Long-Term Effect of Stablecoins Purchasing U.S. Treasuries

[Dalal.Holdings]

The yearning of some folk to want to tie all human wealth to an element on the periodic table is bizarre

[TwoCitiesCapital]

9 hours ago, nsx5200 said:

I agree that the advancement started happened before the US got off the gold standard, but the statement "Meanwhile the economy is basically flat while measured gold, all that growth is an illusion, it just masks monetary decay." implies that the economy and living standards stood still after the the US got off the gold standard.  That, I have serious issues with.  If you truly believe that the national capabilities, as whole, has stood still since we got off the gold standard, well... 

 

I generally believe some things got better, some things got worse, but the the nation as a whole is NOT better off for having 2% of their aggregate productivity/value leached to the government/banks/wealthy each year

 

9 hours ago, nsx5200 said:

 

Whether the advancement would've happened quicker or slower if the US stayed with the gold standard is debatable.  For that, we would need to look at the historical evidence, which I'm not an expert in.  Crashes tend to slow and pause progress a bit, although it's sometimes necessary to prune out the bad ideas (ex. 2000, 2008).  So a quick Google AI search on crash yielded "Crashes and major financial crises happened with greater frequency and severity before the U.S. fully abandoned the gold standard,

 

There are so many differences other than just monetary policy that make that a hopeless comparison. Social safety nets massively blunt the impact of economic slowdowns preventing most form going through years of unemployment on savings that forever changes spending habits. FDIC insurance prevents domino effects on bank collapse and credit availability. Government deficit spending further blunts impacts. All three are huge in varying the degree at which economic downturns last. 

 

But we haven't yet seen the after effects of government deficit spending and intervention because the debt is a can that gets kicked down to the next generation until it can't be. Then you have a massive economic grind to either work your way out of the debt or a massive financial repression to inflate it away. We haven't yet seen what that pay back looks like while still giving credit for all the borrowed money. 

 

9 hours ago, nsx5200 said:

 

I guess some people can favor more frequent crashes the same way some people are masochist.  In that case, I'll have to file these data points in my own collection of patterns of... interesting behaviors.

 

I favor more frequent and small set backs than a once-in-a-generation crisis happening every 10-15 years that forever impacts the financial trajectory of the country. 

 

For your thesis to hold in water, you have to tell me why the government/banks/wealthy stealing 2% of everyone's collective labor/productivity every year, and the ensuing collective efforts spent on additional jobs, risk taking  on investments, adjustments of political policy, and financial products, etc all geared towards addressing inflation and helping you run on place after it are productive spends of time that yield a better/more robust economy then if those efforts were spent on anything else. 

 

Technological advancement is inherently deflationary. The only reason we don't see prices consistently flat to falling with consistent improvements as a society is because that is what is being stolen - stolen by those that are closest to the money printing process. Government, banks, wealthy elite who borrow to acquire assets, and leave everyone else who is incapable of that (or incapable of matching their scale due to lack of Capital) falling further behind. 

Edited September 6, 2025 by TwoCitiesCapital

[TwoCitiesCapital]

1 hour ago, Dalal.Holdings said:

The yearning of some folk to want to tie all human wealth to an element on the periodic table is bizarre

 

Defending the theft of stored productivity and labor is even weirder stance to take IMHO

 

I don't understand why "keep what you earn until YOU want to spend it" is so much more controversial than stealing 2-3% of your stored labor productivity if you don't spend it now. 

Edited September 6, 2025 by TwoCitiesCapital

[Spekulatius]

I think the Gold standard was bound to fail due to it‘s inherent lack of flexibility. To increase money supply, the supply of gold needed to indessen and miners could only mine about 1-2& incremental gold (relative to the existing stock ) while a goring economy required far higher money supply at that point.

 

Also with many nations on gold standard it meant that nations would compete for the Gold to increase their money supply which is another issue.

 

On a high level, does it make sense to make money supply (which is a function of economic growth) based on the supply of a shiny element in the periodic table? I think it does not.

 

Gold was useful as a universal currency like in the Roman Empire, but at some point I think the invention accounting (in Italy) and development of a modern banking system made this and outdated  concept.

