Matthew Pines on the Future of Money, AI, and Monetary Policy

Matthew Pines is the executive director of the Bitcoin Policy institute. Matthew returns to the show to discuss the future of Bitcoin as a strategic reserve, US stablecoin regulation, geopolitics under Trump, monetary policy at the Fed, and much more.

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This episode was recorded on May 16th, 2025

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected]. 

David Beckworth: Welcome to Macro Musings, where each week we pull back the curtain and take a closer look at the most important macroeconomic issues of the past, present, and future. I am your host, David Beckworth, a senior research fellow with the Mercatus Center at George Mason University. I’m glad you decided to join us.

Our guest today is Matthew Pines. Matthew is the executive director of the Bitcoin Policy Institute and a former guest of the show. He returns to tell us about the future of money, AI, and the US role in that future. Matthew, welcome back to the podcast.

Matthew Pines: It’s great to be back.

Beckworth: It’s great to have you on again, and this is very special for me because you are now in a new and exciting role. You’re the executive director of the Bitcoin Policy Institute. Tell us about your new gig and what you guys are doing there.

Matthew’s Career Path and BPI

Pines: Yes, certainly. My career has evolved through a few different twists and turns. I started out as a physics and philosophy major at Hopkins, then did a master’s in public policy at LSE, worked for the National Science Foundation supporting the grant programs in economics for two years, and then stumbled into national security consulting as a security analyst helping the government think about worst case scenarios, assessments of emerging technology, doing operational experimentation. Then became director of intelligence for a geopolitical and cybersecurity risk consultancy, mainly focused on advising multinationals, critical technology companies, frontier AI labs, on essentially their geopolitical risk, aka China.

In parallel, around that same time, post-COVID, I helped this startup think tank get off the ground, Bitcoin Policy Institute, which was a glorified blog, essentially, that was dedicated to this idea that we should have rigorous, thoughtful, objective, nonpartisan research on Bitcoin to advise policymakers. The premise was that Bitcoin wasn’t going to go away, and it was going to be increasingly a serious topic that national leadership, policymakers, staffers, will have to understand, and will then look for objective and good research on. That at the time, the existing space in Bitcoin was people’s blogs and YouTubes and Twitter threads. Low-hanging fruit to pluck. I became a national security fellow for them and have helped mature and expand the organization as an adviser ever since. 

The last few months, post the Donald Trump election, it became very clear that the US government was going to move decisively in a pro-Bitcoin direction. Exactly what that would mean and whether it would mitigate possible risks and maximize a strategic upside motivated me to jump into the deep end of the pool here. BPI is now in a position of significant influence to help shape those conversations and try to steer US policy and global policy on the subject in a manner that we think aligns with our values and our interests.

I’m managing this team now. It’s about 10 full-time staff. We have about 23 fellows, academics, traditional economists, philosophers, folks that are experts in energy systems, folks thinking about the future of money and regulation, and really just having an all-star bench of people really putting out exceptionally high-quality research. The average staffer on these committees, they’re overwhelmed. They don’t necessarily want to trust some lobbyists from an industry association. We’re not an industry association. We have no entanglements. We have no vested equities in any particular business model. 

We’re here to represent Bitcoin as an open-source monetary network. We think it’s going to be an increasingly important issue that policymakers on all sides of the aisle will have to pay attention to. It’s really exciting. I like building small teams. My last consultancy was acquired by a publicly traded cybersecurity company. Now it’s the opportunity to help build something from the ground up. It’s exciting.

Bitcoin and National Security

Beckworth: It’s exciting to see you in this new role. It speaks to your entrepreneurial ability and your interest in this topic. Just to make it very clear to the listeners, the national security angle to Bitcoin, people understand the asset, maybe the money, that side of it, but give us the overview why this is also a national security topic.

Pines: Early on in Bitcoin’s history, the US government was paying close attention to it as a mechanism for illicit finance, Silk Road, money laundering. That evolved in the years since to being a facilitation medium of exchange for cybercriminals to monetize ransomware. Most of the US government’s historical interaction with cryptocurrency, Bitcoin, et cetera, has been through that law enforcement national security lens. When it’s small, it doesn’t have much of a strategic impact. Now that Bitcoin has monetized to a $2 trillion asset class, and done so relatively quickly, there’s more strategic dimensions to Bitcoin now, to Bitcoin policy applications that go beyond just its uses, criminal money, which was its early days. It was a cross-border, censorship-resistant, peer-to-peer payment system, which is good for dissidents and good for criminals. Open systems are open for a reason. This was its early intersection with US government. 

It’s evolved pretty quickly now to the point where you have the president of the United States stating Bitcoin is a strategic asset, calls it digital gold, signs an executive order establishing a strategic Bitcoin reserve. Now, how much of that is rhetoric, a pat on the head to a certain constituency versus how much of that is a signal that’s being sent to national leadership in other countries?

I think now this is the geopolitical era of Bitcoin, where it’s emerging as a neutral reserve asset, still speculative, highly volatile, but is of a sufficient size and scale and institutionalization now. You have sovereign wealth funds acquiring Bitcoin exposure. You have major institutional portfolios recommending it as a portion of their asset class, like the model portfolio from BlackRock, 2% to 5%. Larry Fink’s out there pitching it to sovereign wealth funds. You have major institutional elements of our traditional finance system now getting permission to custody it and to allow it in people’s brokerage accounts.

Bitcoin has moved firmly from the fringes into the core of the system. Now it’s intersecting with all these different prerogatives here. As we’ve seen in the last few months, the mental models that people have about the structure of the global economic and monetary system are being reassessed at the highest levels. That’s going to create second-order shocks and feedback loops in terms of what is a reserve asset. Where do surplus capital flows move on the margin in the next few years? What is the relationship between stablecoins, Bitcoin, the Treasury market, gold, and the US-China competition?

These are no longer theoretical questions, which I was writing about three, four years ago. These are now live empirical questions that national leadership has to understand. That’s what we’re focused on.

