's easy to say it's their fault. It's kind of like saying it's our fault, it's our predecessor's fault, it's part of the system, it's kind of nobody's fault, it's kind of all those answers are partially true. And so it's this big Gordian knot that's been tied over the course of arguably 50 years, uh, if not longer.”

The US represents only 4% of world population and 15% of purchasing power GDP but 25% of nominal world GDP and is 'by far the biggest ledger' globally, creating massive imbalances that come back to hit the US industrial base

“for 4% of the population, 15% of the purchasing power GDP, 25% or so of the nominal GDP of the world and yet by far the biggest ledger and the the imbalances from that um come back and hit us in our industrial base.”

Bitcoin is 'priced in dollars' now, but historical precedent shows currencies can reverse this relationship - the dollar itself was once 'priced in gold' until the dollar system became larger than gold, after which gold became 'priced in dollars', suggesting Bitcoin could eventually price the dollar rather than vice versa at much larger scale.

“people often say, you know, Bitcoin's priced in dollars, therefore Bitcoin is not worth anything. It's kind of a bad argument. I mean, there was a time where the dollar is priced in gold. uh meaning that what was the dollar? The dollar was a a equivalent of a certain amount of gold and eventually the dollar system became so big that when it got you know cut off from gold the dollar system became bigger than gold and now gold's priced in dollars. Generally speaking pricing happens in whatever is the most liquid thing the most sellable money right now that's dollars.”

From 2020-2024, liquidity was the biggest driver of most asset prices (Bitcoin and equities moved together), but other regimes can cause decoupling—for example, stagnant equity margins without dollar shortages could allow Bitcoin to outperform stocks.

“in the 2020 to 2024 environment, liquidity was the biggest driver for most asset prices. It was such a crazy macro environment. uh the liquidity was a you know liquidity always plays a role but it was a bigger than normal role given the roller coaster of macro and printing and and contraction that was happening and so most most kind of liquidity sensitive assets were going up and down together NASDAQ and Bitcoin up NASDAQ and Bitcoin down and what separates them is magnitude um over that multi-year period um now there are other other regimes that can happen where they decouple more firmly and for example something that pressures the margins of stocks um without hurting liquidity is an example of something that could hurt stocks but not really Bitcoin.”

The average consumer won't benefit from reshoring manufacturing through tariffs because they'll pay higher prices for the same products, making the median consumer worse off unless accompanied by real productivity improvements

“the average consumer um is probably not benefiting from the manufacturing jobs but is now paying more for the same product in the US than they would from China or Bangladesh or whatever the case may be”

The eurodollar market refers to dollars held outside the US and represents a third layer of fractional reserve on top of fractional reserve, where foreign banks issue dollar accounts to customers while maintaining only fractional reserves of dollars at US banks, creating 'turtles all the way down' leverage.

“historically it's been called the Euro dollar market which which refers to not just dollars in Europe but any dollars outside of the US basically. Um these are kind of fractional reserve built on fractional reserve. Um because in addition to a bank being a fraction reserve on on as compared to the central bank there are foreign banks that will have they'll they'll issue dollar accounts to their customers and then they have an account say at a US bank which is itself a fraction of their bank and it's kind of turtles all the way down.”

Reducing reserve currency dominance requires 'aikido'—feigning weakness for strength—which is difficult because countries rarely voluntarily give up power, similar to empires not strategically pulling back from oversized borders; it usually happens to them

“that's almost like the like in martial arts it's something like iikido. It's kind of like like feigning weakness for strength. Uh which is hard to do... countries rarely ever voluntarily kind of decide to give up their global reserve currency status. It's kind of like how same thing like an empire rarely decides you know what maybe our border is a little bit too big to realistically defend. Let's pull back while we're good. like let's let's strategically do this instead. It usually kind of happens to them.”

When broad money supply growth stops, asset prices decline sharply across most categories, as shown during 2022 when broad money contracted and equities and other assets performed poorly, demonstrating the system's dependence on continuous credit expansion.

“during parts of 2022 for example the broad money supply contracted. Uh now we saw markets didn't do well. Pretty much any asset uh did pretty poorly.”

Bitcoin and gold benefit from strategic rebalancing of the global reserve system toward neutral reserve assets, and Bitcoin specifically could become more valuable as a central bank reserve asset if the US government adopts it on its balance sheet as part of elevating neutral assets alongside gold.

“he he says gold and cryptocurrencies benefit from this I probably um and so uh he talks about that basically if you if you do kind of reshift global trade uh it it ideally involves elevating neutral reserve assets and he he says gold and cryptocurrencies benefit from this”

The trade deficit became a problem not when it hit an absolute breaking point, but when it accumulated enough political constituency—voters and politicians—willing to elevate it as a serious political issue, driven by populist tension against major imbalances.

