Western Hegemony, Digital Scarcity And The Case For A Neutral, Global Reserve Currency.
By Philip Hoeller on ALTCOIN MAGAZINE
“We are living the end of Western hegemony,” French President Macron told diplomats on Tuesday, pointing to the rise of Beijing and Moscow as signs of a shift on the world scene. “The world order is being shaken like never before…”[1]
The below excerpt from an article on Bloomberg describes how the ongoing trade war between the United States and China is actually part of a wider, currency war and an open challenge to global reserve currency hegemony:
A trade war between China and the U.S. has become something bigger: a currency war. Beijing’s weakening of the yuan prompted the Treasury Department to brand it a “currency manipulator.” Central banks around the world, including Thailand, India and New Zealand, promptly followed China’s lead nonetheless.
This isn’t the first time that protectionism became entangled in exchange rates. In fact, what we’re seeing has an eerie resemblance to a back-and-forth volley of currency devaluations and retaliatory tariffs that ripped apart the global economy in the 1930s. There’s no reason something similar won’t happen again.
“Historically, reserve currency status does not last forever.”
Over time, we’ve seen many forms of reserve currency emerge, grow and fade. Our current primary reserve, the US Dollar, used to be tied to gold:
In 1861, Treasury Secretary Salmon Chase printed the first U.S. paper currency. The Gold Standard Act established gold as the only metal for redeeming paper currency. It set the value of gold at $20.67 an ounce. [2]
In my article Macro Risk, Bitcoin and the Safe Haven Asset Narrative, I mention how President Nixon effectively ended the gold standard in 1971.
Rather than being redeemable for gold, paper money was to be exchanged as an IOU based on faith in the credit of the United States Treasury and Federal Reserve Bank — including by other countries and strategic adversaries.
Consequently, continued printing of US Dollars in the face of escalating government debt is catalyzing a trust crisis and an unsustainable geopolitical scenario.
Well before President Trump began undermining trust in the Federal Reserve, a 2010 UN report recommended moving away from the US Dollar as a sole global reserve currency.
The President has since exacerbated volatility in global markets by abruptly withdrawing from international agreements, alienating allies, and upsetting the world order. He has accelerated the erosion of trust in institutions, banks, politicians, corporations, and the media.
The public is questioning everything. Some zeitgeisty nerds are even questioning the fabric of reality itself. Ever since we appear to have crossed into a ‘stranger than fiction’, upside-down clown universe, it’s been inviting to consider the odds we may be stuck in a simulation run by our capricious galactic overlords.
Trump wants to refinance US debt at the same low and negative rates that the European Central Bank has been struggling to maintain. As the following quote from Fox Business describes, negative interest rates are typically used as a last resort to stimulate economic activity by motivating market participants to spend money rather than saving it.
Normally, banks pay depositors an interest rate for storing their money with the bank. But when interest rates turn negative, the reverse happens: Depositors, like the Fed, need to pay banks to store their money instead of getting paid. Negative interest rates have historically been used as a drastic means of spurring growth in times of economic downturn.
At the very least, these are uncharted waters for global monetary policy. What happens when a recession takes hold but all the monetary policy tools usually used to mitigate contractions have already been used up?
Does the system fail? Does anybody know?
“I’ve always been in favor of abolishing the Federal Reserve and substituting a machine program that would keep the quantity of money going up at a steady rate.” — Milton Friedman [3]
Ever since humans first wielded sticks and stones to keep records, we’ve engineered increasingly fair and accurate accounting systems.
Fundamentally, Bitcoin is simply a shared ledger on a distributed network and the cryptoeconomic incentives behind maintaining it encourage network participants to play honestly and transparently.
The financial incentive to cooperate works. It’s capitalism, it’s game theory…and it’s sound money, the core functions of which are as follows:
1) Store of value
2) Medium of exchange and
3) Unit of account.
