Back in the 1960s, French Finance Minister Valéry D’Estaing once referred to the US’s ability to issue the world’s reserve currency as an “unreasonable privilege.”
What did he mean by that? Being a reserve currency publisher has allowed the United States to borrow cheaply, operating trading deficits indefinitely and dominate Global funding Practically uncontested for the better part of a century.
Yet there is a back side; Few are considering the cost of having the world’s reserve currency. In this article, we will look at these costs, how they drive geopolitics and economics today and if there may be an alternative to the Almighty USD.
The birth of the dollar’s dominance – Bretton Woods
In July 1944, the Allies, led by the United States, designed a new financial system at Bretton Woods. According to the terms American dollar would be linked to gold to $ 35 per ounce, and all other currencies would be linked to the dollar.
But not everyone who attended favored this system. Apart from the Soviet Union, which openly opposed it, the economist John Maynard Keynes believed it was wrong and offered an alternative: Bancor. This would be a supranational currency, not issued by any specific country, which would only be used for international trade.
Keynes also proposed the creation of a global institution called International Clearing Union (ICU) to manage trade balances, a set of rules for punishing those who drive persistent trade surplus, a mechanism for adjusting and stabilizing exchange Prices, temporary cash credit for countries to use and national currencies would be linked to Bancorn.
But it wasn’t to be. Because of its leverage, namely gold and industrial power, the US proposal won; The rest is history.
Triffin’s dilemma means guaranteed instability
While the United States received many benefits from having Global backup currencyThere are always balances in finance. Having a national currency structure when the reserve currency introduces Triffin’s dilemma, named after Robert Triffin, which introduced it in the 1960s.
Triffin’s dilemma means that the United States must operate trade deficits to provide the world with dollars to use for reserves and trade. However, doing this guarantees long -term instability by undermining confidence in USD’s value.
In short, the world needs lots of dollars to trade with, so to give liquidity, the US drives trade deficits (exports dollars). Sustained US deficit, however, undermined the dollar in the long term when foreign countries began to doubt gold convertibility, ending in 1971 with Nixon ShockOr that the dollar would retain its purchasing power.
The hidden price that the US has paid
Although the world’s reserve currency allows the United States to dominate global financing and borrow cheaply, this will come at a cost. The financing of the US economy, rising levels of personal, corporate and public debt and hollow from the US manufacturing base are just some of the disadvantages. The consequences of all this can be seen very clearly today.
As this system enters its later stages, political destabilization increases and populism is rising. Anti-globalization nationalist movements and Trade war with China are some signs that the system is being broken down and no longer serves a large segment of the American people. The American record debt levels and interest paid on them will also be an inevitable fiscal and political problem.
But let’s not forget the benefits
Of course, the world’s spare currency comes with many benefits. If that were all disadvantages, the United States would never have agreed to it in the first place.
The main benefit is to be able to borrow at low prices. Global demand for USD and Treasury means that the United States can borrow at lower interest rates than almost any other country. Economists say correctly that the United States has the strongest companies and the largest consumer market, but both are partly due to the low interest rates that both fund.
Having the reserve currency also means that US imports are cheaper. This increases the standard of living, which allows Americans to buy an abundance of goods from all over the world at a relatively affordable price. The goods may not be done in America, but they are cheaper, and most people who lost their manufacturing jobs have been absorbed in other, higher paying industries further up the value chain.
It also allows Wall Street to dominate global funding. Much of the surplus that other countries earn by trading with America is recycled to Treasurybusiness bondsshares and other assets. In essence, America buys goods with cheap credit, and the world recycles the profits back through Wall Street, which allows it to dominate the global financial industry.
All this combined gives the United States unmatched geopolitical leverage. In addition to political power and influence, it can sanction enemies through FAST and even seize their USD -Central Bank reserves.
So we can say that the global reserve currency is a faustic find with enormous benefits and costs. Still, this is an advantage that many countries would grab a heartbeat.
Signs of stress-they-dollarization and rivals
It’s no secret that the USD system is under stress: US president has said so. While US 47th president does not say it directly, he has identified the trade deficit as unsustainable and has expressed a desire to close them and handle the debt.
Other signs that the monetary order is under stress include de-dollarization, with oil agreements in Yuan with BRICS Nations that drive de-dollarizationDigital currencies such as Bitcoin and Ethereum offer alternatives and US financial position; Few would call it well.
Of course, this is somewhat inevitable; No spare currency has kept forever. While USD is ubiquitous and could not be abandoned without anything other than a new Bretton Wood Convention, there is an increasing number of competitors and demands independence from the US system, and there is increasing concern about US economic and political stability.
Scalable bitcoin can potentially act as a new bancor
Where does all this leave us? Are we doomed to go from one spare currency to the next and burn through a monetary system after another with inevitable turbulent transitions when they quit? Not necessarily.
It is worth considering how Bitcoin (The scalable version) may be an alternative to Keynes Bancor idea. It has the following properties to make it appropriate:
- It is neutral, not tied to any special nation state.
- The limited supply of 21 million means that it is really healthy money.
- It is decentralized, guided by a fixed protocol and distributed nodes.
This means that Bitcoin cannot be manipulated for political advantage by any nation state and cannot be removed.
Bitcoin can also serve as an automated version of Keynes International Clearing Union: Countries with persistent deficits would simply run out of bitcoins. In the same way, countries that were running persistent surplus would be stimulated to spend them or face deflation pressure (Hodling would not be good). In essence, this means a Bitcoin-based monetary order would have market-driven self-correcting rules that balance trade.
Unlike the current system, which the United States can exercise as a political weapon, Bitcoin transactions cannot be controlled by any party. There is no need for correspondent banking networks and the power they put in the hands of some elites; Transactions are peer-to-peerAnd anyone can participate. Bitcoin would also avoid Triffin’s dilemma by eliminating the need for any country to deliver it. It can serve as a neutral, apolitical, healthy account for international trade used by central banks, companies and people.
However, in order to serve this purpose, bitcoin must scale. BTC’s throughput capacity of seven transactions per second will not reduce it, and second -layer solutions such as Lightning Network destabilize the system’s economy and introduce security owls. Scalable versions, such as BSV, enable central banks and companies to use it for settlements while making retail payments, transfers and micropaymm’s possible.
This is not to say that bitcoin is only response Or that the current dominant player would allow it without struggle. If the world looks at the scalable electronic cash system that Bitcoin was designed to be rather than the quasi investment it has become, it may be part of a potential solution to the current system’s misery and could act as a neutral currency in the style of Keynes Bancor but with many other functions he could not have imagined in 1944.
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