What is a global reserve currency
A global reserve currency is the currency that the majority of global trade is conducted in.
Having a global reserve currency promotes economic efficiency by having a stable unit of account and pricing and a standard way to settle international trade.
Up until recently, the vast majority of large global trade deals were denominated and paid in USD.
This includes deals not involving the USA at all.
Now this is changing rapidly.
Brief History of USD as global reserve currency
Since at least the Breton-Woods Conference of 1944 the US Dollar has been the world's reserve currency. Before that, the British Pound held reserve currency status and other national currencies before that. You can read a detailed history here.
At Bretton Woods, the nations agreed to use the USD as global reserve currency and the USA agreed to back the USD with gold.
Thus a partial gold-standard was re-established after the full gold standard was abandoned in 1914, as nations printed masses of money to fund "The War to End All Wars". This then led to the Great Depression and World War II.
Hence the need to re-establish global financial stability with a partial gold standard in 1944.
But by the early 1970s this wasn't working for the US any more because it wanted to print more money (than it had gold) to fund, you guessed it - more wars.
In 1971 President Nixon reneged on the Breton Woods agreement and ended the full backing of the USD by gold.
In order to preserve the USD's reserve status in 1974 he did a deal with the Saudis where they agreed to price ALL their oil sales in USD and invest in US Treasury bonds (buy US debt). The US provided weapons to the Saudis who were freaking out after Israel's victories in the 1967 and 1973 wars.
Rapid De-Dollarisation
While there were some small moves away from the USD as reserve currency for the past decade, the Ukraine War and Russia sanctions has driven a massive and rapid shift away from USD as reserve currency.
The US has weaponised the USD against too many countries and the sanctions against Russia have completely backfired and caused a huge loss of confidence in the USD.
Very large sections of the world economy are rapidly abandoning the USD and the US controlled global financial system.
The following has all happened in the last year and mostly in the last few weeks.
- Saudi Arabia has ceased pricing its oil exclusively in USD and is now doing deals in Chinese Yuan and other currencies (including Kenyan Shillings). See here and here.
- India has entered into numerous deals with other countries (including Malaysia, Russia, Iran, & UAE) to price trade deals in Indian rupees;
- Russia and China are using rubles and yuan for trade deals, including with third parties
- Brazil and China agreed to use their own currencies for trade.
- Indonesia pulls the plug on Visa and Mastercard.
BRICS GDP exceeds G7
This de-dollarisation is being led by the BRICS countries (Brazil, Russia, India, China, South Africa), whose combined GDP (PPP basis) has just exceeded that of the G7 nations. Many other countries including Saudi Arabia, Argentina, Iran, Turkey and Egypt and looking to join BRICS and follow their lead on de-dollarisation.
Impact of loss of reserve currency status
Because reserve currency status creates huge international demand for the reserve currency and also the debt instruments in the reserve currency (because trading companies need to hedge against currency risks and banks need reserve currency sovereign debt instruments to provide that service), the USA has been able to borrow extraordinary sums without the normal consequences which flow from borrowing more than you can afford.
The US national debt now stands at almost 32 Trillion dollars.
Including State debt it is 133% of GDP.
Loss of reserve status means loss of that exorbitant privilege.
Because interest rates have been held artificially low for so long, the interest rate that the US government is paying on its debt is currently very low.
But now interest rates have risen and are continuing to rise, making long term US Treasury bonds issued at super low rates be worth substantially less than their par value. These were the 'toxic assets' that sank SVB and other banks.
As time progresses, the very low interest bonds mature and the debt needs to be recycled by issuing new bonds.
The US government will have to pay much higher interest rates on these new bonds because:
- there will be far less demand for US Bonds because of far less trade being denominated in USD;
- interest rates having risen sharply because of inflation caused by over-printing of money (esp USD);
- much higher risk premium due to loss of reserve currency status and immense debt.
Sooner or later, the interest rates being demanded by the market for new debt will put the US in a position where it cannot make interest payments and will default on its sovereign debt, causing economic collapse - see Argentina for a historical example.
A multi-polar, multi-currency world
While in the past, another national currency has usually taken over the role of global reserve currency, this time what is happening is that there is no clear replacement reserve currency. Deals are being done in rupees, yuan, rubles, rials and others.
Part of the reason for this is that no one country is clearly overtaking the US:
- China has already peaked demographically and has a shrinking workforce and population;
- India, while fast growing demographically, is still well behind economically;
- Russia, has enormous natural resources and a strong economy but is still struggling demographically (although less so then China).
What we are going to see as the USD declines, is a very messy mix of multiple currencies usage in international trade.
This is economically inefficient and will be a temporary state of affairs as the markets search for a new global reserve currency that is fast, global, efficient, not controlled by anyone and not able to be weaponised.
Source: https://www.quoteinspector.com/free-bitcoin-cryptocurrency-images/
The Bitcoin Standard
After the abuse of its reserve currency status by the US as a weapon, no other major power will want any other major power to obtain reserve status for its currency.
While the BRICS+ nations are banding together to dethrone the US, many of them (particularly Russia, China and India) are historic competitors who will never fully trust one another. Once the US is dethroned, old rivalries will re-assert themselves.
The economic inefficiencies of usage of multiple currencies and the natural distrust outlined above will eventually lead the markets to adopt Bitcoin as the global reserve currency.
This is not because any government will necessarily want this to happen but simply because it is the only economically efficient and politically acceptable option.
Those who quickly adopt the Bitcoin Standard will benefit economically and those who resist the Bitcoin standard will suffer economically, just as countries which held on to Silver during the Gold Standard Era fell behind. More details on this can be found in the book "The Bitcoin Standard".
HIVE and other Cryptocurrencies
The adoption of Bitcoin as the global reserve currency will also benefit other economically sustainable and fully decentralised cryptocurrencies. While Bitcoin is excellent for large international trade transactions, it is not so good for smaller, much more frequent transactions by people and small businesses.
Here there is plenty of opportunity for other cryptocurrencies, but two crucial criteria must be met for long term viability:
- the blockchain network must be self-sustaining economically without any centralised outside funding. People running nodes must be sufficiently financially rewarded for this activity (profit after costs) by the blockchain itself or from transaction fees from users in a free market;
- the governance of the blockchain must be sufficiently decentralised that no centralised entity (including a nation state) or small group of them is able to take over control or have undue influence.
Currently only BTC and HIVE fully meet these criteria but there is time for other blockchains to have their Satoshi or Sun moment and become fully decentralised and sustainable.
Why BTC as global reserve currency is essential for humanity's survival
While some military conflict is an inevitable part of human existence, the influence of massive money printing by governments untethered from a fixed, low inflation standard (like Gold or BTC) in producing unnecessary wars and expanding and lengthening necessary wars is a well documented historical fact.
This has been true in modern times since 1914 (see above) and was also true in ancient times (see Rome and the debasement of the denarius).
As the world again faces the possibility of nuclear war, with more and more destructive weapons available, a monetary system that discourages war by forcing governments to pay for them directly out of tax revenue (politically unpopular) rather than currency debasement (hidden from most voters), is essential for human survival.
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