Beckworth: I encourage listeners to go back and check out Matthew’s last visit to the show. We discussed some of those issues. He had a nice geoeconomic paper that tied all those threads together. We’ll touch on some of that later today, but a bit more about the BPI, Bitcoin Policy Institute. I know you have some of your affiliated scholars are past podcast guests: Josh Hendrickson is one of them, Will Luther, and you’ve got a number of other great people on your team there are affiliated with your program. Now, you also have a big event coming up. What’s that?

Bitcoin Policy Summit

Pines: Our annual Bitcoin Policy Summit. This is going to be on June 25 at the Ronald Reagan Building and International Trade Center. This is the third year in a row we’ve done this. The first year was essentially two months after the FTX collapse. It was our first event.

Beckworth: Good timing.

Pines: It was basically to try to plant the flag in the ground and say, “Yes, crypto blew up. Crypto was rife with scams and hucksters and fraudsters.” Bitcoin is not that. Bitcoin is different. Bitcoin is serious. Bitcoin is not going to go the way of FTX, which was the prevailing attitude inside DC. We put on this event with serious policymakers, serious experts across human rights, national security, the nature of the monetary system, and had a very serious and sober discussion. That was very successful. That was a template that we followed each year since. This is the third year. We’re expecting it to be even bigger and better.

Now there’s a lot of policymaker attention on this. We’re going to have a full day of not traditional panel jibber-jabber, riffing sessions, which is most conferences, but actually have structured presentations, both from leaders of our current government agencies and senators that sit on relevant committees, folks from the industry, as well as policy experts and technologists that are laying out now, what does this look like in the next six, 12, 24 months here?

The US government has decided to be pro-Bitcoin. What does that really mean? What are the right ways to cash out that rhetorical commitment? What are the implications for our national security and geopolitical interests? How does Bitcoin intersect with our energy system and the emergence of AI? What does this mean for our commitment to liberal values around the world and human rights and financial inclusion? These are live questions, and we want to put serious policy proposals on the table.

Folks can sign up. It’s invitation-only, but we’re bringing together a wide constellation of folks from the industry, but really we’re focused on folks from these different policy communities that have an expertise in, say, energy or the environment or national security or the traditional financial systems, monetary policy, and to ask the question, well, what does Bitcoin mean if you’re assuming Bitcoin’s not going to go away? How is it going to intersect? How can we mitigate potential risks and maximize opportunities here? Yes, it’s going to be an exciting event. We’ll put the link in here. US government employees can attend for free and happy to come up with a discount code for the Macro Musings audience.

Beckworth: Fantastic. There’s a lot of big names there. I saw the list: senators, congressmen, people in the government. I have to do one shout-out to my former colleague, Hester Peirce. She’s the SEC commissioner. I know she got the nickname of “Crypto Mom.” She’s going to be there, a good friend of mine. I’m looking forward to interacting with her and some of the other people, and some of the great ideas that you’ll have presented there.

Pines: Yes, and we’re expecting other very senior US government officials that maybe you would not expect to attend this event. We just haven’t announced them yet, but I think people will be surprised.

Beckworth: I’m looking forward to it. Thank you for inviting me.

Pines: Yes, we’d love to have you.

State of Crypto Legislation

Beckworth: Now, let’s talk about where the US government, where Congress is on legislation. We know Trump’s much more positive or supportive of crypto. We’ve got the GOP. I’m particularly interested in the stablecoin legislation, but there’s other bills going through as well. We have the GENIUS Act, I believe in the Senate. The House has the STABLE Act. Where do we now stand on that front?

Pines: 10,000-foot level view for 2025 legislative agenda on digital assets generally is, first out the gate is stablecoins. Second out the gate is market structure. Then, now emerging as a third legislative priority is codifying the strategic Bitcoin reserve. The policymaker attention has been focused on stablecoins for the last few weeks. There’s been a lot of brouhaha and political drama playing out in the Senate on the GENIUS Act in particular. I think as we speak, there is a resolution to those disagreements.

I’m expecting a cloture vote sometime on Monday, maybe Tuesday of next week, if this is Friday, where it seems like the Dems and the R’s have come to an agreement on that. They want to have a vote before Memorial Day so that they can pass it over to the House, and then get a bipartisan bill on President Trump’s desk before the August recess. That’s the current legislative calendar. There was a bit of a hiccup in the past week. I think that’s resolved. All the signals that I’m hearing is that they’ve basically worked that out.

Stablecoins look like they’re back on track. There’s obviously a lot of in the weeds details associated with who’s going to be permitted to issue such stablecoins, what sorts of KYC, AML, what requirements will be imposed, domestic issuer registration, aka Tether, and as well as bans on government officials having equity stakes or personal involvement in stablecoins, which has been a major point of contention on the Dem side. That’s going to move. 

After that is the market structure bill. That’s a bit more open-ended. We have a whole hour just on the different dynamics at play there. That’s less of a settled piece of legislation. There was a revised version of the FIT21 bill that was introduced a few weeks ago, that basically the upshot is trying to lay out categories of different digital assets and provide a clear set of what are the rules and who’s the regulator for those rules between the SEC and CFTC, to give clarity on what’s a security, what’s not a security, what sort of registration requirements, what sort of disclosure requirements have to be put out there. That’s very necessary because crypto is a Wild West.

There were stories just in the last week of a new token that was launched, and secretly, 10% of the issuance was given to certain backers without that being public. That’s the kind of thing that needs to get cleaned up. You can’t have the insider self-dealing, nontransparent disclosures, rug pulls. This is the thing that the industry has become known for. It’s just rife with criminality and unethical behavior. I think you need clear regulation, you need strong enforcement, and I think this is a necessary piece of legislation.

There’s big divergence of opinion. Again, we’re focused on Bitcoin, so we don’t have a huge dog in the fight of precisely how the government defines a crypto asset security. That’s mainly what Coinbase is focused on and what these venture capital funds are focused on. We think Bitcoin is unique, and it’s already well-regulated, well-established as a commodity. There are some aspects in terms of who regulates the spot markets and the futures markets.

