Hayes: Stablecoins Will Finance the Coming Credit-Fueled Military Economy

The Financial Architecture of a New Economic Era

Arthur Hayes has proposed a striking economic theory: stablecoins will become the primary funding vehicle for a massive credit expansion focused on rebuilding America’s military-industrial capacity. This isn’t about Bitcoin or Ethereum – it’s specifically about dollar-pegged stablecoins becoming the unexpected backbone of government financing.

According to Hayes, as the new administration prepares to flood the system with credit to bolster defense production, traditional funding sources won’t be the primary buyers of this new debt. Instead, stablecoin issuers like USDT will increasingly purchase Treasury bills with cryptocurrency inflows, creating a novel financing pipeline for government spending.

Understanding the Credit-Driven Military Production Model

Hayes argues this economic transformation isn’t fundamentally about GDP or tax revenue. The emerging model resembles China’s state-directed approach where the government guarantees profits for strategically important industries – semiconductors, rare earth minerals, and defense technologies. This guarantee effectively compels banks to lend because profitability is secured by government backing. The resulting credit expansion enables large-scale military production infrastructure.

MP Materials: The Blueprint for Credit-Backed Strategic Production

Hayes points to MP Materials as a prototype for this economic model. The company secured a $1 billion loan package backed by major financial institutions including JPMorgan and Goldman Sachs to construct a rare earth processing facility. What made this financing possible? The Department of Defense intervened by guaranteeing a floor price for the minerals at approximately double Chinese market rates, while simultaneously becoming the company’s largest shareholder.

The financial mechanics work as follows: MP Materials borrows $1 billion, which creates an equivalent amount of new currency in the financial system. This capital finances plant construction and worker compensation. Those workers subsequently spend their earnings, creating additional deposits throughout the banking system, perpetuating a liquidity cycle.

Simultaneously, the government purchases rare earth materials from MP Materials, financing these acquisitions through new Treasury debt issuance. Banks convert MP’s loan into Federal Reserve reserves and utilize these reserves to purchase government debt. The end result? The banking system, government agencies, and the company all experience balance sheet expansion as the monetary supply grows – what Hayes characterizes as “QE for Poor People.”

This approach circumvents congressional appropriations processes. The Defense Department can directly approve procurement agreements. Financial institutions eagerly fund any project designated as “strategically critical.” Representatives compete to secure contracts for their districts. It creates what Hayes describes as a perfect engine for economic growth – with inflationary consequences.

The Inflation Challenge and the Asset Bubble Solution

Hayes identifies the critical weakness in this model: credit creation outpaces actual productive capacity. Labor pools and material supplies cannot expand as rapidly as financial liquidity. The inevitable result is inflation, with rising wages, increasing goods prices, and economic pressure on those outside the government-banking nexus.

The solution Hayes identifies is asset price inflation: if an asset class appreciates rapidly enough, the public perception of wealth overshadows underlying economic challenges. China employed this strategy with real estate. Hayes suggests the United States will implement it through cryptocurrency markets.

Credit Expansion, Cryptocurrency Markets, and Treasury Demand

Hayes has developed an index combining U.S. bank reserves and liabilities, mapping it against Bitcoin price movements. His analysis indicates that when credit doubled, Bitcoin appreciated approximately 15x. The correlation suggests that expanded fiat creation correlates strongly with cryptocurrency market growth – a dynamic Hayes believes the incoming administration fully understands.

This relationship has strategic political implications. Cryptocurrency ownership demographics skew toward younger, less affluent, and more diverse Americans compared to traditional equity markets. When cryptocurrency markets appreciate, this broader demographic experiences wealth effects. Hayes suggests policy initiatives like allowing retirement accounts to include cryptocurrency holdings (potentially unlocking $8.7 trillion) and eliminating capital gains taxes on digital assets would further accelerate market growth.

The critical mechanism isn’t merely market appreciation but the recycling effect Hayes identifies. As cryptocurrency market capitalization increases, a portion converts to stablecoins. Hayes estimates approximately 9% of total crypto market value ultimately flows to stablecoin assets. These stablecoin issuers typically invest in short-term Treasury bills for yield – instruments that are secure, short-duration, and highly liquid. The relationship becomes self-reinforcing: rising markets increase stablecoin assets under custody, which increases Treasury bill purchases.

Hayes projects that if the cryptocurrency market reaches $100 trillion by 2028, approximately $9 trillion would flow into stablecoins, generating equivalent Treasury demand. “That would be a 25x rise from current levels,” he notes. This substantial demand would fund military contracts, mineral price guarantees, and industrial subsidies.

Historical Precedent: Modern Financial Engineering Meets Wartime Financing

Hayes draws historical parallels to World War II financing mechanisms, when the U.S. government prioritized short-term bill issuance over long-term bonds to fund military production. The primary difference is the funding mechanism: previously war bonds and patriotic appeals; today stablecoins and yield optimization.

The cycle becomes self-reinforcing: military economy expansion drives credit growth through commercial banks incentivized by government guarantees. Expanded credit pushes cryptocurrency valuations higher, driving stablecoin adoption. Stablecoin issuers purchase Treasury bills, providing the government with continuous liquidity for military-industrial financing.

Hayes concludes that stablecoins are evolving into the modern equivalent of war bonds – a financial pipeline connecting cryptocurrency market growth directly to government funding requirements, creating a symbiotic relationship between digital assets and military production finance.