PEJOURNAL – The dollar has been a global reserve currency for 100 years, but many people have been buying bitcoins since March, fearing that the US Federal Reserve-led central banks will devalue their currencies.
Morgan Stanley, chief executive officer of Global Investment Management Strategy, is the author of Ten Laws of Successful Nations.
When it spread, the US dollar was as strong as ever. Despite talk of faltering US supremacy, the dollar as an intermediary in international trade, another anchor for other countries to value their currencies, and the “reserve currency” of most central banks as the dominant savings.
Before the United States, only five powers aspired to a “reserve currency” status and returned to the mid-1400s: Portugal, then Spain, the Netherlands, France, and Britain. These kingdoms lasted an average of 94 years. At the beginning of 2020, the dollar exchange rate lasted 100 years. This could be a question of how long it could last, but for one important point: the lack of a replacement.
There are claimants. Europe had high hopes for the euro, which was introduced in 1999. But the currency has failed to gain global confidence due to doubts about the effectiveness of the Eurozone multi-state government. China’s aspirations for the Renminbi have stalled for one opposite reason: concerns about the arbitrariness of a one-sided country.
U.S. officials were therefore confident that, in response to the lock down of Quaid-19, they could print the dollar in unlimited quantities without weakening their reserve currency, allowing the country to continue to run large deficits without obvious consequences. But a new class of claimants is emerging: cryptocurrencies. By operating on peer-to-peer networks under the control of any country, cryptocurrencies such as Bitcoin are presented by their heroes as decentralized and democratic options.
The prevalence has made these cryptocurrencies less like pure digital drug addiction. Many people have bought bitcoins in bulk for fear that the US Federal Reserve-led central banks will devalue their currencies. Its price has more than quadrupled since March, making it one of the hottest investments of 2020.
Since its launch in 2009, the creators of Bitcoin have aspired to create it as “Digital Gold”, a prestigious store that offers a safe haven in turbulent times. But skeptics find it hard to feel safe investing in highly volatile assets: the last bitcoin bubble appeared less than three years ago, and its daily price fluctuations are still four times higher than gold.
Suspicious people are especially visible among those who have not grown up with digital technology. They tend to prefer gold that has been bought for hundreds of years as a hedge against the decline of standard currencies. In a recent poll, only 3 percent of boom kids said they had a cryptocurrency, compared to 27 percent of millennials. Still, that number is growing, and there are reasons why we think this bitcoin influx has deeper roots.
This is a turning point for the dollar. Last year, after decades of increases, US debt to the rest of the world exceeded 50 percent of its economic output – a threshold that often signals a future crisis. Since then, with heavy government borrowing subject to locking, these debts have reached 67% of production, deep in the warning zone. The dollar reign ends when the rest of the world loses confidence that the United States can continue its bills. Thus, the dominant currencies fell in the past.
In addition, the United States and other major governments have shown little enthusiasm for curbing rising deficits. Money printing is likely to continue, even if the disease spreads. Trusted or not, Bitcoin will benefit from spreading distrust of traditional options.
Bitcoin is also working to replace the dollar as a medium of exchange. Most bitcoins today are held as an investment, not used to pay bills, but that is changing. Smaller businesses are beginning to use bitcoin in international trade, especially in countries where the dollar is difficult to obtain (such as Nigeria) or the local currency is unstable (Argentina). And in recent weeks, PayPal and its subsidiary Venmo have begun storing bitcoin with the goal of accepting it as a payment next year.
The rise of bitcoin may continue to be a bubble, but even if it does occur, this year’s influx of cryptocurrencies should serve as a warning to government money printers everywhere, especially in the United States. Do not assume that your traditional currencies are the only store of value or exchange that people will always trust. Technically savvy people probably won’t stop looking for other options until they find or invent one. And taking action to regulate the digital currency boom, as some governments have previously thought, may only accelerate this populist uprising.