Then there’s emerging questions on Bitcoin that are more technical in terms of other layers of Bitcoin, other Layer 2 systems that interact with the main Bitcoin blockchain that facilitate other types of financial transactions or tokenization of assets that are pegged to the Bitcoin blockchain. That’s where maybe Bitcoin will have an interface with some of these emerging regulatory frameworks. That’s a little bit more up in the air. Then, coming in more recently is this idea of codifying what the president has established as an executive order for a strategic Bitcoin reserve. That’s just now rising in salience among certain members of the Senate, but they’ve been focused on these two major packages.

Beckworth: I should note that we are recording this on May 16. Some of this legislation, the stablecoin ones in particular, may have already been processed. We’ll keep paying attention to it. We’ll check in with you maybe again in the future.

Geoeconomics

Let’s move on and talk about some big developments that are happening, stepping back. Because you’re good at this. You love geoeconomics. That’s the correct term that you specialize in. You do well. You had a recent tweet that really speaks to some of the big issues going on. You said, “The EU is now worried about NATO and reliability of Fed swap lines. Will the USG or US government greenlight stablecoins and negotiates a massive investment deal with UAE on AI and crypto?” Then you have also, “The ECB’s reaction to double down on Euro-CBDC is not a good idea.” There’s a lot going on there. Maybe let’s step back and assess where we are in terms of the trade war. I want to do that because I want to use that as a segue to talk about the dollar’s role.

Is it fair for me to say at this point, it looks like the trade war has dialed down some, a little more predictable maybe, a little less onerous. I think in some sense, Trump has pushed hard, he’s hit the wall. He realized there’s some counter pressures from markets, from big players like China. Is that a fair assessment where we are on the trade war? What would you add to that?

Pines: Yes, I can go tactical, and then I’ll zoom out. The tactical read of the situation is you have to read the court politics of the Trump policy apparatus. That explains, I think, this whole dynamic, which was you had two broad camps. You had the technocratic Miran/Bessent camp, and then you had the punch-everyone-in-the-face and flip-the-table-over and maybe even collect-tariff-revenues camp of Lutnick/Navarro. You can just, I think, imagine the scene before Liberation Day where they’re considering two courses of action. One’s being pitched by Bessent, one’s being pitched by Lutnick. They’re very different personality types. They have very different mien, different ways of being.

I think you can imagine Trump being inclined to say, “Hey, let’s go with the Lutnick. He seems like he knows what he’s doing. He’s confident. He speaks like me.” They went with that approach, but Bessent’s plan was always in the background and Bessent’s plan, which was forecast going back to the Manhattan Institute speech that he gave and then Miran, with his white paper, which was basically just integrating a lot of other stuff, including from Zoltan Pozsar, that was broadly like a forward guidance approach to tariffs that were geopolitically tiered, where there’d be red, yellow, green zones. Then there would be a clear ratchet every month of increases and to maximize bargaining pressure, all with the fundamental objective of containing China and reorganizing a tech tariff and security zone to re-underwrite the American-led system. That was the vision, you could say. 

What was implemented post-Liberation Day was not that. It was, basically, a fortress America. It was, we’re going to smack everyone in the face, and we’re going to try to do a bunch of these deals, maximum uncertainty. I think you had the chaos, and then the Treasury market started getting wobbly. The move index went to 140. Then Bessent gets calls from everybody, and he gets on a plane to Mar-a-Lago and convinces Trump to let him take the wheel. Then Bessent started giving us a bunch of speeches, including mentioning of Treasury buybacks, and that brings the move index down. Then, ultimately, they have a few of these wins come together. Then, ultimately, the pivot was the Geneva meeting, where they established the mechanism with China deescalate. Because we’re effectively at a full-on embargo with China, when you have tariff 140%.

Beckworth: Yes, that’s massive.

Pines: Yes, where it was like, “Okay, that’s mutually assured economic destruction there.” Everyone had to walk back from the brink. That’s, I think, the read of the situation. We have this 90-day pause while they try to line up all these deals. I think the trade war, though, is just one element of this larger reordering that the Trump administration is trying to execute, sometimes with more effectiveness than others. It’s principally being driven by China. That’s it.

If you have conversations with folks inside the Defense Department, the intelligence community, “the deep state,” there is a five-alarm panic at China right now. The pace at which they’ve climbed value chains, their techno-industrial expansion. They match and exceed us in almost every single military domain except for one. They have been able to basically jump over most of the AI tech supply chain roadblocks we’ve thrown in their way. They are not just a peer competitor on the military front, but peer competitor across all these different domains.

There’s a camp inside the Trump administration that has this view that this is a now-or-never time to do this confrontation, and try to reset the terms of the global system in a way that is recognizing our current fragilities and vulnerabilities. We have a hollowed-out defense industrial base. We have a massive political division. We have massive deficits. Those are not exactly strengths to confront a peer competitor with. 

You could say, one view of what this is, is essentially a more explicit demarcation of, again, the security and monetary zone. When security zones change, monetary zones change. The monetary zone that has been in place really since the ’50s and ’60s, as the Cold War got going, was this eurodollar system that increasingly started to recycle petrodollar surpluses into Treasury securities. Then we went off the gold standard, and then Treasury securities became the foundational collateral in that global offshore dollar system. And you’ve had Lev Menand talk about the love-hate relationship with that system and the instabilities it generated. 

Fundamentally, it was a global system where everyone used Treasury securities. Russia used it. China used it. It was a global system, especially post-Soviet collapse, where we were the hegemon underwriting global trade. We would become the consumer of last resort and become the source of final demand for these producing countries that allowed China to enter into the global economy and unlock a billion people’s labor. That hypercharged this era of globalization, which was finally underwritten by a geopolitical arrangement, and a security zone that was effectively global. They’re like little demarcations—North Korea, Iran—not everyone was in that system, but most people were in that system.

Then first Russia comes out and says, “No, we’re not going to be in that system anymore. We’re going to invade Ukraine. Then we freeze their reserves and kick them out of SWIFT.” Then, boom, they’re on their own system now. It’s not that great, but they’re independent now of effectively the dollar system for the most part. China’s helping that, obviously. China is stronger than Russia in almost every domain. They don’t have to just punch us in the mouth. They can subtly try to take over the global trading and financial system from within.