“a lot of times when you see academics analyzing the trade deficit, they'll look at kind of numbers in an ivory tower sense and say, 'Oh, there's there's still room to go here. The numbers um are still workable.' But then there's this kind of this there's this real politic or this this populist overlay on top of it where it doesn't have to hit the absolute breaking point to get elevated to become a pretty serious political issue.”

Any sustained trade imbalance tends to develop problems, but they manifest differently across countries - Australia and Canada experience real estate bubbles from capital inflows while the US primarily experiences stock market asset inflation.

“the way I would describe it is that any sustained imbalance tends to have issues. Um, and and and those imbalances uh manifest in different ways. Um, and so um you know it'll it'll it'll show up differently. One thing that both Australia and Canada have in common is that their real estate markets are really kind of bubbled up. Um yeah and and so whereas the US is more the stock market.”

Reshoring US manufacturing faces a compounding problem: even if tariffs work, automation will replace most manufacturing jobs, and US labor costs (including healthcare bureaucracy overhead, the highest per capita healthcare cost in the world) create high barriers to non-automated production compared to lower-cost countries.

“automation also depends on labor economics so for example if you're making textiles in Bangladesh uh where labor is very cheap um you're less likely to automate because labor is so cheap. Whereas, if you're operating in a high labor cost area, you're far more likely to automate because the the ratio wages to to robot costs are marketkedly different.”

The costs of being the global reserve currency issuer are exponential and cumulative over time (outweighing benefits after 50+ years), while benefits remain relatively linear and limited, creating a dynamic where early years show net advantage but later years show net harm—analogous to the sword of Damocles hanging over a king's power.

“there's there's downsides of being in this kind of very powerful position and the work that it takes to maintain it and to have gotten there in the first place compared to living somewhat of a simpler life. And so with the uh global reserve currency uh it does come with a lot of advantages to be the issuer of that world reserve currency but then it's not without costs and um I think one of the downsides is that the costs in some ways are more cumulative than the benefits uh which is that early on the the it's almost all upside. The benefits are very clear and the downsides are marginal and far in the future. Um but then when you play that future out by 50 plus years um the benefits are still fairly linear and limited and yet the costs are kind of exponential and cumulative”

Bitcoin faces headwinds from liabilities-mismatch: most central banks hold reserves to back liabilities (sovereign debt, bank deposits), and because Bitcoin is not used as a liability denominator, it cannot easily match these liability needs, limiting its adoption to sovereign wealth funds (treating it as an investment) rather than central banks (needing it as a backing asset).

“because it's not really used as liabilities, uh that also to some extent limits it its use as an asset. Um and um the mitigant for that is that there's a path dependence which is for example we see it popping up in sovereign wealth funds rather than central banks. uh because nations can say, well, this is an investment. We're treating it like gold where we don't plan to ever really touch this.”

The US has only three options to address the trade deficit: (1) tactical—weaken the dollar temporarily (another Plaza Accord) to create another dollar cycle, which perpetuates the system without solving it, (2) strategic—voluntarily cede partial reserve currency status by elevating neutral assets (gold, Bitcoin) or allowing competitors to lend in their own currencies, or (3) military/political enforcement—which historically is how empires address overextension.

“there's tactical and strategic options. Uh, tactical would be weakening the dollar. Uh, and that was brought up by Steven Meyer in his paper. um something akin to the Plaza Accord uh which which because it's often named after the hotel... to work with trade partners to to weaken the dollar.”

The strategic option to address structural trade deficits is to partially give up reserve currency status by allowing other currencies (like China's yuan) and neutral assets (gold, Bitcoin) to handle a larger share of international transactions and reserves, though countries rarely voluntarily relinquish reserve currency status.

“The other option is to go at it more strategically and say we don't just want another cycle we want to actually end this like 50 plus year period. Um that requires more than just weakening the dollar. That that requires giving up a portion of being the global reserve currency... there is no like you don't have to be the reserve currency or not. I mean there's a spectrum of being the global reserve currency which is for example... 90% of of on on currency trading pairs. We could be 80 or 70% and still be the the plurality the majority actually. Um or for example... 80% of crossber debt is dollars and 20% is everything else. You could have a scenario where 50% is dollars and then the other 50% is everything else combined.”

The trade deficit should be evaluated not just on current account metrics but on what is actually being traded: the US exchanges consumption goods (depreciating) for claims on appreciating financial assets (stocks, bonds, real estate).

“we're buying depreciating assets. We're giving them pieces of our appreciating assets. Uh and therefore, they have future bigger entitlements to our our dividend payments, to our voting rights, to our, you know, our interest expense, whatever the case may be.”

A balanced economy requires not just free trade but matching currency values and incentive structures that don't systematically overvalue one currency relative to underlying trade fundamentals.