The issue of bitcoin is not the only problem for the future of US dollar penetration. The Chinese yuan is also moving as a serious competitor to the shadow of the dollar, and China wants its official currency in terms of credit for international transactions, especially in the petrodollar debate, “the official currency for buying and selling energy carriers and petrochemical derivatives.” “Replace the US dollar globally.
Petro bit Quinn, Petro Yuan are some of the titles that will be heard more in the future by oil and energy traders in the world stock markets from Shanghai China to Dubai, London and Wall Street in New York.
Founded in the early 1970s, Petrodollar provided more than 40 years of US influence in the oil trade, but it has recently been shown that its dominance is gradually declining.
Richard Nixon, then President of the United States, withdrew due to the devaluation of the dollar, Vietnam War debt, and excessive domestic spending.
His move, dubbed the Nixon Shock, left the United States with high debt and low liquidity, and many of its key allies, including Britain, Germany and France, questioned whether the United States would be a legitimate leader in leading the global economy.
As the US economy plummeted, another geopolitical event ensued that led to a further free fall.
In 1973, the Arab-Israeli war pushed up oil prices, and Arab countries responded when the United States provided financial and military assistance to Israel.
The Organization of the Petroleum Exporting Countries (OPEC) was established in 1960. At the heart of the organization were countries such as Iran as its creator, the emirates of Kuwait, Libya, Qatar, Saudi Arabia, Iraq and the United Arab Emirates, all of which strongly opposed US involvement in the 20-day war. Following US aid to the Israeli government, OPEC targeted all countries it thought had aided Israel, including the United States, Britain, Canada, Japan, the Netherlands, Portugal, and later South Africa. This caused oil prices to quadruple by 1974.
In 1974, US President Richard Nixon worked hard to revive the value of the US dollar and entered into negotiations with the Saudi royal family with then-Secretary of State Kissinger. Under the agreement, the United States was to provide Saudi Arabia with equipment and aid to protect oil fields, in return for which Saudi Arabia was to set the selling price of oil in US dollars and invest the excess oil revenue in US securities. Until 1975, all OPEC oil-producing countries followed suit, and thus began petrodollar rule.
Petrodollar has since elevated the United States economically and politically globally, but after years of unpredictable wars and geopolitical hostility, American influence has waned. In recent years, steps have been taken to distance ourselves from the petrodollar system, especially within OPEC, many of whose members are not friendly with the United States. Another strong advocate of change is Russia, which has offered China and Japan to buy oil in yen or yuan.
However, a Kuwaiti financial company took the issue a step further, proposing in 2014 that GCC countries could benefit from trading oil against Bitcoin. The proposal was based on the idea that GCC members could save time and money with faster, cheaper and more efficient exchanges.
The idea has been debated for some time, with some even suggesting that the issue of anonymity may usher in a new era of world peace. The idea was that by using “Petro Bitcoin”, countries would be immune to currency manipulation by governments with clear global consequences. A neutral software platform can serve as a great intermediary for doing business globally.
As good as it sounds, neither the United States nor China has stopped short of trying to increase their power.
China has in fact been at the forefront of the fight against petrodollars. In 2012, Iran and earlier this year, in response to US sanctions, Venezuela began trading oil in yuan. Venezuela, a member of OPEC, has begun pricing its oil in Chinese yuan. However, China’s biggest move has been to try to force Saudi Arabia to do the same. One of China’s most notable moves against the petrodollar has been the recent unveiling of the base price of the crude oil, priced in yuan.
Although China is trying to spread Petro Yuan, Russia has taken steps that could have serious consequences for the US dollar.
In addition to Ration Miner Coin, the Kremlin has announced that it will create a new government-accepted e-currency that will be backed by gold. The purpose of this system is to enable free exchange between electronic money and rubles and reduce reliance on foreign currency and at the same time mobilize the domestic online economy.
Although little is known about the digitally encrypted e-money, it looks like the technology will be based on a software platform as Putin works with consultants from companies Ethereum and WAVES has met to build these platforms.
While these important steps are being taken by China and Russia, there is no doubt that the dollar will face downward.