[TwoCitiesCapital]

11 minutes ago, Spekulatius said:

I think the Gold standard was bound to fail due to it‘s inherent lack of flexibility. To increase money supply, the supply of gold needed to indessen and miners could only mine about 1-2& incremental gold (relative to the existing stock ) while a goring economy required far higher money supply at that point.

 

Also with many nations on gold standard it meant that nations would compete for the Gold to increase their money supply which is another issue.

 

On a high level, does it make sense to make money supply (which is a function of economic growth) based on the supply of a shiny element in the periodic table? I think it does not.

 

Gold was useful as a universal currency like in the Roman Empire, but at some point I think the invention accounting (in Italy) and development of a modern banking system made this and outdated  concept.

 

I don't necessarily think "trying to an element of the periodic table" is necessarily the argument.

 

But removing the money supply decision making from authorities who have proven time and time again their only ability is to abuse it IS a good move. Particularly paired with fair system with transparency around issuance where that issuance/supply requires WORK and isn't just handed out to a favored few. 

 

If that so happens to be a periodic element, Bitcoin, or some combination of the two, then I believe that will be better. 

 

We have enough history to conclude the flexibility given to authorities is far worse as medicine than the ailments it supposedly cures. 

Edited September 6, 2025 by TwoCitiesCapital

[wabuffo]

I don't understand why "keep what you earn until YOU want to spend it

 

Sounds good in theory, doesn't work in practice.

 

Why should we limit annual money supply growth to 1.8% (the rate of new gold mined every year vs total theoretical above-ground inventory - or worse, a cryptocurrency that will eventually have zero supply growth?)

 

What happens when you do that?  What if the transactional needs of economy are greater than that (say, 3% annual growth).  Then it follows that this will result in a rate of deflation at least equal to the rate of economic growth less the growth of money supply (1.8% - 3% = minus 1.2% for gold; 0 - 3% = minus 3% for crypto).  Of course, there would also be periods of cyclical increase in the demand for money which would exceed those average rates of deflation.

 

The offset would be total factor productivity - but its likely that the deflation rate would also exceed this safe limit.  In reality, what tends to happen is that borrowing increases in order for the private sector economy to maintain consumption.  Until it ends in a deflationary contraction and banking panic.  And when it all ends in tears, the Austrians lecture us about cyles and malinvestment, without truly understanding the underlying monetary and economic forces.

 

Deflation might be good for savers, but it absolutely destroys economies as debts increase in real terms and businesses are forced to lay off workers due to falling prices.   The very bottom income earners without any meaningful savings get hurt the most. 

 

We've never had to live in a deflationary period though we came close in the early aughts that culminated in the GFC and the near collapse of most of the US banking sector.  During the period of 1997-2007, the US actually started to pay down its debt.  From 1997-2007, money supply as measured by Treasury securities outstanding in private sector hands grow by 1.8% CAGR (similar to gold).   And the private sector as predicted had to add debt to maintain consumption until it all blew up.

 

 

Every decade under the gold standard period (1870-1910) was like this with a GFC-like implosion at the end of each deflationary cycle, except there was no big fiscal response to rescue.  

 

While some harbor romantic feelings about this hard money standard, the reality is that it was rejected by the majority of the population because of the harm they suffered having to go through this destruction multiple times in their lives.

 

So, maybe good for savers, but very, very bad for everyone else, and at the end not even good for savers either.

 

Bill

Edited September 6, 2025 by wabuffo

[nsx5200]

41 minutes ago, TwoCitiesCapital said:

Social safety nets massively blunt the impact of economic slowdowns preventing most form going through years of unemployment on savings that forever changes spending habits.

...

I favor more frequent and small set backs than a once-in-a-generation crisis happening every 10-15 years that forever impacts the financial trajectory of the country. [implying that past frequent crashes were less severe]

Just nitpicking: there are some issues with what you stated above that are most likely not true.  The European/US safety net difference yielded results opposite of what you've stated.  The second, based on Google, yielded results opposite of what you've stated as well.  In general, I can see the desire not to have hard-earned labor (as measured by currency) eroded due to currency inflation, and should be a noble goal for any currency to have.

 

46 minutes ago, TwoCitiesCapital said:

Technological advancement is inherently deflationary. The only reason we don't see prices consistently flat to falling with consistent improvements as a society is because that is what is being stolen - stolen by those that are closest to the money printing process.