“We'd have less imbalances, but that's that's a different type of world... we exist in a fractional reserve system, we'd have less imbalances, but if we were all just using grams of gold as our kind of global shared ledger.”

The US currently buys depreciating consumption goods from the rest of the world while selling them appreciating assets like stock market shares, creating an unfavorable long-term trade where foreigners accumulate growing ownership stakes and future dividend/voting rights while Americans consume non-durable goods.

“So, we're buying depreciating assets. We're giving them pieces of our appreciating assets. Uh and therefore, they have future bigger entitlements to our our dividend payments, to our voting rights, to our, you know, our interest expense, whatever the case may be. Uh and that that's what's flowing to the rest of the world.”

Bitcoin has only occupied one macroeconomic regime during its 16-year history (fiat money expansion cycles with heavy liquidity sensitivity), and if the regime shifts (stagflation, capital repatriation, margin pressure without liquidity crises), Bitcoin's correlation with equities could permanently break and display genuinely different cycle dynamics.

“Most of this kind of bit Bitcoin's 16-year history happened within one particular kind of regime. Uh and and if we enter a pretty different regime, you could get pretty different dynamics as well as just Bitcoin hitting a new scale and therefore having totally different types of of you know, marginal buyers and sellers.”

Steven Meyer (chair of the Council of Economic Advisors) published a paper in November 2024 that outlined Triffin's dilemma, the costs of dollar reserve currency status, the overvaluation problem, de-industrialization, and proposed solutions including tariffs, currency accords, and elevating neutral reserve assets including cryptocurrencies.

“there are different um pockets in the administration which is the case for any administration and some of those pockets get it better than others. So uh you know the top of that list would be uh Trump's um uh chair of the council of economic adviserss Steven. Uh he wrote a paper about this in November 2024 and he outlined a lot of what I've outlined here and what I outlined a lot back in 2020. He kind of talked about Triffin's dilemma. this kind of currency reserve kind of cost. Um kind of point out the issues of the overvalued dollar, the de-industrialization kind of outlined that whole thing.”

A 20-30% currency overvaluation compared to fundamental trade and interest rate differentials is approximately equivalent to profit margins in competitive manufacturing industries (10-20%), making US manufacturers uncompetitive globally unless they are dramatically superior or operate domestically without global competition.

“if you're just 20 to 30% kind of overvalued on a currency basis compared to what you would be based on so most currencies trade on um what the trade deficit's doing and then also interest rate differentials things like that. So there's a handful of fundamental metrics that currencies kind of trade each other on. And if your currency happens to be 20 to 30% overvalued compared to what it otherwise probably would be based on those metrics alone, u in a in a pretty competitive business where profit margins might be 10 or 20%. And you're working at a 10 20 30% currency like you know uh limiter like you're kind of fighting with one hand beside behind your back.”

Fiat currency systems are structurally designed to always grow—they must expand continuously or risk collapse, similar to sharks that must keep swimming or die, or musical chairs where growth only matters when the music stops; in the current system, the music cannot stop without cascading defaults.

“every every fiat currency broadly in every country is growing all the time. It's because that's how their systems are constructed. It's different from a more sound money equitybased system. It's an unsound debt based system and so the way it's structured kind of always has to grow or die. Like some sharks have to keep swimming. Uh people often assume it refers to all sharks. It's not true. Like some sharks can stop swimming and be fine. But there are a subset of sharks that if they stop swimming, they literally die.”

A sustained trade deficit (multiple years) almost universally indicates an economy doing poorly or parts of an economy doing poorly, with exceptions being rare and usually occurring when trade deficits are in inputs (energy, raw materials) rather than finished goods, and when paired with strong demographic and productivity growth (e.g., India).

“a year or two of trade deficit is not a big deal. Nine times out of 10, if you're running a trade deficit for like 5, 10, 15, 20 years, it's usually not an economy that's doing very well. Um or at least parts of the economy.”

Four-year political cycles are too short to implement meaningful trade deficit reductions; the realistic expectation is for an administration to start turning the ship and change public narrative rather than solve the problem, with success being establishing continuity across administrations.

“I mean I don't think they're going to make meaningful like progress in terms of shrinking the trade deficit in in this 4-year period. Um I think like if if somehow it was on me to try to figure this out. My goal would not be we're going to fix it in this term. It'd be I want to be known as the one that that turn that started to turn that ship around slowly and then you know communicated like my successor to hopefully keep doing the same thing and to change maybe the public narrative.”

The Trump administration rushed and 'front-ran' tariff implementation with triple-digit tariffs within months, causing businesses to freeze decision-making because relocation takes years and they cannot plan under such rapid, uncertain policy shifts.

