Bitcoin and the Macro Policy Issues of Biden v Trump
Will Ogden Moore
Last Updated: 3/15/2024 | 15 min. read
In the upcoming election, major macro policy issues at stake will include the size of government deficits and debt, inflation and Federal Reserve independence, and the US role in the world.
Bitcoin is an alternative money system that competes with the US Dollar. Therefore, US government policies that affect the economy and/or the outlook for the Dollar may also have implications for Bitcoin.
In Grayscale Research’s view, the Dollar could depreciate—and Bitcoin may benefit, we believe—from policy changes that result in (i) rising US government debt, (ii) an erosion of Federal Reserve independence and more risk of inflation, and/or (iii) a decline in US leadership abroad.
Macro issue #1: Government deficits and debt
Exhibit 1: Foreign investors may lose appetite for buying US debt
Exhibit 2: Presidents Trump and Biden both governed under wide budget deficits
Because public debt could increase under both candidates, a more important consideration may be whether either party controls both the White House and Congress. Under current practices[9], a party with a simple majority in Congress can pass fiscal policy legislation, and both President Trump and President Biden enacted major legislation under unified government at the start of their terms. The implication for Bitcoin: Demand may rise if one party controls both the White House and Congress, because it will be easier to pass deficit-widening legislation.
Macro issue #2: Inflation and Fed independence
In a partnership with Harris Poll, Grayscale surveyed likely voters on their views about crypto and the upcoming election. Strikingly, respondents said that inflation was the most pressing problem for the country by a wide margin (Exhibit 3).
Exhibit 3: Inflation single most pressing problem for the USA
Macro issue #3: The US role in the world
Exhibit 4: Dollar dominates global trade and finance
The Biden Administration has offered more support for existing alliances and multilateral institutions. Examples include support for NATO and for Ukraine funding—featured in his recent State of the Union Address—and a more positive take on the TPP. The Biden Administration has also abstained from major new tariffs. However, after Russia’s invasion of Ukraine, the United States and allies sanctioned Russia’s central bank—perhaps the most important policy decision for the international role of the US Dollar in recent years. This action caused Russia to “de-Dollarize” its economy—to diversify away from the Dollar and towards gold and other currencies. In the future, other countries facing sanctions risk may also attempt to diversify away from the Dollar. The implication for Bitcoin: More isolationist policies and/or aggressive use of extraterritorial sanctions may weigh on the Dollar and support alternatives like Bitcoin.
Bitcoin on the Ballot
Regardless of how the US regulatory landscape for crypto evolves, the macroeconomic and geopolitical trends driving the Dollar and Bitcoin seem likely to continue. In our view, these trends include large government budget deficits and rising debt, higher and more volatile inflation, and declining trust in institutions. Bitcoin is an alternative “store of value” that competes with the US Dollar. If the longer-term outlook for the US economy and the Dollar were to deteriorate, we would expect to see rising demand for Bitcoin.
For the presidential election, both candidates have held the office before, so investors can partly assess the impact of a second term from their prior statements and actions. Given the historical record, government debt may continue to rise under either Trump or Biden—if the same party also controls Congress. Another period of large deficits despite a healthy US economy may create downside risks for the US Dollar. Similarly, any policies that raise the risk of inflation and/or reduce the demand for Dollars by foreign governments could result in a weaker currency, and potentially benefit the Dollar’s competitors like other national currencies, precious metals, and Bitcoin.
[2] Economists posit that excessive government borrowing can affect a nation’s currency through three main channels: (i) through a “fiscal risk premium” due to the risk of default, (ii) due to “fiscal dominance”, where the government insists that the central bank hold interest rates too low in order to help finance government borrowing, or (iii) through the “twin deficits'' effect. For representative research literature on these topics, see see Carlson and Osler, “Determinants of Currency Risk Premiums”, Federal Reserve Bank of New York working paper, February 1999; Calomiris, “Fiscal Dominance and the Return of Zero-Interest Bank Reserve Requirements”, Federal Reserve Bank of St Louis Review, Q4 2023; and Bluedorn and Leigh, “Revisiting the Twin Deficits Hypothesis”, IMF Fiscal Policy Conference, June 2011.
[3] See, for example, Kumhof and Laxton, “Fiscal Deficits and Current Account Deficits”, IMF Working Paper October 2009.
[4] Source: CBO, “The Budget and Economic Outlook: 2024 to 2034”, February 2024.
[5] We consider the COVID outbreak period in the US to be from March 2019 through spring 2022.
[6] From December 2016 to February 2019, federal government debt held by the public increased from 76% of GDP to 80% of GDP; Source: Grayscale Investments calculations based on Bloomberg data.
[7] Source: CBO, “The Budget and Economic Outlook: 2018 to 2028”, April 2018.
[8] Source: CBO, “The Budget and Economic Outlook: 2024 to 2034”, February 2024.
[9] Through the Reconciliation process, which typically demands that policy changes which widen the deficit expire before the end of the ten-year budget scoring window.
[10] For an introduction to this topic, see “Why Central Bank Independence Matters”, The World Bank Research and Policy Briefs, November 2021.
[14] Source: Eichengreen, Mehl, and Chitu, “Mars or Mercury? The Geopolitics of International Currency Choice.” NBER Working Paper, December 2017. See also Goldberg and Hannaoui, “Drivers of Dollar Share of Foreign Exchange Reserves.” Federal Reserve Bank of New York Staff Report, March 2024.
[17] The two comprehensive bills refer to 1. The Financial Innovation and Technology for the 21st Century Act (McHenry-Thomson Bill) and Responsible Financial Innovation Act (Lummis-Gillibrand Bill).
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