That’s the fundamental dynamic here is an acute anxiety among the national security and the folks that have presided over this global system for the past few decades. They look at China and they realize that they’ve met their match. It’s a now-or-never moment to try to lock in a certain new arrangement before war, basically.

Beckworth: I think it’s fair to say Trump realized he met his match going up against China because they have market power, too, a lot of market power. I guess you’ve painted this picture, which it’s a very nice vision of maybe what the ideal was, because we’ve gone after everybody, not just China. We’re going after Canada, Mexico. In my mind, if we want to fight China, we need all our allies on our side. We need a unified team. You’re suggesting that probably wasn’t the original vision of some people. The vision was, let’s do what we can to isolate or get at China. Is that fair?

Pines: There’s this debate, different wings of the camps that both recognize the strategic challenge of China, but have different solutions. The Biden wing or the associated Biden national security wing represented by, say, Kurt Campbell and Rush Doshi, who was the senior national security official for China under Biden. They’ve come out in a Foreign Affairs piece that was the contra-Trump strategic orientation, which essentially using a lattice work of our allies essentially as platforms to mitigate our weaknesses. We don’t have the defense capacity that we used to. We can’t make the ships that we used to. We can’t churn out the missiles that we used to.

Guess what? The South Koreans can, the Japanese can, the Taiwanese to a certain extent can, the Swedish can, the Norwegians can. If we have a coalition of allied countries that effectively represent, what you could call the greater Oceania, liberal Oceania, somewhat maritime commercial powers, liberal democracies, advanced economies with lots of different technical specializations. If we can link them together in a web and use them essentially as platforms, where we have trade agreements, security agreements, technology transfer agreements, collectively, we will definitely outweigh China by itself and box China in. That’s the Rush Doshi argument.

Given that framing, they want to start allies first. Allies get better deals. You want to entice the allies in. Finally, it’s a mix of how much is inducement versus how much is coercion? How much do you think about the international system as fundamentally hierarchical versus fundamentally, we’re friends? We all go to the same Atlantic Council, Munich Security Conference meetings. You don’t want to treat the Japanese delegation like they’re fundamentally subservient to you.

I think Trump views the world system, rightly or wrongly, as fundamentally hierarchical, no permanent interest, no permanent friends. I think he views the Japanese and the South Koreans and the Taiwanese as effectively subordinate in this hierarchical system. Given that, it explains why now that we’ve done this walk-back in the post-Geneva mechanism, why it almost looks like China has a better deal right now than Japan does.

Beckworth: Right.

Pines: It seems counterintuitive if you’re the Rush Doshi/Kurt Campbell camp of, “No, we need to make sure that the allies get a better deal to keep them in our camp.” Whereas, Trump views them as, “Well, they’re fundamentally entirely dependent on us either for dollar liquidity, for swap lines, for our nuclear umbrella, our garrisons of troops there, that finally they don’t get a seat at the high table. They get rules dictated to them. Therefore, I can impose more pain and more losses on them than I can on China. Of course, I’ll have to deal better with China. They can force me to give them a better deal. Japan can’t force me to give them a better deal.”

“The people that are underneath me in the global system essentially have to take it. The folks at the high table that have raw power, can push back, they’ll get the new deal.” This is a rearrangement more back to 19th-century style, great power politics, as opposed to this liberal international system that’s emerged in the Cold War era, the COCOM committees, et cetera, which was, “Okay, we’re going to have a mesh of aligned democratic nations that will stitch together this economic insecurity zone in the interest of democracy and liberalism.”

That seems to be decaying. At least it’s not the driving strategic logic of Trump’s moves, which is fundamentally just raw power-based. It’s a view of the international system. Fundamentally, it’s like a bunch of competing mafias. There’s the high table of the different capital regimes, and they’re going to get together, and they’re going to write the rules to divide up territory. Fundamentally, if you’re just a lieutenant in that system, you don’t get the seat at the high table. Again, I’m an analyst, objectively viewing this.

Beckworth: You’re being objective.

Pines: People have certain moral and political views.

Beckworth: You’re giving positive analysis. I’ll give my normative analysis. I think that’s, in the long run, misguided. I think in the long run, North America, the factory, it’s Canada, the US and Mexico, we want us working together to produce whatever it is we can to fight off our challenges overseas.

I guess just more generally, I had this conversation with Scott Lincicome from Cato, he’s big pro-globalization guy. I asked him, I said, “Do you think in the long run that this history, the long arc of history bends toward more globalization, more markets?” He goes, “Yes, the forces are there. In fact, in the rest of the world, they are still playing this liberal order, multicountry free trade deals.” My suspicion is that once Trump and his crew are gone, we’ll still have China to contend with. Maybe we’ll revert somewhat back.

The Dollar’s Future

Let’s shift gears from geoeconomics to maybe a narrower topic or application of that, that is the dollar. You know I like to talk about the dollar, dollar dominance, king dollar. Let’s go there with it. Let’s talk about where money is going in the near term here with the dollar. Maybe later we’ll go to maybe the longer-term perspective. When the Liberation Day took off, we saw a lot of people just choking and crying and beside themselves, the dollar’s days are numbered. There were some unusual developments. We saw the dollar’s value fall and Treasury yields go up. Usually, they move together. Usually, that’s a sign of an emerging economy, currency crashing.

Here we are on the other side of this reprieve, this 90-day hold, maybe it’ll be longer. You know what? If you look at the dollar’s value, how much has come down, it’s still way up compared to, say, 2014. Right now, it’s about where it was in 2022. If you look at it compared to 2014, we’re still up 20%, Treasury yields are 4.3, 4.4. To me, it’s not an earth-shattering change. Yes, there’s some tinkering on the margins. In my view, and this is where I want to go with you, I think people understandably got shook up by Liberation Day, but they overplayed the implications for the dollar.

I think the reach of the dollar is so pervasive, it’s so established, it’s just really hard to find another competitor to scale up to that. If countries like China and Japan were to suddenly sell all their Treasuries, they would probably take as much of a loss as we would, because the market would front-run them as well. More generally, the critique of Trump destabilizing the dollar looks at the trade war. I think a probably more lasting consequential development is his promotion of stablecoins.

