The author, Morgan Stanley Investment Management’s chief global strategist, is the author of ‘Ten Rules of Successful Nations’
When the pandemic struck, the US dollar was as strong as ever. Despite mentioning the failure of American supremacy, it ruled the dollar as a medium of international trade, the anchor against which other nations value their money, and the “reserves” that most central banks hold as savings.
Prior to the United States, only five powers had enjoyed the stylish “reserve” status, dating back to the mid-1400s: Portugal, then Spain, the Netherlands, France and Britain. Those reigns lasted an average of 94 years. At the beginning of 2020, the dollar’s run had lasted 100 years. That would have been reason to question how much longer it could last, but to one caveat: the lack of a successor.
There are competitors. Europe had hopes for the euro, introduced in 1999. But the currency has failed to gain world trust, due to doubts about the effectiveness of the euro area multi-state government. China’s aspirations for the renminbi are stumped for another reason: concern over the arbitrariness of a one-party state.
US officials were therefore confident that, in response to Covid-19 locks, they could print the dollar in unlimited amounts without undermining its reserve status, allowing the country to continue to run major deficits without apparent consequences. But a new class of competitors is emerging: cryptocurrencies. Operating on peer-to-peer networks not governed by any state, cryptocurrencies like bitcoin are set by their promoters as decentralized, democratic alternatives.
The pandemic has made those crypto fields sound less like pure digital hype. Fearing that central banks led by the US Federal Reserve are ruining the value of their money, many people have bought bitcoin in bulk. Its price has more than tripled since March, making it one of 2020’s hottest investments.
Since its launch in 2009, bitcoin builders have aspired to establish it as “digital gold,” a trusted, high-value store that offers a safe haven in troubled times. But skeptics are struggling to feel safe investing in such a volatile asset: the last bitcoin bubble popped less than three years ago, and its daily price swings are still four times more than gold.
Skeptics are particularly well represented among those who did not grow up with digital technology. They tend to favor gold, which has been purchased as protection against the decline of a standard currency for hundreds of years. In a recent survey, only 3 percent of baby boomers said they owned cryptocurrency, compared with 27 percent millennials. Still, those numbers are increasing, and there are reasons to think that this bitcoin rush has deeper roots.
It’s coming at a turning point for the dollar. Last year, after increasing for decades, U.S. debt to the rest of the world surpassed 50 percent of its economic output – a threshold that often signals an impending crisis. Since then, with the government heavily borrowing under lockdown, those obligations have poked to 67 percent of output, deep in the alert zone. The dollar’s reign is likely to end when the rest of the world begins to lose confidence that the United States can continue paying its bills. That is how currency collapsed in the past.
Moreover, the US and other large governments show little enthusiasm for change in the growing deficits. Money printing is likely to continue, even when the pandemic passes. Trust it or not, bitcoin will benefit from expanding distrust in the traditional alternatives.
Bitcoin is also beginning to make progress on its ambition to replace the dollar as a medium of exchange. Today, most bitcoins are held as an investment, not used to pay bills, but that is changing. Smaller businesses are starting to use bitcoin in international trade, especially in countries where it can be difficult to source dollars (like Nigeria) or the local currency is unstable (Argentina). And in recent weeks PayPal and its subsidiary Venmo have begun storing bitcoin with an eye toward receiving it as payment next year.
Bitcoin’s surge may still bubble up, but even if it does pop up, this year’s rush to cryptocurrencies should be a warning to government money printers everywhere, especially in the US. Do not assume that your traditional currency is the only stores of value, or exchange media, that people will ever trust. Technically-savvy people are not likely to stop looking for alternatives, until they find or invent one. And stepping in to regulate the digital currency boom, as some governments are already considering it, may only accelerate this popular uprising.
Letters in response to this article:
Why bitcoin can never be a reserve / By Daniel Aronoff, Department of Economics, MIT Cambridge, MA, US
A history of money shows what bitcoin is up against / By Lajos Bokros, Professor of Economics and Public Policy, University of Central Europe, Vienna, Austria
Don’t forget gold in search of new reserves / By Thomas Coughlin, Chief Executive, Kinesis, Brisbane, Australia