Former Greek Finance Minister Yanis Varoufakis posted a lengthy article on his website, warning against the “time bomb” represented by the liberalization of stablecoins introduced by the Trump administration’s GENIUS Act. Varoufakis notes the irony that two seemingly opposite groups—radical libertarians and “statist dollar worshippers"—have united on the issue of stablecoins to “maximize the threat of a financial meltdown.” Varoufakis lists “five supersized systemic risks posed by stablecoins": 1) Moral Hazard; 2) Migrating Deposits; 3) The Doom Loop between Stablecoins and Banks; 4) The Doom Loop between Stablecoins and Securities; and 5) Global Fragility.
These are all risks generated by the volatility of stablecoins and by the volatility of U.S. bonds induced by the stablecoins. As for the reasons why the Trump administration is unleashing what Goya represented with his print, “The Sleep of Reason Produces Monsters,” Varoufakis has the following explanation:
Aside from the obvious self-enrichment motive, the more interesting explanation is that stablecoins fit in nicely with the Trump administration’s goal of shrinking global trade imbalances in a manner consistent with their strategy for “Making America Great Again.” Nothing motivates these people more than the idea that what is good for their bank account is good for America.
Team Trump has no qualms that it aims to devalue the dollar, with a view to shrink America’s trade deficit, yet preserve its dominance by using the threat of tariffs to force allies to dump dollars but refrain from buying rival fiat currencies. Stablecoins are assigned a key role in this plan.
Suppose, for instance, Japan were to be bullied into using a considerable portion of its $1.2 trillion holdings to buy dollar-denominated stablecoins. Trump’s twin aims would be served: First, the dollar’s aggregate supply would rise, devaluing the dollar. Secondly, the stablecoin issuers would use the dollars it receives to buy Treasury bills, thus reducing the U.S. government’s borrowing costs and, in the process, bolster dollar supremacy. In the words of J.D. Vance, a greater stablecoin uptake will be “a force multiplier of our economic might.”
In conclusion, Varoufakis wrote: “To err in the world of financial innovation is human. But to cock things up big time all you need is the U.S. government to promote private stablecoins, to cloak them in the legitimacy that a little regulation-lite can provide, to ban the Fed from deploying the same technology, and to deprive it of the means to clean up the inevitable mess.
“So, yes, be afraid. Be very afraid.”