I bring this up because last week, I was at Hoover Monetary Policy Conference, and Luis Garicano, he’s from the London School of Economics, he had this really compelling presentation about the future of stablecoins in Europe. He basically said the Europeans are terrified of dollar stablecoins, because in the US, our approach is to let the private sector flourish, let fintech take off. They’re worried about dollar stablecoins coming into Europe. Then they’re taking the other approach. They’re highly regulating stablecoins to the point it’s not really profitable to do it, and they’re pushing the CBDC from the ECB.

They see the writing on the wall. This is not going to go well for them. He says, “Look, if this goes where I think it’s going to go, the ECB is actually going to lose influence over its own economy, globally. The dollar is going to get actually stronger. If anything, the Federal Reserve’s reach will get stronger because when it hits monetary conditions here, it’s going to affect Europe.” I guess as I’m stepping back, I’m like, “Man, I think we may have misread the long-term dollar implications of President Trump.” The trade war is just one piece of the puzzle. I think a small piece, I think a bigger, more important piece is his promotion of stablecoins. Am I reading that wrong, or what would you say?

Pines: No, you’re reading it exactly correctly. There’s different ways of thinking about the strength of the dollar, as the DXY, as a trade-weighted measure value, as a network, meaning how many offshore dollar balance sheets exist, and what’s their relative elasticity in a global economy as it expands and contracts? Is it moving proportional to demand for treasury securities as underlying collateral, as we move from a LIBOR to a SOFR standard?

The technical plumbing of how the dollar system works has been engineered in a certain way to structurally embed demand for Treasury assets. Then balance sheets that need to expand to facilitate the intermediation of those financial and trade flows have to be denominated in dollars. There’s a dollar network that’s a function of those dynamics. There’s a strength of the dollar system is, well, are those balance sheets continuing to absorb Treasury securities effectively? Are most trade contracts denominated in dollars? Are they settled in dollars that clear through chips, et cetera? That’s one measure.

Then there’s just the savings vehicle for global surpluses, especially national savings, and sovereign wealth funds, and national reserves. Are countries on the margin shifting away from Treasury securities? I think there’s a mixed bag there. I think it’s very clear that China, for example, stopped marginally accumulating reserves in 2014. Obviously, Russia is no longer going to accumulate any more of those. Even the Gulf countries, it seems like they have more leverage now to not be forced to buy Treasury securities with their surpluses, but get deals to get, essentially, equity in our techno-industrial champions and accumulate GPUs for their own AI techno-stacks in their countries.

They’re recycling dollar surpluses into AI, effectively, and other emerging technologies. Stablecoins are critical to expand the power of the dollar in two fundamental ways, recognizing that, on the one hand, because we’re essentially going to have to print 6%, 7%, 8% of GDP of peacetime, nonrecessionary deficits, and we’re increasingly being forced on the short end through activist Treasury issuance, which is even tying Bessent’s hands at the moment. They have to use all these technocratic tweaks to keep the long end from blowing out. That’s not a position of strength.

That, you could say, is a fragility of the dollar system, the fragility of the Treasury market, all these repo facilities, all the different backdoor QE we do through Bank of Japan, for example. Those are still features that are weaknesses or fragilities in the dollar system. Stablecoins, they represent one of these emerging new tools that helps strengthen that system. One, it broadens the access to dollar rails that don’t have to go through a correspondent banking system, that is probably going through, in many countries, a corrupt, somewhat unstable banking system. Now you can have crypto dollar rails that penetrate direct to the end user and disintermediate a lot of those local financial institutions.

Then the TBAC, the Treasury Borrowing Advisory Committee, just did a report, per the request, the Treasury Department, they released, I think, at the end of April, specifically focused on digital money and stablecoins. They made the forecast that premised on something like the GENIUS Act passing. They forecast the total expansion of the stablecoin issuers to 2 trillion by 2028, from 250 billion roughly now, which is 8.1 times from here in three years.

Beckworth: That’s huge.

Pines: Yes. The implication there for the Treasury market, T-bills, represent maybe $114, $130 billion right now. On those balance sheets, that’ll go up to $1 trillion. The total size of the T-bill markets may be $6 trillion now. A meaningful fraction of the total T-bill market will be absorbed by stablecoin issuers expanding around the world. They did analysis of what would that have an effect versus the onshore versus the offshore dollar system, because as you mentioned, certain countries will be affected differently than others based off of their domestic banking and regulatory environment.

The domestic onshore system probably won’t be affected that much by stablecoins. We have Venmo, we have PayPal, we have Zelle, especially if they’re not interest-bearing stablecoins, which is what the GENIUS Act will prohibit. I think this GENIUS Act bill will also prevent Meta and the big tech giants from issuing stablecoins. They already have Google Pay and Apple Pay. Some have Alipay. Stablecoins don’t have that much of a niche in the retail side on the domestic side. On the commercial side, wholesale clearing, tokenization, that’ll still be a big thing.

Beckworth: Cross-border payments, that’s big.

Pines: Cross-border payments, again, going back to geopolitics, part of the thing is a 5% tax on remittances that’s easier to enforce through highly regulated stablecoins, et cetera. Then expansion of these balance sheets will, I think, expand the dollar network, improve demand for US Treasury securities, depending on how you regulate their high-quality liquid asset collateral. I think the GENIUS Act specifies less than 90-day maturities. If you’re forced into issuing more at the short end, and essentially stablecoins become more like money markets, but they can now bring more and more people into the dollar system.

That’s, basically, been my argument there for a while now. I wrote my first white paper in 2021 about this exact point, and in particular, pointing to the flywheel between Bitcoin and stablecoins, and that if you back out, what’s the implied price of Bitcoin by this Treasury estimate of the expansion of stablecoins? You could do lots of different assumptions, but somewhere it implies roughly $300,000 to $800,000 Bitcoin price.

Stablecoin Use Cases

Beckworth: Wow. Let me just quickly go back to stablecoin to make sure our listeners know what it means. I think most of them do, but what are the use cases? I read an article, Elon Musk is using stablecoins to transfer earnings from Starlink revenues overseas back into the US, so cross-border payments. Stablecoin is a legitimate transaction asset. Many crypto assets, more speculative at this point, but stablecoins, literally, they facilitate trade and payment. Is that the key way to think about a stablecoin?

