History tells us that no international monetary system lasts forever.
And as Barry Eichengreen, the leading thinker in this arena, has repeatedly reminded us, those systems tend to collapse very quickly, whether it was the dominance of Rome’s coins, the British pound’s status as the common unit of international trade, or the various periods in which the world aligned around the gold standard.
The same will be true for the US dollar’s unofficial status as the international reserve currency. Its hegemony will at some point disappear and, when it does, the fall will be swift as the world scrambles for a new commercial anchor.
Below, I will make the case that the trigger for this decline, whether it happens in the next four years or not, could well have been put in place last Tuesday. A Trump presidency could hold the right ingredients for a US dollar collapse.
I will also argue that this time, when the dollar system collapses, it won’t be replaced by another outdated fiat currency like the euro, yen or Chinese yuan. Neither will we go back to a precious metals standard, however much gold bugs hanker for it.
In the interim, we may anchor world trade to a transitional, multilateral combination of these paper and commodity currencies, but soon enough it will prove to be too unwieldy and out of touch with a changing global economy.
The fact is, we now operate in a digital economy in which economic activity is increasingly decentralized, with transactions happening peer-to-peer and, when the Internet of Things is in place, machine-to-machine. That online, decentralized economic architecture will require a digital, decentralized system of monetary exchange that bypasses the inefficient financial intermediaries of a broken banking system.
The solution might not be bitcoin per se, but the distributed, network-run system of value transfer that it represents will, I believe, provide the template for the future model.
Change is coming
Why might Trump set this chain of events in play? To be sure, we don’t know what changes the next president will introduce, but he has definitely stoked uncertainty around the direction of US policy. And uncertainty, the enemy of efficient markets, can often have a self-fulfilling effect.
That’s an unsatisfying answer, however. So let’s also break down some of the ideas that Trump has floated and how they might change the international perception of America’s commitment to the dollar-based international system:
Rights determined by ethnic background
Trump suggests we should discriminate against external foreigners (Muslim visitors to the US), domestic non-citizens (undocumented Hispanic immigrants) and domestic citizens (judges deemed unfit to serve for being of Mexican descent.) This is not just a moral issue; it goes to the heart of whether the law is impartially upheld in the US.
That perceived impartiality is critical to foreign investors’ willingness to hold dollar assets. Might a Trump presidency call into question the vital notion that anyone can assert their contractual property rights in the US, regardless of who and where they are? If so, might it tip those investors toward repatriating some of the trillions of dollars they hold in US assets and which underpin the dollar’s reserve status?
Contempt for international treaties
Whether it’s Trump’s aggressively anti-free trade stance (vs Mexico and vs China) or his disregard for NATO and other international security pacts, the president-elect does not hold existing international agreements in high regard. Yet the US’s commitment to them is integral to the dollar’s role as the monetary rails of international trade.
It also seems possible that this isolationist mindset would lead the US to cut off support for the Bretton Woods institutions, the IMF and the World Bank, two cornerstones of the current international financial system that have already been squeezed by funding constraints from a Republican-led Congress.
Foreign governments trust the US to hold their reserves under an implicit understanding that Washington will stand by these key elements of the international framework for cross-border exchanges and commitments.
Ambiguous commitment to US security umbrellas
Trump’s dismissal of NATO, his apparent cuddling up to Russia, and his seemingly more lax approach to nuclear proliferation hint at a dramatic diminishment of the US’s military deployment around the world.
That security structure is fundamental to the dollar’s strength – there is an implicit quid pro quo in the idea that in return for Washington’s expenditure on ships, planes and personnel that protect the world’s trade routes, the world uses dollars to transact along those routes.
Mistrust in the Federal Reserve
during the campaign, saying she should be “ashamed” of keeping interest rates low, challenges the independence of the most important institution charged with upholding the value of the dollar. What might that do to foreign investor confidence?
Runaway federal deficits
that Trump’s campaign spending proposals would add a staggering $5.3 trillion dollars to America’s debt load over the next 10 years, 25 times that of Hillary Clinton’s proposal.
If even half of that were to be committed, the government would have two options: default on the debt or use inflation to monetize it. Either way, the result would be a massive devaluation in the dollar akin to that which President Nixon achieved when he abandoned its gold peg in 1971.
Speaking of the “Nixon shock,” it’s worth remembering that it was achieved through executive fiat, with the audacious plan privy to only a very small clique of close-knit presidential advisors. It provides a valuable reminder of the power of a strong-minded president to singlehandedly change the international monetary system.
I’m not saying Trump would willingly take such action, but these are the kinds of historical reference points that foreign investors will keep in the back of their minds as they weigh their bets on the dollar.
As for what comes next, it’s worth considering how reluctantly many governments participate in the current dollar-based bargain. It’s no secret that China would love to be less dependent on the dollar for foreign trade, which in turn would mean that it isn’t trapped by a need to hold more than $1 trillion in national savings in US Treasury bonds.
But there are also smaller-country governments that feel completely vulnerable to the dollar system, since it means that any change in US interest rates can have a destabilizing effect on their economies. The situation effectively robs them of monetary autonomy.
What’s interesting is that new, digital money solutions inspired by, if not based on, bitcoin could help these countries wean themselves off the dollar.
The digital ledger technology that Wall Street banks are using to pursue the real-time settlement of securities transfers could equally be used to achieve real-time settlement of trade flows. If Chinese exporters can now get direct rubles-to-yuan payments from Russian importers, without depending on the US-led international banking system to clear transactions through its cumbersome, time-consuming process of aggregated transfers, those two countries’ payments would no longer need to triangulate through dollars.
Meanwhile, in smaller emerging markets, governments are exploring digital money solutions that might also bypass banks and potentially even allow them to create independent monetary policy systems.
And what might smart contracts that give both businesses and governments automating tools to mitigate cross-border currency risks do to demand for reserve currencies? The only reason to hold reserves, which amounts to deferring money that could be put to use back home, is for insurance against those risks.
Decentralizing the future
To me, these changes in the technology of money, along with other aspects of our increasingly digitalizing and decentralizing global economy – everything from machine-learning and augmented reality to drone delivery and 3D printing – make it unlikely that the post-dollar, international solution for managing value exchange will be another fiat currency-based regime. The new architecture will come from within the decentralizing digital technologies themselves.
I’m under no illusions that the powers-that-be who will help determine this future will necessarily gravitate toward bitcoin. But right now, there aren’t many other ways to hedge for these kinds of changes. Bitcoin is the only bellwether we have — a proxy asset class — for the prospect of a future financial system based on a decentralized, distributed trust network.
So if, you’re worried and/or excited about the disruption that a Trump presidency could do to the global monetary system – I’m both, I suppose – bitcoin might just be a creative way to bet on whatever emerges next.
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