The Slow Rug of Dollar

An Implicit Tax:

In a Bankless Interview with Arthur Hayes, released March 22, 2023, Hayes describes the US National Debt as “unallocated losses”, which are inevitably socialized by printing money, and diluting the money supply.

The unallocated losses described are underwater treasuries, held on the balance sheets of banks. The process of socializing these losses is felt through inflation, and an increased cost of living for Americans.

Hayes states:
“If you have money inside of the system, you will pay for it. It’s an implicit tax on anyone who saves in things that don’t go up as fast as the amount of money printed.”

Hayes believes that eventually, all banks will either become insolvent, or have their debts guaranteed by the Federal Reserve, which translates into the debasement of the US Dollar.

On the podcast, a relationship is described between three players:

1. The US Treasury Dept.

• Total Public Debt: https://fred.stlouisfed.org/series/GFDEBTN

34.8 trillion dollars in Federal Debt is depicted in the chart above. This is operational debt for the US Government, and Deficit Spending is expressed in the system through T-Bills, Notes and Bonds – each with different dates of maturity, ranging from Short Term to 30 Years.

1. The Federal Reserve

• Debt Held by Federal Reserve Banks: https://fred.stlouisfed.org/series/FDHBFRBN

$4.813 trillion of Federal debt is held by Federal Reserve Banks.

The Federal Reserve has the ability to create money, and they use this money to purchase government-backed Treasuries. They can trade these treasuries on secondary markets. They can also print cash to lend to banks who are in a liquidity crisis, via the Discount Window.

The Federal Reserve also sets rates for treasuries, which means they have the power to bury debt onto the balance sheets of US Financial institutions.

1. Public US Financial Institutions

• Debt Held by Public: https://fred.stlouisfed.org/series/FYGFDPUN

$27.6 trillion of Debt is held by US Financial Institutions / Banks.

It appears as though the US Public Institutions have been trapped into holding 79% of National Debt.

The Fed Rug Pull

• Source: https://www.americanbanker.com/list/15-most-recent-bank-failures

Silicon Valley Bank collapsed because when the Federal Reserve hiked rates from 1.5% to 4.6%, SVB’s long-term treasuries went underwater, and their bank became insolvent.

The other banks listed above have a similar story.

If 79% of the national debt is held by US Financial Institutions, and Rates are higher than they have been, that means that most banks are holding paper losses on Long-term Treasuries.

Between Q1 2022, and Q4 2024:

1. Fed holdings dropped significantly (22.2% → 14%)
2. Total debt increased by $6.67 trillion.
3. Public holdings increased by $5.59 trillion.
4. Foreign holdings increased from 0.5% to 7%.
5. Interest Rates rose by 2.36%.

The Federal Reserve is therefore caught between flooding the system with money by lowering rates, or providing liquidity to banks who are underwater due to rate hikes.

Whatever the direction, the Federal Reserve must print money.

Gratuitous deficit spending, and mounting interest on current debt balances are the underlying issue. The Federal Reserve is tasked with socializing these losses in the least violent way possible.

Unfortunately for USD Holders, and Long Term Treasuries Holders, there is no non-violent way to socialize $34.8 Trillion in debt.

Holding Stablecoins:

Markets are so volatile in crypto, that Inflation’s impact on USD-pegged Stablecoins is not typically on the highest list of priorities – but if your DAO or Multi-Sig is holding its 4 year Runway in USDC or USDT, you are losing money each year to Inflation.

The Crypto India Fund

The Crypto India Covid Fund is a great example, as they currently hold $180M USDC.

In 2021, Vitalik was given a SHIB Allocation and he donated it to the Crypto India Covid Fund. Wintermute ended up helping them sell off the SHIB, and they got a total of $463.8M USDC from the sale.

The cost of inflation as applied toward this specific case might be dismissable, because:

• By holding in USDC, they protected themselves against a 15% loss compared to holding in Rupees, between ‘21 and ‘24.
• They could have blown up their Treasury on Anchor, or FTX, or Celsius.
• There have been developments in onchain yields from stablecoins since 2021, and some options are new.
• If Wintermute was handling their sale, then they are probably more concerned with using the money, and their skills are not in DeFi Treasury management.

But how much was lost to USD Inflation on just the remaining $180M, since Q1 2022?

• 2022 Inflation was at 6.5% = $11.7M lost to annual Inflation.
• 2023 Inflation was at 3.4% = $6.1M lost to annual Inflation.
• 2024 Inflation was at 2.6% = $4.6M lost to annual Inflation.

Source: https://www.usinflationcalculator.com/inflation/current-inflation-rates/

In Total, that’s $22.4M in losses on a balance of $180M held over that time period.

Obviously, this is an imperfect example, and the accounting doesn’t include compound interest, or the varied amounts remaining in the Fund over time – but it does speak to a problem:

US Dollars are not a safe store of value, and there are alternatives.

Yield-Bearing Stables:

There are currently a handful of projects which are trying to solve this issue. Each of them has a different strategy, and carries their own risks.

USDM [5% APR]

Mountain Protocol is an interesting alternative. USDM is backed by T-Bills. Accrue rewards automatically, just by using the token.

sFRAX [7% APR]

https://frax.finance/ has a whole ecosystem built around their product. If you Stake your FRAX for sFRAX, you can get this yield.

USDC held in a Coinbase Wallet [4.7% APR]

https://x.com/coinbasewallet/status/1859286084535906744 a recent post on 𝕏, Coinbase announces that if you use their Wallet, to hold USDC onchain, they will give you yield, facilitated through Coinbase, and extended to Onchain users.

DeFi:

Yearn [~5 or 6% APR]

https://gimme.mom/ offers vaults where you can deposit USDC and earn yield.

Compound [ Currently 12% APR | Variable]

https://compound.finance/ offers lending, where you can deposit your USDC or USDT and earn a variable interest rate from Borrowers.

These smart contracts have their own risk, but they are battle hardened, and are good solutions for treasury management.

Conclusion:

Constructing diversified yield strategies for your assets, and doing research on how these onchain products work is not easy, but it’s important.

Bitcoin was built as a hedge against inflation, and DeFi was created to decentralize access to financial tools which were only accessible to bankers. In spite of these liberating technologies, there are multi-million dollar onchain treasuries holding dollars, when they ought to be behaving more like hedge funds.

Protocol Treasuries need to act as good stewards of their funds, or those assets will be worn away like sands on a beach.