 

22 minutes ago, Spekulatius said:

I think the Gold standard was bound to fail due to it‘s inherent lack of flexibility. To increase money supply, the supply of gold needed to indessen and miners could only mine about 1-2& incremental gold (relative to the existing stock ) while a goring economy required far higher money supply at that point.

I guess those are the main two driving levers for setting the inflation target rate of a currency, with the primary goal of maintaining its value while minimizing the frictional cost of transactions.  Seeing how much trouble the Fed in determining a target inflation rate, I think, as a thought experiment, it might be interesting to design a perfect currency, and see what that currency would look like.

 

If we're omniscient and able to perfectly distinguish the price impact of permanent supply changes(i.e. increase in productivity) from temporary changes(i.e. supply imbalance), we should be able to set that currency's inflation rate perfectly.  If some advancement cause the supply of a good to increase leading to a price decrease, we should inflate that currency to match that price decrease, thus maintaining the value of that currency to that good.  Temporary issues leading to price increase or decrease should be passed through, with no changes on the currency.  This would need to be repeated for all the goods and services, each with its own inflation rate for that good/service.  The idea being that even if productivity gains increases the supply, ceteris paribus, the same currency still buys that same good at the same quantity.  No more, no less.

 

Of course this is totally undoable, as omniscient is impossible due to research cost, and multiple inflation rates are impossible to be compacted into a single inflation rate without assumptions.  But I think it lays out the template for how the central banker can approach the target inflation rate more methodically, and any numerical adjustments/assumptions used made public for more transparency.  As technologies make these capabilities possible, the central banker should yield more of these manual adjustments to the market.

 

I imagine a future where goods/services-specific currencies exist, and the exchange of those currencies happen with market forces with the end results compacted and delivered at the time of purchase so an individual can go to some market, and see how much the goods/services 'cost' in real time.  I imagine the final currency would be converted/denominated/summarized in that purchaser's "time", which is the ultimate personal limited resource.

[TwoCitiesCapital]

6 hours ago, wabuffo said:

Deflation might be good for savers, but it absolutely destroys economies as debts increase in real terms and businesses are forced to lay off workers due to falling prices.   The very bottom income earners without any meaningful savings get hurt the most. 

 

Savers are who provide the accumulated capital for the system. There is nothing wrong with a system that rewards people doing work and saving it for investment in a brighter future. 

 

Debts would naturally be lower in an economy where you didn't have to borrow to keep up and where prices are naturally falling over time. Interest  rates would be lower too. Interest itself might even largely be unnecessary as the return of principal is return enough when the principal is appreciating in purchasing power. 

 

 

6 hours ago, wabuffo said:

We've never had to live in a deflationary period though we came close in the early aughts that culminated in the GFC and the near collapse of most of the US banking sector.

 

Yes. An asset bubble blown by monetary authorities printing money and manipulating interest rates. And interesting defense for why they should be allowed to do more of that. 

 

6 hours ago, wabuffo said:

 

 

.  

While some harbor romantic feelings about this hard money standard, the reality is that it was rejected by the majority of the population because of the harm they suffered having to go through this destruction multiple times in their lives.

 

This is a joke. It took the government making private transactions illegal and pegging the price at an artificial level after the Great Depression to move the American public on from it.

 

And even then, the government still continued to use to settle international balances until the point where it bounced those checks against all gold it stole from it citizens because it still couldn't manage to contain its spending.

 

The only reason we're on fiat now is because governments and their officials can't maintain a budget - not because the public demanded that 2% of their accumulated purchasing power be destroyed each year

 

6 hours ago, wabuffo said:

 

So, maybe good for savers, but very, very bad for everyone else, and at the end not even good for savers either.

 

Savers provide the capital for investment in the future that drives the technological advancement and innovation that pushes us forward. What's good for them is good for the economy. 

 

It's not enough to only have savers, or to only reward saving, but consumption doesn't do anything for the future - accumulated savings does. 

[Dave86ch]

On 9/6/2025 at 7:08 AM, nsx5200 said:

I agree that the advancement started happened before the US got off the gold standard, but the statement "Meanwhile the economy is basically flat while measured gold, all that growth is an illusion, it just masks monetary decay." implies that the economy and living standards stood still after the the US got off the gold standard.  That, I have serious issues with.  If you truly believe that the national capabilities, as whole, has stood still since we got off the gold standard, well... 

