Why is it said that the Federal Reserve's massive liquidity injection is the deadliest blow in the new currency war?

Written by: Rick Awsb

The Baizhihao Principle as a Precondition Might Be the Only Choice for Financial Institutions in Various Countries to Respond to the AI Industrial Revolution

— Preface

“The Federal Reserve’s balance sheet size may need to grow in the long run in line with the growth of the economy and financial system.”

This is a signal repeatedly conveyed by several Federal Reserve officials recently.

It can be said that the Federal Reserve’s approach is unprecedented in history — this is already significantly different from the past cycle narrative of “expanding the balance sheet — shrinking the balance sheet — returning to normal.” This may be one of the series of actions the Fed is taking in response to the long-term impacts of the AI revolution.

AI does not bring about a new industrial cycle but is more likely a superposition of multiple (Kondratiev) cycles. In an era characterized by extremely high capital density, highly irreversible infrastructure investments, and potentially enormous returns, systemic risks do not primarily stem from short-term inflation fluctuations but from disruptions. Computing power, energy, networks, data centers—once forced to stop, the costs are exponential and often irreparable. The essence of expanding the balance sheet is to use existing credit systems to bring forward long-term investments that cannot wait.

The long-term effects of these AI-related investments may ultimately determine the fate of a nation (if there are still nations in the post-AI era), and thus decide the destiny of fiat currency. Therefore, the Fed’s long-term balance sheet expansion might be the most critical move in the current global new currency war.

Of course, this is not without costs. Domestic expansion of the balance sheet essentially exchanges credit for stability. It inevitably dilutes the “credit” of the dollar, but if one only sees this side, they will misjudge what is actually happening.

Using the Baizhihao Principle to understand, what the Federal Reserve is doing is not unfamiliar. Traditionally, the “lender of last resort” supports institutions lacking liquidity during crises to prevent localized problems from evolving into systemic collapses. The difference today is that the Fed is not stepping in after a crisis occurs but is preventing it before:

AI, energy, computing power, infrastructure—these new production functions share the characteristics of extremely high capital density, highly front-loaded investments, and impacts that are almost irreversible once interrupted. Waiting until a “crisis” appears in traditional form and then having the central bank intervene is often too late. Therefore, the Fed’s role as a lender of last resort has been artificially pre-positioned.

But the problem lies here: if the Fed continuously assumes this pre-positioned, normalized role as the lender of last resort, will the credit of the dollar be continuously depleted? The answer is obvious. However, the U.S. has already discussed solutions: external suppression to maintain internal stability, embracing cryptocurrencies, bypassing national financial regulations, and engaging in global financial colonization to sustain the dollar’s position.

In the context of the AI era, does the change in the U.S. attitude toward cryptocurrencies seem more reasonable? This has led to a seemingly contradictory but logically highly consistent structure: on one side, expanding the balance sheet domestically, taking on the role of the last lender, stabilizing the banking system, government bond markets, and financial infrastructure; on the other side, through cryptocurrencies, stablecoins, and new financial forms, continuously expanding the coverage of the dollar in new markets.

Within a core, controllable system, the U.S. accepts certain risks of credit dilution to prevent systemic issues; on the periphery, outside the U.S. financial system, it uses stablecoins to expand the use and pricing of the dollar to hedge this risk. From this perspective, the Fed’s balance sheet expansion is not gambling on the eternal safety of the dollar but acknowledging the existence of uncertainty and proactively adjusting risk exposure. It tolerates pressure within controllable limits and expands into new markets.

Mainstream media and institutions interpret today’s phenomena as signals of the dollar’s decline. What they overlook is the impending “supersonic tsunami” brought by AI—(Elon Musk).

The current path of the dollar is likely the most rational choice the sovereign currency financial system can make in the face of such profound structural changes.