Cryptic, Crypto, Krypton

By Michael Every of Rabobank

The Bank of Canada left rates on hold at 2.75%, as expected and predicted either we get a quick resolution to US-Canada trade tensions or a year-long recession (see here for more). There’s the kind of nasty, geopolitical, binary outcome I was flagging for 2025 from mid-2024.

Fed Chair Powell said tariffs may raise inflation and unemployment, so no rate cuts for you. It’s nice to see the guys who earn, and manage, the big bucks are on the ball.

Next up today, the ECB: please see our preview here (Many forks in the road). We expect them to cut the deposit rate by 25bp to 2.25%, an additional cut to the one we see in June, so we now have our terminal rate at 2%. However, this is again all very much contingent on trade developments, and a significant further escalation of the trade war could require the ECB to return to an accommodative policy stance, even as the Fed seems to be leaning the other way.  

On trade, President Trump said “big progress” is being made on a deal with Japan, and the White House also expects one with the UK “in three weeks.” Europe can get one too if it decouples from China; but German/EU firms are lobbying to ‘give China a second chance’ –and why wouldn’t Europe ‘try again’ with the economy wiping out its auto industry and propping up the Russian war-economy which the EU is rearming against?– as some worry the EU will sleepwalk into the China bloc due to its own rigidities.

That outcome could risk making the US outright adversarial in energy, defence, and swaplines as well as trade – but even that doesn’t necessarily mean institutional inertia/motion, or “because markets” mindsets, can adapt in time. It’s unclear what the ECB would do in those worst-case scenarios, and presumably they won’t even be alluded to today. Expect them to remain cryptic.

Aware of this, however, is Italian PM Meloni, in the US today, with the EU worried she might strike a side deal for zero-tariffs on Italian goods that would split the EU and open the door for others to follow suite. If you were the US and didn’t like the EU, wouldn’t you do exactly that? The question may be if the Italians are prepared to reap the rewards for being the first to break rank while risking brickbats from the EU, and the downside if the US reneges on any agreement. Chi non risica non rosica?

Elsewhere, oil markets noticed earlier Arab press reports about a troop build-up vs the Houthis now it’s in English on Bloomberg; and the latter also ran an op-ed about the five signs to look for ahead of a US-China war (not trade war): and we are already seeing all of them. That isn’t very reassuring, or much guidance for markets.

Gold just surged to a new nominal high and is starting to move like a stock. Glibly, this is ‘risk off’. Yet even with the Middle East and China news above that misses what’s also happening as the US tries to remake itself by remaking the global trading and financial system.

This missive from Matthew Pines shows how US gold reserves could be revalued vastly higher to create $1 trillion of fiscal breathing room and to bid up Bitcoin. Alongside tectonic shifts in the global architecture, is gold up only as a ‘haven’ rather than front-running? Likewise, USD-backed stablecoins, where framing legislation is moving forwards, may also see up to $1-1.5 trillion of new demand for US T-bills ahead. That’s also a controversial and potentially market-moving hypothesis that goes beyond just saying ‘crypto’.

Ok, so here’s my latest take on how Bessent may be able to revalue the gold certificates w/o legislation:

Under 31 USC §5117 & the Gold Reserve Act of 1934, the U.S. Treasury is authorized to issue gold certificates to the Federal Reserve Banks, backed by the gold it holds, at… https://t.co/vRRCS3pGui

— Matthew Pines (@matthew_pines) April 16, 2025

However, looking ahead, the larger issue would be if such financial ‘fartcraft’ were followed by the economic statecraft of adopting gold, Bitcoin, or stablecoins –only accessible via the US dollar– as neutral reserve assets for external trade and clearing. That would truly start the global bifurcation some have been warning of as a risk for years and have massive market implications.

Indeed, what if either the US or China, or Europe refuse to accept Bitcoin, stablecoins, or gold even if the other/s do/does? Mercantilist China, with a vast trade surplus, has no issues with any neutral reserve asset. Partially-mercantilist Europe is pushing ahead with a digital Euro CBDC: would it want to switch to another USD asset if it’s in the China bloc, or to gold? The US, with a vast trade deficit, has a huge problem with a neutral reserve asset until it reindustrialises if it wants to avoid a larger inflation shock than that presented by tariffs (i.e., all commodities follow gold higher). And it has already banned all Central Bank Digital Currencies within the US system, which will necessarily keep a digital Euro off the balance sheet of any US entity.

Hypothetically, what if the US revalued gold higher –encouraging China to buy more of it, which it is doing, partly to prevent capital flight– then used the $1 trillion from that and the $1-1.5 trillion from stablecoin issuance to help onshore production…. and then banned gold again, leaving China with a lot of shiny metal that wouldn’t be useful to it as reserves, or within the US/Western bloc? Why wouldn’t it do so, in fact? “Because gold”? Recall the US has form, having seized/gone off gold in the 1930s, and going off it again in the 1970s.

Of course, this is probably too many dots for those who think only in dot plots, or gold & yachts, to join. Yet if we are going to see financial steps in that bifurcating direction, again we can look for warning signs; like more digital ring-fencing of crypto assets to keep some in and some *out*. Saying what assets can and can’t be used where is not just ‘regulation’, as some will dully put it, any more than China’s Common Prosperity was: it would literally be the digging of trenches to lay the pipes for future central bank liquidity within non-fungible systems.

Meanwhile, see here for our indicative quantitative scenario of what trade bifurcation and milder trade war outcomes could imply for the US, Europe, and China: don’t focus on any one macro number – the point is to look at the spread between them. And, yes, the current American bull in a China shop may be able to force China to shop a lot more… at a high economic price to everyone – but that would just be economic statecraft over policy again. (And kudos to Jeffrey Powell and Lize Naute for their brilliantly original innovation of using an economic gravity model of trade that places China 1,000,000km from the US, three times the distance of the Moon from the Earth, to simulate a Cold War-style bifurcation.)

It’s also hardly a quiet day on multiple other fronts.

Reportedly, the IRS have begun stripping Harvard University — which some have called a hedge-fund with a (highly politicised) school attached– of its tax-exempt status.

A US judge has found probable cause to hold the Trump administration in criminal contempt of court for defying his order to turn around planes in mid-air, as some legal experts point out he likely doesn’t have jurisdiction on the issue at all, which will now have to be adjudicated by the Supreme Court (again).

Lastly, the Financial Times says astronomers have found the strongest signs yet of alien life. I now await their editorial piece arguing that anyone coming from ‘Krypton’ must be in favour of Ricardian free trade, because anything else would be illogical.

Then again, Superman used to promote “Truth, Justice, and the American Way” – which today would mean high tariffs, Bitcoin, and USD-backed stablecoins.