 

Whether the advancement would've happened quicker or slower if the US stayed with the gold standard is debatable.  For that, we would need to look at the historical evidence, which I'm not an expert in.  Crashes tend to slow and pause progress a bit, although it's sometimes necessary to prune out the bad ideas (ex. 2000, 2008).  So a quick Google AI search on crash yielded "Crashes and major financial crises happened with greater frequency and severity before the U.S. fully abandoned the gold standard, with the consensus among economists and historians being that economic volatility was higher in the 19th century and during the gold standard era compared to the post-WWII period.", with citations.  If you have evidence that Google's AI's hallucinating on this, you're free to share.  If you disagree with those historians, well..

 

I guess some people can favor more frequent crashes the same way some people are masochist.  In that case, I'll have to file these data points in my own collection of patterns of... interesting behaviors.

Detach money from hard backing and debasement is inevitable, history proves it.

Excuses abound, but they’re hollow; just rationalizations and psyops by the authorities.

It’s not rational policy, it’s raw greed.

Will Durant records this pattern again and again.

Bitcoin solves it: difficult to seize, easy to exchange, and secured by thermodynamics at layer 1.

Edited September 7, 2025 by Dave86ch

[Spooky]

Does anyone have a good primer explaining stable coins? I've been looking into Tether ... how is it not a scam?

[TwoCitiesCapital]

1 hour ago, Spooky said:

Does anyone have a good primer explaining stable coins? I've been looking into Tether ... how is it not a scam?

 

I'm.l not a fan of the company or it's history, but what makes you describe them as a scam? 

[Red Lion]

On 9/6/2025 at 7:47 AM, TwoCitiesCapital said:

Technological advancement is inherently deflationary. The only reason we don't see prices consistently flat to falling with consistent improvements as a society is because that is what is being stolen

I’m not an expert, but did we see prices consistently flat to falling before we went off a gold standard? That doesn’t seem right to me. 

[Marco Van Basten]

9 hours ago, Red Lion said:

I’m not an expert, but did we see prices consistently flat to falling before we went off a gold standard? That doesn’t seem right to me. 

So it is complicated.  We did see deflation in the late 19th century, hence William Jennings Bryant famous speech - you shall not crucify mankind on a cross of gold.  However, it is possible to have massive inflation on a gold standard.  Two famous examples are post Black Death in Europe and post Spain's conquest of the Americas.  

[TwoCitiesCapital]

9 hours ago, Red Lion said:

I’m not an expert, but did we see prices consistently flat to falling before we went off a gold standard? That doesn’t seem right to me. 

 

I'm not sure where we would go for the quality of data we would need, but generally speaking technology lowers costs and progress as a society is largely deflationary. That is the benefit of accrued capital for the next generation in a capitalist system. 

 

As long as productivity is rising faster than population growth, you'd end up with net deflation. If they match, it's neutral, and if inflation growth exceeds productivity then you get moderate inflation. There were several deflationary episodes in the US history books in the 1800s and early 1900s before the current monetary regime made inflation and constant debt growth the inevitable outcome. 

 

Not sure the post-WW2 period is the best to judge the period by because even though we were on a "gold standard", they inflated a ton at the start by changing the ratio of $ to gold, made gold illegal to transaction in private transactions, AND continued to print more money than there was gold to back it creating all sorts of distortions and it only be "gold standard" in name only. 

 

 

[TwoCitiesCapital]

1 hour ago, Marco Van Basten said:

So it is complicated.  We did see deflation in the late 19th century, hence William Jennings Bryant famous speech - you shall not crucify mankind on a cross of gold.  However, it is possible to have massive inflation on a gold standard.  Two famous examples are post Black Death in Europe and post Spain's conquest of the Americas.  

 

Can't speak for the Black Death, but the conquest of America's was because of the large amounts of additional fold added to circulation - a la 'money printing.' 

 

It's not impossible to get inflation in a hard currency standard - just a lot harder as it requires you constantly finding more of the finite resource and requires work/investment/time to get it vs a money printer. That being said, I view Bitcoin as superior to gold in this regard as it is verifiably capped issuance and a ever decreasing stock to Flow. 

