Whenever the U.S. credit rating comes into view – as it did with Fitch’s surprise downgrade this week – it’s an opportunity to discuss the connection between money, debt and power and to explore how Bitcoin and crypto could upend those relationships.
To start with, let’s note that while a downgrade does reflect a moderately poorer outlook for the U.S. government’s finances, an actual default by the U.S. is highly unlikely, notwithstanding the Congressional game of debt-ceiling-chicken that periodically raises talk of a “technical default.” Countries that issue debt in their own currency rarely miss debt payments in the nominal sense, because they don’t need to. They can just print money to make repayments.
Of course, printing money to repay debts does not let governments off the hook. Doing so depreciates the exchange rate and reduces the currency’s purchasing power via inflation, thus imposing a form of tax on both the domestic population and foreign creditors. That undermines confidence among foreign investors and beads mistrust among taxpayers as a self-perpetuating cycle of collapsing exchange rates and higher prices arises.
In theory, these unhealthy economic outcomes should incentivize governments not to use expansive monetary policy to meet debts. But that assumes there’s democratic accountability, and international debt markets suggest that creditors judge different governments differently on that score. Many emerging-market governments across Latin America, Asia, Africa and Eastern Europe can’t issue debt in their own currencies because foreign lending institutions demand higher-than-affordable interest rates, leaving them with no option but to issue bonds in foreign currency – primarily in dollars.
This international differentiation would all be fine, and perhaps a disciplining force on corrupt, undemocratic governments, if the international debt market was a fair, unbiased forum for judging the trustworthiness and democratic bona fides of each country’s political system. But it’s not.
In fact, because international sovereign credit markets largely trade in debt denominated in dollars, it’s the U.S. – the very same country that Fitch just declared to be a less-than-perfect credit risk – that most gets to shape those assessments, creating distortions in what should be a free market. It’s another way the dollar’s reserve status affords the U.S.’s “exorbitant privilege,” in this case the power to influence geopolitical outcomes and push for the profit-interests of its banks.
The U.S. wields this power, in part, through the International Monetary Fund, within which, as the largest shareholder, it is the only country with sole veto power.
When the IMF swoops in with a bailout offer because Argentina or Turkey or Nigeria is staring down the barrel at debt defaults, it attaches constraints on the deal – fiscal austerity, macroeconomic reforms, higher interest rates and so forth – all in the name of restoring the confidence of foreign creditors. These politically unpopular policies are largely dictated by what the U.S. wishes, and often they can be dialed up or down in intensity to put pressure on a political enemy or support a friend.
Banks, meanwhile, with the help of perhaps the most powerful lobbying entity you’ve never heard of – the DC-based International Institute of Finance, or IIF – regularly emerge out of negotiations with their assets more or less intact. It’s a giant, international version of the “corporate socialism” that was observed in the U.S. following the massive bank bailouts during the mortgage crisis of 2008.
When, as a journalist in Argentina, I covered that country’s decade-long, torturous debt restructuring in the 2000s, I found myself sympathetic to the domestic left’s critique of the U.S.-led IMF’s excessive power. But I also had little faith in the corrupt and dysfunctional Argentine political system, which led me to begrudgingly view the IMF as a necessary disciplinarian. I found Argentine government protestations that Washington was stripping the country of its economic sovereignty to be self-serving, as it was really about protecting a corrupt political class.
Then, four years later, I got interested in Bitcoin and began to look back on that period quite differently. I saw a third, middle way.
The core issue that should have been at stake in Argentina’s debt negotiations was not the independence or sovereignty of the government per se, but of the Argentine people. And when it came to their monetary system, Argentines’ sovereignty had been stripped away by politicians who’d debased their wealth and restricted their access to their bank accounts.
Thanks to Bitcoin, the citizens of developing economies can now opt out of this undemocratic and distorted international system in which they are caught between their own corrupt, domestic government models and a Washington-Wall Street nexus of self-serving power.
That citizen element is what made El Salvador’s move to declare bitcoin legal tender interesting, far more so than the fact that the government also chose to build a stash of the digital currency, which President Nayeb Bukele and his supporters often described as an act of asserting the nation’s sovereignty in breaking its dependence on dollar reserves. I tend to think Bukele’s purchases recklessly exposed the country’s finances to intense volatility and investor mistrust. But the idea of explicitly granting freedom for people to choose bitcoin if they desired was a powerful, symbolic act of affirming citizens’ agency and sovereignty.
El Salvador is not the only country claiming to restore monetary sovereignty. China and its allies are exploring ways to reduce their dependence on the dollar. They believe central bank digital currencies (CBDCs) can help them achieve that. Some are already working on digital swap models that provide workarounds to bypass the dollar in trade.
When combined with fiscal challenges in Washington, this process could move faster than we think, as the loss of confidence in dollar assets combines with an expansion of a parallel, Chinese-led system.
What should the U.S. do about it? It could exercise fiscal discipline, abandoning counterproductive debt ceiling standoffs for bipartisan efforts to sensibly reprioritize spending and taxation. But that currently sounds like an impossible utopia.
What it should do is lean into the principle of free choice and open systems in money. Giving people that choice would be consistent with its values, which are, in any case, the “soft power” pieces of what makes the dollar the preferred currency of the world.
There’s an implicit bargain in the world’s demand for dollars: it suggests people the world over expect the U.S. government to uphold its values with regards to human rights and property rights. They expect that it will not confiscate someone’s property, even if they are a foreigner without a vote, such as a bondholder (unless you’re a Russian oligarch, Iranian ruler or someone else on the sanctions list). And they expect the country’s democratic foundations are strong enough that a U.S. dictator won’t arise who would choose to debase the currency in favor of his own interests.
So, the counterintuitive way to boost the dollar’s standing and stave the threat posed by a deteriorating credit profile and challenges from China and co. is to let people choose how they want to transact. The U.S. should actively encourage the right to open monetary systems, whether that’s bitcoin or stablecoins, both of which will be shaped by the fate of two pieces of key crypto legislation currently in the House – which, it is feared, the Democrat-controlled Senate or White House will reject.
There’s much at stake in all this.