Game Theory in Macroeconomics: Bitcoin Strategic Reserve

Macroeconomic systems and agents can be understood in game-theoretical terms by modeling their interactions as strategic decision-making processes under conditions of uncertainty, competition, and cooperation.

A recent Executive Order by President Trump to establish a Strategic Bitcoin Reserve and seed it with federally seized BTC may well be an example the US stimulating global economics away from its US-led Stackelberg equilibrium.

1. Macroeconomic Agents as Players

Key players include households, firms, governments, central banks, and international institutions. Each has specific objectives:

• Households: Maximize utility
• Firms: Maximize profits
• Governments: Optimize policy effectiveness
• Central Banks: Ensure economic stability

2. Types of Macro-Level Games

• Central Bank vs. Government (Policy Games): Monetary vs. fiscal policy conflicts modeled as Stackelberg or coordination games.
• Countries in Trade (Trade Wars): Trade policies lead to a Prisoner's Dilemma, where cooperation is beneficial but defection is tempting.
• Firms in an Economy (Oligopoly): Companies engage in Cournot (quantity) or Bertrand (price) competition.
• Expectations and Monetary Policy: Interactions between central banks and market expectations modeled as Bayesian games.

3. Coordination and Equilibrium Concepts

• Nash Equilibrium: No agent can unilaterally improve their position.
• Stackelberg Equilibrium: One player (e.g., central bank) moves first to influence others.
• Pareto Optimality: Determines efficiency in policy choices.

4. Strategic Dynamics in Macroeconomics

• Repeated Games: Long-term interactions shape cooperation and retaliation.
• Evolutionary Game Theory: Explains how behaviors adapt over time.
• Coalition Formation: Models economic alliances (e.g., EU, OPEC).

5. Application to Crises and Stability

• Financial Crises: Coordination failures in banking or currency markets.
• Debt Sustainability: Governments and creditors engage in dynamic games over borrowing and repayment.

By using game theory, policymakers can anticipate strategic interactions and design institutions that promote economic stability and efficiency.

Many crypto observers believe the newly formed Strategic Bitcoin Reserve will kick off a global BTC acquisition strategy. The US should do something soon to start adding to it initial pile of 200,000. That may sound like a lot, but not when compared to Microstrategy's own stockpile of about 500,000 on their balance sheet!

I fully expect that in the coming week's we'll hear more and more announcements from countries investing some portion of their sovereign wealth funds in similar BTC reserves.