[Spooky]

14 hours ago, TwoCitiesCapital said:

 

I'm.l not a fan of the company or it's history, but what makes you describe them as a scam? 

 

Has all the hallmarks of a fraud. Headquartered in El Salvador, no auditor, no disclosure of who holds their treasuries, intermingling of accounts, fees and difficulty redeeming your coins, etc. The purpose is to be pegged to the USD and be a bridge between the crypto world and the traditional finance world claiming it is pegged to the dollar but not capitalized property - taking deposits and investing in a whole spectrum of risky assets. 

[Red Lion]

2 hours ago, Marco Van Basten said:

So it is complicated.  We did see deflation in the late 19th century, hence William Jennings Bryant famous speech - you shall not crucify mankind on a cross of gold.  However, it is possible to have massive inflation on a gold standard.  Two famous examples are post Black Death in Europe and post Spain's conquest of the Americas.  

 

1 hour ago, TwoCitiesCapital said:

 

I'm not sure where we would go for the quality of data we would need, but generally speaking technology lowers costs and progress as a society is largely deflationary. That is the benefit of accrued capital for the next generation in a capitalist system. 

 

As long as productivity is rising faster than population growth, you'd end up with net deflation. If they match, it's neutral, and if inflation growth exceeds productivity then you get moderate inflation. There were several deflationary episodes in the US history books in the 1800s and early 1900s before the current monetary regime made inflation and constant debt growth the inevitable outcome. 

 

Not sure the post-WW2 period is the best to judge the period by because even though we were on a "gold standard", they inflated a ton at the start by changing the ratio of $ to gold, made gold illegal to transaction in private transactions, AND continued to print more money than there was gold to back it creating all sorts of distortions and it only be "gold standard" in name only. 

 

 

 

 

Thank you both for the interesting discussion. The rationale certainly makes sense to me. I feel like the likelihood of any major economies going to a gold standard in my lifetime is very low, although I suppose China perhaps could pull it off in hopes of upsetting the reserve currency status of the dollar. 

 

On the other hand, any move like this by China could be seen as illusory (just think of their history with publicly traded companies). 

[TwoCitiesCapital]

9 minutes ago, Spooky said:

 

Has all the hallmarks of a fraud. Headquartered in El Salvador, no auditor, no disclosure of who holds their treasuries, intermingling of accounts, fees and difficulty redeeming your coins, etc. The purpose is to be pegged to the USD and be a bridge between the crypto world and the traditional finance world claiming it is pegged to the dollar but not capitalized property - taking deposits and investing in a whole spectrum of risky assets. 

 

+1 I tend to agree

 

I don't trust the company. Given their history, I think it's best to stay away from them and use more regulated stable coin issues like Circle with their USDC. 

 

That being said, they've survived multiple -80% hours in Bitcoin's price, so they're either extremely lucky where other 'hedge funds' haven't been OR they're not doing all the cowboy stuff on the asset side that people suspect. I don't know which it is, but their survival signals something. 

[Spooky]

2 minutes ago, TwoCitiesCapital said:

 

+1 I tend to agree

 

I don't trust the company. Given their history, I think it's best to stay away from them and use more regulated stable coin issues like Circle with their USDC. 

 

That being said, they've survived multiple -80% hours in Bitcoin's price, so they're either extremely lucky where other 'hedge funds' haven't been OR they're not doing all the cowboy stuff on the asset side that people suspect. I don't know which it is, but their survival signals something. 

 

I read at one point they were a big holder of Chinese real estate developer paper.... Maybe they have just able to keep the ponzi scheme going. 

 

Any materials on USDC and how they are able to maintain the peg to the USD?

[TwoCitiesCapital]

11 minutes ago, Spooky said:

 

I read at one point they were a big holder of Chinese real estate developer paper.... Maybe they have just able to keep the ponzi scheme going. 

 

Any materials on USDC and how they are able to maintain the peg to the USD?

 

 

Circle is publicly traded, so I'm sure there is something out there.

 

My guess is the obvious way: Some liquidity buffer in cash with the rest in short-term Treasury debt that is saleable at any time. Nothing exotic. 

