The White House’s newly unveiled National Security Strategy looks less like a traditional diplomatic plan and more like a call for global fiscal expansion. For the cryptocurrency market, addicted to the idea of rapid interest rate reductions in the US and around the world, this appears to be a cold shower that no one ordered.
The core of the strategy, signed by President Donald Trump, explicitly advocates an “America First” agenda backed by a major economic and military reorientation both at home and abroad.
Consider the directives: The strategy calls for NATO allies to increase defense spending to 5% of GDP, a significant increase from their long-standing mandate of 2%. Japan and South Korea are also expected to spend more.
“Given President Trump’s insistence on greater burden sharing by Japan and South Korea, we must urge these countries to increase defense spending, focusing on capabilities, including new ones, needed to deter adversaries and protect the First Island Chain,” the strategy says.
He further adds: “We will also tighten and strengthen our military presence in the Western Pacific, while in our relations with Taiwan and Australia we maintain our resolute rhetoric on increased defense spending.”
The document explicitly calls on US allies to spend much more of their gross domestic product on their own defense and for greater US military investment in the Indo-Pacific to strengthen surveillance in that region.
Financing this kind of monumental spending inevitably means more government borrowing or more bond supply around the world, which would raise bond yields, the cost of capital and inflation, making it harder for central banks to cut rates. In fact, rate cuts may have little impact, as increased bond supply will likely keep yields elevated.
Furthermore, increased indebtedness in many of the already heavily indebted advanced nations could increase the risks of a fiscal crisis.
If that weren’t enough, the strategy explicitly states that “the era of mass migration is over.” It means the United States may not import cheap labor at the rate seen in previous years, which could make wages sticky, driving up inflation.
All of this looks like a bullish tailwind for assets considered inflation hedges and safe havens, such as gold. bitcoin Its defenders also present it as “digital gold”, but this year it has not lived up to expectations.
Gold is up 60% this year despite the US 10-year yield remaining stubbornly above 4%, while BTC is now down almost 5% year to date. Only time will tell if it evolves into digital gold in an increasingly fiscally emboldened world.
The Federal Reserve is expected to cut rates by 25 basis points next week, lowering the benchmark rate to 3.5%. But with the safety strategy calling for global expansion, the chances of sharp rate cuts look bleak.
