The White House’s recently unveiled national security strategy reads less like a traditional diplomatic model than a call for global fiscal expansion. For the crypto market, addicted to the idea of rapid interest rate cuts in the United States and around the world, this seems like a cold shower that no one ordered.
The core of the strategy, signed by President Donald Trump, explicitly advocates an “America First” agenda supported by significant economic and military reorientation both domestically and abroad.
Consider the guidelines: The strategy requires NATO allies to increase their defense spending to 5 percent of GDP, a significant increase from their longstanding mandate of 2 percent. Japan and South Korea are also expected to spend more.
“Given President Trump’s insistence on increased burden sharing from Japan and South Korea, we must urge these countries to increase their defense spending, with an emphasis on capabilities – including new capabilities – needed to deter adversaries and protect the First Island Chain,” the strategy states.
He further adds: “We will also strengthen our military presence in the Western Pacific, while in our relations with Taiwan and Australia we maintain our determined rhetoric on increased defense spending. »
The document explicitly calls on U.S. allies to devote a much larger share of their national gross domestic product to their own defense, and to invest more in the U.S. military in the Indo-Pacific to increase vigilance in that region.
Financing this type of monumental spending inevitably means more government borrowing or bond offerings globally, which would drive up 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 the increased bond supply will likely keep yields high.
In addition, increased borrowing by many already heavily indebted advanced countries could increase the risks of a fiscal crisis.
As if that were not enough, the strategy explicitly states that “the era of mass migration is over.” That means the U.S. may not import cheap labor at the rate in previous years, which could make wages sticky and worsen inflation.
This all looks like an upward tailwind for assets seen as inflation hedges and safe havens, like gold. Bitcoin is also touted as “digital gold” by its supporters, but has failed to live up to the hype this year.
Gold has surged 60% this year despite the US 10-year yield remaining stubbornly above 4%, while BTC is now down almost 5% on an annual basis. Only time will tell if it will become digital gold in an increasingly fiscally emboldened world.
The Fed is expected to cut rates by 25 basis points next week, bringing the benchmark rate to 3.5%. But with the security strategy calling for global expansion, the chances of a big rate cut appear low.