[nsx5200]

Google AI Overview:

"Key Mechanisms for Peg Stability:

• 100% Asset Backing: For every USDC token in circulation, Circle holds a corresponding value in U.S. dollars or highly liquid, short-term U.S. Treasury securities.
• Redeemability: Circle guarantees that users can always redeem USDC for U.S. dollars on a 1:1 basis directly with them, creating a strong incentive for stability.
• Arbitrage: If USDC trades below $1 on exchanges, arbitrageurs buy it cheap and redeem it with Circle for $1, driving the price back up.
• Mint/Burn Mechanism: To mint new USDC, Circle receives funds; to remove USDC, tokens are "burned" (destroyed), maintaining the balance with reserves."

The biggest risk that I can see with these "stablecoin" is that if something, internal or external to these issuers, that cause the public to lose trust in the convertibility of the coin, it'll create a run to redeem it for USD.  Depending on how liquid their backing is, not every stablecoin can be redeemable for the corresponding USD.  So despite being a "stablecoin", it can, in times of panic, not be so stable.  These coins are not riskless equivalent of the USD.  Not saying there aren't risks to USD, but there are additional risks and features to these stablecoins.

[thowed]

Interesting stuff on Tether.  I have a feeling that people were suspicious about it a few years ago, but have no record.

 

I'd like to find out more, as they are doing some big, interesting investments in the Gold space at the moment with all their money - specifically the Gold Royalties area which is a pond I like to fish in.  They're either buying companies outright, or taking strategic stakes in stuff I invest in, so if they're going to collapse, it would be useful to know.

 

Cheers to all for the info so far.

[Spooky]

32 minutes ago, thowed said:

I'd like to find out more, as they are doing some big, interesting investments in the Gold space at the moment with all their money - specifically the Gold Royalties area which is a pond I like to fish in.  They're either buying companies outright, or taking strategic stakes in stuff I invest in, so if they're going to collapse, it would be useful to know.

 

This was kinda the genesis of my inquiry into Tether. A friend of mine who is more into speculative mining and gold companies was going on about Xaut and how it is now one of the largest owners of gold and managed to somehow make it so that gold now generates a yield... the part about generating yield raised my fraud antenna. I also wonder if they have some responsibility for the run up in gold prices? Anyways, I'm going to have some drinks with him tomorrow night and it should be a pretty interesting discussion! He's always going on about devaluation of fiat and all that fun stuff.

[scorpioncapital]

It seems to me Tether is using the profits from their reserve assets to do a bunch of stuff that weakens their coin's stability. Is that reading it wrong? They are no longer backed 1:1 with USD, they have gone out on the backing spectrum to stuff that can hardly be considered a stablecoin backing reserve, then they took the profits , which in theory should be a liability to stablecoin holders if they ever need to redeem in a panic and have bought a football team and a bunch of other wacky ventures?

[TwoCitiesCapital]

15 minutes ago, scorpioncapital said:

It seems to me Tether is using the profits from their reserve assets to do a bunch of stuff that weakens their coin's stability. Is that reading it wrong? They are no longer backed 1:1 with USD, they have gone out on the backing spectrum to stuff that can hardly be considered a stablecoin backing reserve, then they took the profits , which in theory should be a liability to stablecoin holders if they ever need to redeem in a panic and have bought a football team and a bunch of other wacky venture

 

 

 

I don't follow them closely, but I can't really say. There's been speculation that they're not 1:1 pegged since they started, that they own a huge chunk of Bitcoin and manipulate the price. but they've survived multiple 80+% drawdowns in BTC so makes it hard to believe unless if they're just incredibly lucky. 

 

Ultimately, there's nearly $200B of Tether in circulation. Even if it was all interested in overnight treasuries, that's still ~$8B pre-tax of interest income that doesn't get paid out to token holders for a company that only has ~200 employees.

 

And they've probably made that for the last 3-4 years. So tens of billions they can invest at their discretion WITHOUT having to use their reserves backing the token. And then, what if their reserves are 90% liquid and 10% illiquid which still isn't 'reckless' (but not the most prudent). Well, then they e got another $20 billion they could add to the fold. 

 

I think they probably operate more like a Fairfax. Keeping most of the regulatory required capital in liquid fixed income and take the equity bets with their equity/book value. But I don't trust that enough to want my money with them given their refusal for transparency so only use USDC when I need a stablecoin.