Pines: Yes. It’s just a dollar token that is the liability of a certain issuer, in this case, Tether, Circle, or other stablecoin issuers that essentially are reserving that IOU with liquid paper. Those tokens, instead of being traded on some offshore eurodollar bank’s balance sheet, it’s being traded on a digital currency network, Tron or Ethereum.

The use cases are broadening much further than intermediating transactions, say, on crypto exchanges, where you buy Bitcoin and other digital assets using a stablecoin, which has been its main use case to date, which is why the relationship between the spot dollar price of Bitcoin directly correlates to the amount of stablecoins in issuance, because if Bitcoin is 10 times larger, then there’s 10 times as much stablecoins you would need to intermediate that in the crypto economy.

Tether’s getting into, for example, issuing lines of credit to facilitate oil trade already. They’ve been exploring that. There is also an increasing attention paid to tokenization on these sorts of platforms. I think we’re going to see an expansion, in particular, with the acceleration of AI. We’re not there yet, but we’re about to hit another inflection point with the economically meaningful performance of agents, where, okay, you have a bunch of agents conducting economic activities for you.

The agents don’t have a bank account, but they can easily hold a crypto wallet address, and they can do micropayments a thousand times a minute to trade with other AI agents for other services. You can imagine an economy not too long from now where you do have economically meaningful agents that are transacting using stablecoins and maybe even reserving some of their savings in Bitcoin. It seems like a sort of fantasy—

Beckworth: It does. Some sort of techno—

Pines: —or some sort of techno novelists. We’re not that far away from that.

Beckworth: That’s fascinating what you just shared about the Treasury Borrowing Advisory Committee, TBAC, that they foresee a sizable increase in the demand for Treasury bills because the other problem we have, actually, you outlined this too, is that we have a problem with deficits in this country. Fundamentally, that’s one of the big problems we need to solve in our country. It’s going to solve a lot of other problems for us.

If we have this new demand for Treasury securities, it’s just going to help us kick the can down the road to another day. Because if there’s this increased demand, it’s going to lower financing costs for the US government. Lower financing costs, Congress doesn’t face these hard tradeoffs. Even now, our 10-year Treasury is 4.3, 4.4. That’s not that much given all the debt we accumulated during the pandemic and as far as I can see, more deficits. What you’re telling me is we’re going to get more demand for Treasuries, and therefore we’re probably not going to solve our debt problem anytime soon.

Pines: Yes. This is a larger question. I don’t think stablecoins are the one weird trick that’s going to fix this. This is a much more fundamental macro question about the path of our deficits, which right now, like ceteris paribus are going to blow up the system. When you have your interest costs more than your defense budget, when you have to just basically refinance this massive debt load of the next few years, it’s going to squeeze out other political priorities, and you’re going to get to a political crisis. It’s forcing geopolitical expenditures of capital, meaning geopolitical capital. Meaning, we’re having these conversations with Japan about this.

The headlines every few days are about, we’re discussing foreign exchange policy between Ishiba and Trump, and that’s all about basically, well, are we going to impose losses on people? We have to finance a lot of these strategic priorities, domestic reinvestment, boomer retirements, social security, ballooning medical costs, rising student debt, the fact that most millennials can’t afford cost of living, raising families. This are major pathologies in the current economic monetary framework, and that we basically papered over by just printing deficits. That’s been the political trick. Ultimately, though, you have to figure out, okay, who’s going to eat those losses if you’re going to have to inflate that debt.

Beckworth: It’s entitlement reform. That’s the ultimate answer. That’s the meaningful answer.

Pines: In the short term, it’s, hey, I can go to Japan and say, hey, you’ve got $150 billion in just basically overnight cash sitting at the FEMA repo facility. It would be nice if that would move out to 30-year or maybe even 50-year bonds. You’ve got to twist some elbows to do that.

Beckworth: You could do that. I think it’s dangerous.

Pines: The last point I’ll say is, in the ’30s, when you get to these moments of crisis, ultimately, sovereigns never default. They only devalue. There we devalued the gold content of the dollar. We’re not on the dollar standard anymore. We’re not on the gold standard anymore. We’re on the Treasury standard. Effectively, we have to devalue the Treasury market relative to other assets. My thesis is that we’re going to do that. It’s just a question of who’s going to eat that pain. Given the current structure of the system, they’re going to force foreign pools of capital who they can force to eat those losses. They’re going to try to do that.

Then they’re going to try to do deals to re-underwrite the American economic and security zone. My whole pitch with Bitcoin stuff has been, okay, well, in that sort of system, if you do that play, gold’s going to run. It has been running. It could run a lot further. Guess who’s been accumulating gold? China, Russia, most of our rivals in Eurasia, even India, which is a balancing power and the Middle East, they’ve been accumulating gold. If you actually do the analysis right now apples to apples, America, including our national reserves, ETFs, and personal holdings, we have about 8% to 10% of the above-ground gold stack and a total market cap of take $20 trillion.

If you do the same analysis for Bitcoin, America, collectively, we have about 30% to 40% of all the available Bitcoin supply. My simple argument has been, okay, if you’re going to do this whole play—there’s a separate argument whether that’s the right play to do—if you’re going to do the play, and gold’s going to run, if you’re going to devalue the Treasury market and monetize hard assets, gold’s going to run. You’re going to bring gold more into the global economy to settle, say, East-West trade that becomes increasingly fragmented into these blocks. China’s going to win. Russia’s going to win. The Middle East is going to win. America’s going to end up a bit like a net loser.

My whole pitch has been, okay, you do that, but Bitcoin’s there, $2 trillion, 10 times smaller. It won’t take a lot to 10 times Bitcoin. Again, we represent Bitcoin Policy Institute. We think that’s a good thing, but people have different views on that matter. Just objectively speaking, if you have a 4-to-1 ratio relative to these different hard assets, and you can probably make one of those assets move much faster than the other one, and you know that your rivals have been accumulating the other asset, I don’t know. The strategic logic is, well, you benefit much more to having Bitcoin run relative to gold. That might be a thing. This is a conversation. I’m not just spewing here. There’s folks inside the intelligence community that are very well aware of this.