“the issue now, of course, is that we kind of rushed it. We front ran it. We we got tripledigit tariffs in in a matter of months and then businesses kind of froze because they said we literally can't can't do anything right now. We can't even it takes years to relocate. So what do you want us to do?”

The US healthcare-industrial complex, built up as a side effect of reserve currency status and trade deficits, adds cost overhead to US manufacturing that even automation cannot fully overcome, creating another structural barrier to reshoring.

“The US kind of has built that up as a side effect of this global reserve currency status and structural trade deficits which is that that healthc are differential is one of them. We've kind of built up this like you have the military-industrial complex, you have the healthcare insurance complex. these like inefficient complexes have built up uh and then they also make it harder to unwind because part of being able to do things in the US would have be involved having competitive healthcare costs which is yet another problem to fix at the same time.”

Mining cycles should increasingly diminish in importance for Bitcoin price dynamics because the ratio of new coins from mining (relative to existing coins) decreases with each halving, meaning resold existing coins dominate the market supply going forward

“mining is like a smaller ratio of new coins like a smaller share of like coins hitting the market. Obviously the the increasing the biggest uh pool of coins available are resold older coins existing coins. Um so so mining cycles should increasingly diminish”

There is approximately a 20-to-1 ratio between dollar-denominated contractual obligations (~$120 trillion in global dollar debt including offshore eurodollars) and actual base dollars in circulation (~$6 trillion), meaning the system requires continuous velocity of money and velocity of the dollar to function; any shock that disrupts velocity or liquidity causes the system to implode unless central banks expand base money.

“there's 102 trillion in in debt in the US. That does not even count derivatives. So that's just loans and securities. There's something like another 18 trillion in dollar denominated debt outside of the US. So we're not even talking about euro denominated debt or Chinese Juan denominated debt, just dollar debt. It's about 100 trillion 120 trillion I mean and again not including derivatives. Um base dollars in existence under 6 trillion. Uh so you have about a 20 to1 ratio between dollar IUS contractual obligations to to give someone dollars in the future by a specified date and only 6 trillion unlevered dollars.”

The rush to implement triple-digit tariffs within months caused business paralysis because companies cannot relocate manufacturing in months; tariffs should have been gradually and transparently ratcheted up to allow businesses time to adjust and to build negotiating leverage for broader structural reforms.

“the issue now, of course, is that we kind of rushed it. We front ran it. We we got tripledigit tariffs in in a matter of months and then businesses kind of froze because they said we literally can't can't do anything right now. We can't even it takes years to relocate.”

Bitcoin's valuation metrics like 'market cap to onchain cost basis ratio' show Bitcoin as 'somewhat elevated' after March 2024 ETF pump, worked off excess for 7 months returning to low levels, then got elevated again after election pump, but not at multi-year top levels

“In March 2024, Bitcoin had the ETF uh euphoria pump. Um, there are various metrics you can look at. Like I like market cap to onchain cost basis ratio, you know, one of my go-to, but there's other metrics you can look at. It's kind of just a a sanity check for how you fork the the Bitcoin ecosystem is. Uh, it got somewhat elevated in March 2024. It spent like 7 months kind of working that off, then going back down to pretty low levels. And then we got the the election pump. Um, and that brought up to similar levels again where it's not it's not like you fork like one of those multi-year tops, but it's it's a little rich.”

The complexity of the trade deficit problem (involving 50+ years of accumulated imbalances from multiple causative factors) makes it difficult to explain in political speeches without scapegoating, because accurate explanation requires acknowledging shared responsibility (predecessors, systemic design, reserve currency structure) rather than assigning blame to a single enemy.

“I do think it's it's that's one of the downsides is it's very complex and then so usually the ways that it's then explained are incorrect at worst or very incomplete at best... in political speeches in particular, you generally want to have a clear like enemy kind of like it's their fault, therefore we're going to fix it. Whereas if you have this kind of tangled mess, it's easy to say it's their fault. It's kind of like saying it's our fault, it's our predecessor's fault, it's part of the system, it's kind of nobody's fault, it's kind of all those answers are partially true.”

Voluntarily reducing reserve currency dominance requires a martial arts principle of 'feigning weakness for strength' - similar to how empires rarely voluntarily pull back their borders when overextended, countries almost never voluntarily reduce their reserve currency status, as this happens involuntarily when the system breaks.

“but that's almost like the like in martial arts it's something like iikido. It's kind of like like feigning weakness for strength. Uh which is hard to do. Uh most martial arts you want to be aggressive and hit. Uh and so countries rarely ever voluntarily kind of decide to give up their global reserve currency status. It's kind of like how same thing like an empire rarely decides you know what maybe our border is a little bit too big to realistically defend. Let's pull back while we're good. like let's let's strategically do this instead. It usually kind of happens to them.”