Bitcoin already serves as an alternative store of value for people dealing with weak government currencies such as Venezuela and Argentina. It can be sent digitally and is both the most secure accounting record and computer network humanity has created.
Additionally, Bitcoin is credited with demonstrating proof-of-concept for digital scarcity. Because of the large amount of energy required to power Bitcoin’s proof-of-work algorithm, the record is tamper proof and individual coins cannot be duplicated.
Federal Reserve Chairman Jerome Powell publicly referred to bitcoin as a “speculative store of value similar to gold”, which has historically been popular for a similar property: It cannot easily be forged.
As a result of uncertainty surrounding negative interest rates, the currency war and its implications on trade, Russia, China, and other countries’ central banks have been ramping up their gold reserves to insulate against reserve currency debasement.
Can the US really expect to keep printing money to pay its debt while expecting other countries to play by different rules?
China still holds an enormous amount of U.S. Treasuries. Germany, France, and a few others prefer hodling gold, while some countries such as Canada and Norway don’t have any.
As fiat currencies seemingly race to the bottom amid inflation, negative yields and a fragile banking system (look up fractional reserve banking, bank runs, and contagion), scarce assets like bitcoin and gold offer safe havens to investors and have gradually appreciated in value.
But how can this value be quantified?
In his article “Modeling Bitcoin’s Value with Scarcity” PlanB explains the math behind Stock to flow (SF) ratios, which can be used to relate scarcity to value.
Are you still with me?
Stock is the size of existing stockpiles or reserves.
Flow is the yearly production:
Gold has the highest SF ratio at 62 (in other words, it takes 62 years of production to reach current gold stock levels. Silver is second with an SF of 22.
Most commodities have an SF barely higher than 1. Existing stock is usually equal to or slightly lower than the yearly output. It’s difficult for commodities to get a higher SF because as soon as somebody begins to stockpile them, price increases, production increases (as it becomes more lucrative) → supply increases and price falls again.
Bitcoin currently has a stock of 18 million coins (with a programmed total of 21 million) and supply growth of ~0.7m/year — an SF ratio of roughly 25.
Bitcoin’s current supply growth of 3.70% is based on the 12.5 BTC block-mining reward (which occurs every 10 minutes) and is set to be cut in half by May 2020. This will lower the supply growth (or inflation rate) of bitcoin supply to less than 1.78% — which is meaningful because it will be lower than the current global inflation rate of ~3%.
In his article, PlanB models a regression based on these numbers that predicts a bitcoin market value of $1 Trillion after the halving event, which translates into a bitcoin price of $55,000 each. Considering the peak market cap in 2017 was around $300 Billion, I don’t consider that unreasonable at all.
“People ask me where all the money needed for $1trn bitcoin market value would come from? My answer: silver, gold, countries with negative interest rates (Europe, Japan, US soon), countries with predatory governments (Venezuela, China, Iran, Turkey etc), billionaires and millionaires hedging against quantitative easing (QE), and institutional investors discovering the best performing asset of last 10 yrs”. — PlanB
In Conclusion
Between you and me, it feels like if there was a script for a Bitcoin movie, it would be writing itself. There are still a lot of challenges and opposition to overcome but despite many obituaries, Bitcoin is not dead.
Due to the geopolitical turmoil and general erosion of trust described in this article, the case for a neutral, trust minimizing, provably scarce, electronic currency to take the friction out of global trade has never been stronger.
International trading partners will never be able to trust each other’s fiat currencies as much as they could trust a neutral, incentive-based consensus-driven, cryptographically secured, distributed ledger.
Central Banks might not accept bitcoin anytime soon but as the turmoil in repo markets this week demonstrated, the incumbent system is beginning to show it’s limits — and it’s comforting to know that there is an alternative.
Additional References:
[2] https://www.thebalance.com/what-is-the-history-of-the-gold-standard-3306136
[3] https://www.econlib.org/library/Columns/y2006/Friedmantranscript.html