Beckworth: Yes. There’s many ways to skin this cat. Devaluing Treasuries, I think another way is simply running higher inflation in the US. That’s another way to pay the bill, an inflation tax. I hope we don’t get to the place where we’re forcing foreign investors to effectively default on what they’re holding and take on longer securities.

Pines: I think we’re about to impose capital fees, right, essentially?

Beckworth: Do you think that’s really in the works?

Pines: Yes. I would expect to see a portfolio interest exemption change, where foreign holdings of your Treasury securities’ interest is going to get—

Beckworth: That would be shocking, I think, to Treasury markets if that happens.

Pines: I think it’s going to happen in the next two months.

Future of Money

Beckworth: Okay. Let’s move on then from the current state of money. We could probably spend the rest of our time on this, but we have a little time left. I’m talking about the long future of money. What’s going to happen many years going forward and maybe along several dimensions? What do you think, just in general, is the future of money, of payments well past this Trump period, well past whatever the shocks we’re going through now, where do you see money ending up?

Pines: I’d say I start with the premise that we’re going to become more of a digital civilization, but we’re going to be a fragmented digital civilization. Fundamentally, how those fragments form will be driven by the present evolution of geopolitics. Who can enforce their rules on a certain sphere of digital influence? There’s maybe three permutations here. There’s a permutation, which is essentially just the US and China block, where from the bottom up, you have almost a self-contained techno-industrial digital currency stack that on the Western side is built at the foundational layer, energy in the Middle East, compute built out between, say, Saudi and the Emirates, with AI tech giants distributing that intelligence. Our energy network and our compute network is the substrate for digital economic and trade network that’s intermediated through traditional financial rails, as well as these emerging digital rails. That network topology is tightly integrated. It’s basically controlled, to a certain extent, by US regulations and companies. 

Then there’s a competing, similar techno-industrial and monetary block in the East. That’s probably going to have to go through a number of different evolutions because that block won’t be as integrated. The BRICS thing is not going to really go that far. It’s going to be much more commodity based. I think it’s going to, for a while, be more net-settled in gold because I don’t think most of those countries are going to trust the DCEP Chinese digital yuan. Do they trust enough of the domestic politics inside China to recycle surpluses into Chinese assets, especially China’s running this mercantilism against everyone, not just the US. That will be a much more fragmented system. China’s play is to try to get the hard commodity and then high-value goods that the economy will still need to run on through that network. The future of money is going to be recognizing the fact the world system is going to fragment, but we’re not going to go to full autarky unless we fight wars.

This decoupling can only go so far because the US and China are just intimately connected. There are scenarios, though, where, right now, there’s folks inside corners of our technological research that think that we can basically do a lot of manufacturing locally between automotive additive manufacturing, 3D printing, AI robotics, where you can localize supply chains. This era of globalized supply chains, Ricardian specialization, where we need South Asian laborers to produce all these things and then get them on super tankers and move them across the world, that in five, 10, 15 years, you get to a situation where the marginal unit of production is close to the marginal unit of consumption.

That’s a bit sci-fi, but there’s folks that are building the technology for that. That’s a very fundamentally different types of trade and money system. Because the whole money system that emerged in this era of globalization was surplus countries and deficit countries. All the persistent structural imbalances that are occupying everyone’s attention and creating all this geopolitical risk, those need to be managed and diffused away. I think some part of the play behind this techno-industrial American Renaissance is all mostly buzzword nonsense. There’s a core set of exponentials underlying that, that you could imagine a scenario where you do actually have something like more autarky where you still need raw inputs, you still need rare earths, you still need components and specializations.

Do you need to have these massive long supply chains? I think there’s a lot of security prerogatives to try to bring those onshore and localize those as much as possible. The transition from our present system to that system is highly nontrivial. There’s going to be a lot of inertia and legacy systems that will resist those shifts. In the meantime, the things that will move first will be the things that are the newest things that don’t have a legacy embedded cost or network, and that’s going to be these digital money systems. I think we’re heading to a world where you’re going to see a lot more financialization of things because you can. That’s the whole Larry Fink tokenization idea. 

My basic premise is Bitcoin will reach a level of parity with gold as a digital monetary asset in this emerging system. Timeline is anyone’s guess. If you don’t assume that as part of a plausible scenario in the next 5 or 10 years, you’ll probably have a blind spot. That will start to reshape things. For example, Bitcoin at $1 million dollars seems crazy, but that’s like parity with gold today. You’re still going to have a massive Treasury market, you’re still going to have a massive real estate market, you’re still going to have a massive equity market. Bitcoin is just going to eat another few percentage points of total assets.

The real crazy scenario is, after that, if it continues to run. The future of money is, I think, people have assumptions on these institutional arrangements, central bank to central bank, settlement clearing systems, the whole architecture, which was ultimately downstream of technology. We had telegraph machines, and now we could finally clear across oceans. We could have ledgers that could now correlate across the planet. Once you can do that, then you can have a trading and financial system that is much more efficient, but it was all downstream of technology. Our technology is changing at an accelerating pace.

I think if you don’t assume that the basic structures, the monetary system, and the institutions that manage that system are going to be disrupted by this technology change, you’re not looking at history here. You’re assuming that the last, 70, 80 years of the way central banks worked and financial systems were managed and monetary policy was done will just endure inevitably. That seems like it’s not going to happen.

Beckworth: We’re going to be in a fragmented world, basically two major monetary regions, both of them will be highly digitized, be different, given their histories and what they aim to do. Fragmented world. It’s interesting, I’ve had on the show Matteo Maggiori he has a paper with the late Emmanuel Farhi, and they actually have a model they go through, and they show that in a world where you have multipolar reserve currencies, meaningful ones, their model says it’s actually more likely you’d have a major financial crisis, because there can be runs from one region to the next, as opposed to having one. Of course, there’s financial crisis even in this world, so there’s no guarantee.

Pines: That’s saying that the new world will be more or less stable. I think human beings are human beings, we are bound to.

