The Dollar and the Future

It is everyday more and more tempting to relate the increasingly greater vulnerability of the American currency, which seems to be getting closer to the end of its cycle as a reserve currency, with a possible scenario in which the next currency that has been touted for some time to replace the dollar, the Chinese e-yuan, does not have the favor of the international community and causes an increasing use of the most widely accepted cryptocurrencies instead.

It is evident that China wants to “sinicize the world,” and in fact, with many of its initiatives, it has already succeeded in having many countries carry out their transactions using e-yuans instead of the American currency. The problem, obviously, lies in the coincidence between the functioning of a country that is already not democratic and seems to have a certain obsession with information control, with the use of a CBDC, a digital currency issued by its central bank, which makes it possible to carry out that control to its ultimate consequences. The Chinese government provides weekly evidence of having a high level of arbitrariness and interventionism in its decisions, another element that detracts from its suitability as a possible reserve currency.

The problems of the dollar have increased significantly with the pandemic. After cheerfully distributing relief checks to its population as if any amount of money could be printed without any further responsibility, something that is probably not debatable if we think about the possible consequences of not doing so in a country where the social protection of citizens is scarce, the inflation generated by tirelessly turning the crank of the money-making machine has affected both its economy and that of all the other countries that depend on the dollar. This is generating a significant loss of confidence in the system: more and more investors are aware of the fragility of the American economy, and the recent fall of several banks has made citizens begin to have little confidence in the possibility of recovering their deposits in the event of being affected by that eventuality.

These fears, both in the United States and China, are driving gold to historic highs, while other economies, such as the Russian one, are plummeting, increasing their dependence on China and communicating “Putin-esque fictions.”

But what consequences could there be if the United States could not justify its enormous debt and a massive loss of confidence were unleashed? Basically, those of a true financial armageddon. In that scenario, which historically has occurred with other types of consequences such as conflicts and wars, it would be susceptible to being accompanied by a channeling of many investments towards cryptocurrencies that generate more confidence, especially considering that this would mean, hypothetically, relying on a neutral reserve currency that depends only on its algorithm, rather than relying on a government or central bank.

If we are to redesign the currency that is used internationally as a reserve, frankly, I prefer to rely on the accuracy and immutability of the blockchain — especially now that it has significantly simplified its operation and no longer has to generate significant energy costs — and on an algorithm that governs it, rather than depending on the arbitrariness of a government with its own interests and agenda. But maybe I’m just a geek and have no idea about economics…

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This post was previously published on Enrique Dans’ blog.

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