The White House’s new National Security Strategy reads less like a traditional diplomatic blueprint and more like a call for global fiscal expansion. For a cryptocurrency market obsessed with the idea of rapid U.S. and global interest rate cuts, this appears to be a cold shower that no one asked for.
The centerpiece of the strategy, signed by President Donald Trump, explicitly supports an “America First” agenda underpinned by significant economic and military realignment at home and abroad.
Consider these directives: The strategy calls for NATO allies to increase defense spending to 5 percent of GDP, a significant increase from their long-standing mandate of 2 percent. Japan and South Korea are also expected to increase spending.
“Given President Trump’s insistence on increasing the burden on Japan and South Korea, we must urge these countries to increase defense spending, focusing on capabilities, including new capabilities, needed to deter adversaries and protect the first island chain,” the strategy said.
The report further added, “We will also strengthen and strengthen our military presence in the Western Pacific, while maintaining a firm rhetoric of increased defense spending in our dealings with Taiwan and Australia.”
The document explicitly calls on U.S. allies to spend more of their gross domestic product on their own defense and increase U.S. military investment in the Indo-Pacific region to increase vigilance in the region.
Funding such huge spending inevitably means more government borrowing or bond supply globally, which will push up bond yields, capital costs and inflation, making it harder for central banks to cut interest rates. In fact, a rate cut may have little impact, as increasing the supply of bonds may cause yields to rise.
In addition, increased borrowing in many already heavily indebted developed countries could increase the risk of fiscal crises.
If that wasn’t enough, the strategy also explicitly states that “the era of mass immigration is over.” This means the U.S. may not be importing cheap labor at the rate of previous years, which could lead to wage stickiness and thus fuel inflation.
All of this looks like bullish tailwinds for assets like gold that are viewed as an inflation hedge and safe-haven asset. Bitcoin Its supporters also called it “digital gold,” but this year it failed to live up to the hype.
While the U.S. 10-year Treasury yield remains stubbornly above 4%, gold has soared 60% this year, while Bitcoin is down nearly 5% so far this year. In an increasingly fiscally audacious world, only time will tell whether it will evolve into digital gold.
The Federal Reserve is expected to cut interest rates by 25 basis points next week, pushing the benchmark rate to 3.5%. But with security strategies calling for global expansion, the chances of a significant rate cut appear slim.