Future of Monetary Policy

Beckworth: Yes. Interesting. Matthew, let’s circle back to my wheelhouse here, talk about monetary policy, the future of it. Far more about the future and long-term geoeconomic trends. In terms of what happens to the Federal Reserve in this world that you just envisioned, if I had to guess, I’d say maybe there’s a whole lot more AI at the Federal Reserve, fewer human bodies.

In fact, I had a really fascinating conversation with Tara Sinclair, former podcast guest, former Biden Treasury official, professor now at George Washington University. And she has a paper, a research project in a paper, where she has created a synthetic FOMC. This idea of a synthetic, or you replicate what the FOMC member thinks based on you feed an LLM all their speeches, all their choices, decisions, and you can replicate all their past decisions perfectly. I said, “well, does that mean if that person, just happened to get sick and not show up to the FOMC one day, the synthetic could step in its place and act on its behalf?” She said, yes.

The obvious next step is, well, you can have an AI completely take over. Now, I think we would probably want a few humans at the top, but a lot of what, like say, FOMC does or a staff does could be completely automated. Another interesting twist that our podcast producer, Sam Alburger, brought up when we were talking about this before the show is we could bring back dead Fed officials from the past. We could bring up Paul Volcker, all his speeches, all his decisions. We can make a synthetic Paul Volcker to run and help contribute to the FOMC meeting. What are your thoughts on those crazy scenarios?

Pines: I have lots of thoughts. I’ll start with actually maybe a slightly different model here is like the Fed and FOMC, particularly as a cybernetic control system. In our modern monetary and communications environment, the Fed has two core functions. It actually has to technically change interest rates, it has to manage other facilities and set the overnight RRP rate and try to keep the quarter system and do all the more technical plumbing things where it can physically or technically change numbers on a screen. Then it has to communicate about all of that and why they’re doing it. 

Most of the people talking about the Fed are talking about the communication and interpretation. What do they mean? What does the dot plot imply? And right now, like the other side of that communication function is interpreted by the market through AIs already. It is AIs parsing Fed statements in a microsecond and then trading algorithmically on it now. You already have financial markets trading Treasury futures and doing all these basis trades that are all done by computers anyways. You just have a certain human being at a podium saying some words that the AIs are interpreting. 

If you’re going in this route of, okay, the Fed is a cybernetic control system that has an internal set of rules that its routines are designed, we want to do flexible average inflation targeting, FAIT, maybe we’ll go to a new cybernetic control rule with just FIT or whatever. That’s going to be the anchoring logic inside this control system that is managed by a bunch of human beings sitting in the Eccles building. Then its outputs are changes to the overnight rate, maybe a few other technical numbers and speeches. Those outputs now could easily be mechanically reproduced by LLMs right now. The question is though, what does the market think about that. Because the Fed isn’t now just a cybernetic control system. It’s a human institution. It’s a political institution.

I go back to the Fed functions in the same way that the high cleristry and the church, the role they played in the medieval era in Europe, or that the priest’s class, the folks that would read the oracle bones for the kings and the chieftains. There always needed to be an institution in any society at almost all scales that was part of the political hierarchy, but that was independent from the commander in chief or the king or the chieftain.

Beckworth: Like the priest.

Pines: The priest that were there to interpret and guide political and collective action into the future to buffer the collective human psychology on the inherent uncertainty of the future. The function of the Fed is to anchor expectations, which is to put a buffer on our collective uncertainty around the world and then act as a sociotechnical anchor that reifies itself. If everyone believes, generally speaking, that inflation will be 2%, if everyone believes and trusts that everyone else will believe and trust that will remain the case, then it will likely remain the case. It’s a reflexive property of us as social creatures in financial markets.

I think you’re seeing this now play out, like if you do have artificial intelligences that are now playing more and more economically meaningful roles in society, that are determining the shape of the Treasury market, that are interpreting Fed speeches, you could get to this self-licking ice cream cone where, why do you need to have a bunch of human beings inside the Eccles building doing all these forecasts when really most of the function is managing human psychology on a mass scale over the long term? If that’s really just about consistency and predictability, well, what’s more consistent and predictable than a machine that you’ve coded. Now, maybe LLMs aren’t as consistent as they could be. You wouldn’t want the Fed-GPT to hallucinate.

The trend line we’re going is that most people are making capital decisions using AI now. It’s less more of a technical limitation and more of a political decision, like will that thing have legitimacy? Because this goes back to our previous conversation about Paul Tucker and the fraught legitimacy challenges that central banks have in democracies that fundamentally have to have a point of accountability over their technocratic decision-makers. You need to have specialized cohorts of people that are doing these things that aren’t just being driven by the demos. AI will democratize access to intelligence. Everyone will be able to run these simulations and critique exactly the new Fed framework review.

This won’t just be a provincial abstruse territory that only PhD academic economists that pass a certain set of intellectual and professional shibboleths get invited to these conferences to discuss, meet together, parse out little phrases and clauses and macroeconomic models and get together and decide what the canon is going to be that they’re going to bring to the lady for the next five years. That privilege, that sort of specialization is no longer going to be technically maintained. You can still have the authority, the political legitimacy. Everyone will be able to immediately run the Fed framework review through o3 and come up with like five different critiques of it that are at the level that you could give.

They don’t have the institutional or political voice in that system. As people start to realize the power of these tools, they’ll be like, “Oh, well, those debates aren’t beyond me.” I am not one to participate in those debates and I have a cognitive amplifier for me. Why is the FIT framework, why is that the right one? Why do you fundamentally know more about how to manage the global monetary system than I do? This is going to be quite disruptive. I don’t know what the Fed will do to adapt to it, but a lot’s going to change in the next few years.

Beckworth: On that high note, our time is up. Our guest today has been Matthew Pines. Matthew, thank you for coming on the program again.

Pines: Thanks for having me. Fun.

Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. Dive deeper into our research at mercatus.org/monetarypolicy. You can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. If you like this podcast, please consider giving us a rating and leaving a review. This helps other thoughtful people like you find the show. Find me on Twitter @DavidBeckworth and follow the show @Macro_Musings.