The White House’s newly unveiled national security strategy sounds less like a traditional diplomatic plan and more like a call for global fiscal expansion. For the crypto market, addicted to the idea of rapid interest rate cuts in the US and globally, this appears to be a cold shower no one ordered.
The core of the strategy, signed by President Donald Trump, explicitly advocates an “America First” agenda supported by significant economic and military realignment both at home and abroad.
Consider the directives: The strategy calls on NATO allies to raise defense spending to 5% of GDP, a sharp increase from its longstanding mandate of 2%. Japan and South Korea are also expected to spend more.
“Given President Trump’s insistence on increased burden-sharing from Japan and South Korea, we must urge these countries to increase defense spending with a focus on the capabilities—including new capabilities—needed to deter adversaries and protect the First Island Chain,” the strategy states.
It further adds: “We will also harden and strengthen our military presence in the Western Pacific, while in our relations with Taiwan and Australia we maintain our resolute rhetoric on increased defense spending.”
The document explicitly calls on US allies to spend far more of their national gross domestic product on their own defense and for greater US military investment in the Indo-Pacific to strengthen vigilance in that region.
Financing this kind of monumental spending inevitably means more government borrowing or bond supply worldwide, which would increase bond yields, the cost of capital and inflation, making it harder for central banks to cut interest rates. In reality, interest rate cuts may have little impact, as an increasing supply of bonds is likely to keep interest rates high.
In addition, increased borrowing by many of the already heavily indebted advanced nations could increase the risks of the financial crisis.
If that’s not enough, the strategy explicitly states that “the era of mass migration is over.” That means the U.S. may not be importing cheap labor at a pace seen in previous years, which could make wages sticky and boost inflation.
All of this looks like a bullish tailwind for assets seen as inflation hedges and safe havens, such as gold. Bitcoin is also pitched as “digital gold” by its supporters, but has failed to live up to the hype this year.
Gold is up 60% this year despite US 10-year yields staying stubbornly above 4%, while BTC is now down nearly 5% year-to-date. Only time will tell if it evolves into digital gold in a world that is becoming more and more fiscally incentivized.
The Fed is expected to cut interest rates by 25 basis points next week, pushing the benchmark rate down to 3.5%. But with the security strategy calling for global expansion, the odds of sharp rate cuts appear bleak.
