Is the dollar's expiry date getting closer?
The US is on its path to dissemination and no country is leaving a stone unturned when it comes to dethroning the demon
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Every fiat currency known to date has an expiry date. Look back a few centuries and the dollar, the pound and the euro, the currencies we cherish today and which are considered the gold standard were oblivious to existence. Similarly, the civilizations that dominated the globe have fallen and have fallen hard only to embellish human history. Mankind still moves on building on the foundation that is left by the grit and determination of previous generations or in some occurrences, throw all of those efforts down the bin and start building their civilization from ground up, only realizing their mistakes once calamities hit. These realizations only come when something big breaks which in itself is a result of small steps in that direction.
Talking about fiat currencies, we can’t start the discussion without talking about the big daddy in the room whom everyone is annoyed of but is restricted to live with and whatever you do, he just doesn’t leave. We are talking about none other than everyone’s inevitably favorite fiat currency, the dollar. Well, how did the dollar rise to such a position? We can say that it is able to harness the opportunities presented to it in the best way possible. The 1944 Bretton Woods agreement, the lack of a common monetary base for the world, the crippling of world powers during the 2nd world war, and above all, US’s strategic influence over the world that has made it into a superpower and it remains on that status still.
Like it or not, now the world ahs to live with everything the US does and the ripples are felt all across the global economy. One small step by the FED and the banks worldwide rush in to protect their own house of cards. The countries most affected are those taking on high amounts of debt in the US dollar. These include developing nations struggling to build the infrastructure to compete with the global economy. They suffer the most as they don’t have extra capital lying around to pay the enormous amount of interest accruing on that debt. And then comes the monetary policies by the FED, raise rates and the economy starts to constrict, lower rates and we have a high rate of inflation. Who suffers, everyone! In fact, the Treasury secretary John Connally once told a room of European counterparts that
“the dollar is our currency, but it is your problem”
These iconic words, set the stone for what is happening today. Countries suffer from high import costs when the dollar strengthens and their domestic currency suffers because of high inflation.
Why need the dollar?
Not until recently, the US has been a producer nation. With a large economic base, it has been the world’s largest agricultural production hub, the land of many innovations and some forward looking human resource that have dedicated themselves in serving the world on many technological fronts. Hence, it has gained strategic importance in many areas because of the ideologies on which it came into being. In addition, its land and geographical location favors it to be one of the best contenders for world dominance. Read this insightful tweet on why USA has an edge over other countries that if they stand strong united:
https://twitter.com/girdley/status/1652285351107641344 (There’s a feud between Twitter and Substack so the tweet won’t embed : (
What determines the value of the dollar?
Now we get the fact that the dollar has a position which is undoubtedly pivotal in the sustenance of global financial order. Now, who gives the dollar value and how does that evaporate for which everyone is worried about?
The crucial value driver comes from exporting the goods and services the US produces and exports them. Now, obviously to buy them, dollars are required. Demand can also be created when the government or American corporations issue bonds. Confidence in these companies and the government allows for high demand on the transacting medium. Other countries have to sell their local currencies and buy dollars to participate in the US economy.
The dampening effect to the dollar can come from decreased consumption in the US economy which leads to a sell off of dollars and tightening of the economy. This further leads to lay offs and in released unemployment, the effects we are seeing today. Finally, the sentiment amongst investors and economic data released by the US government contributes in determining the price of the dollar. Consider it as a stock which has a company behind it which in this case is the whole US empire and can be regarded as “too big to fail”. We’ve heard that before…
The king does face opposition
When everyone is dependent on a currency which is not domestic, obviously tensions will rise because of the lack of inclusivity in monetary policies that dictate the price of the dollar. Especially when there is no disciplinary measure backing the issuance and constriction in supply of the dollar, the government will do as they please. During the 1920s, the dollar has had a fixed rate of conversion with gold and you can redeem your paper money for actual gold. But then comes the demise of other strong nations on the map giving an undue advantage to the US. The World War I marks a large increase in costs because of a sharp decrease in labor. The US remains unscathed. During the second World War, Europe and Asia are devastated and US is now the country loaning money to rebuild these countries. That is paid back in gold. However, in 1971, the convertibility of gold and the dollar is abolished by Nixon and the era of fiat money starts.
From these events we can see that the dollar gains its status by a series of odds that go exactly in its favor. Now how can the rest of the world stay put. China has been racing forward and the yuan has been gaining momentum. The belt and road initiative has given it dominance over the areas it has been able to reach as it has adopted a similar strategy like the British East India Company which comes in humbly to sell some spices but ended up taking over majority of the subcontinent. Similarly, when China takes over the Hambantota port in Sri Lanka because of missing of debt payments, it gives a similar vibe. In addition, the cheap labor, its industrial materials production, its flourishing middle class and its high investments overseas put it into the most viable criteria to achieve the status that US once boasted.
The debate about the toppling of the dollar has also been ignited by the use of other currencies for trade across Brazil, Russia, India, China and South Africa (the BRICS nations) later including Iran and Saudi Arabia. The cut in oil production that infuriated the Biden administration and the trade between China and Saudi Arabia in yuan depicts a shift of the largest oil producers towards the eastern wing rather than western. When control over the most important commodity is shifting from the hands of the US, it does put into question the status of the petrodollar system.
Never be exit liquidity
The dollar toppling or not, what you have to make sure is that you don’t end up holding the bag. Consider it like this, did you buy the new meme-coin which sprung up from nowhere, PEPE and now you are waiting for it to go up so that you can get rich quick. Well, face the reality. Those who acquired the initial supply have long been gone and you are left holding the bag.
When considered on the macro scale, Asia has become rich because it has been a major of goods to the Americans and has restricted its local population from access to cheap goods domestically. In America, nowadays, if you finance you are much better off than learning some more practical skill like plumbing. This is the bounty it gets from being the financial hub. Corporations in America reward themselves with stock options, stock buybacks, dividends and an increase in the average pay of CEOs all on the expense of those left holding the bag of dollars considering them as a sound store of value. Others sell stuff in dollars and the stash of banks in America gets refilled. The banks can easily lend aggressively on the cost of tomorrow. The FED is focused on bailing out these banks to prevent a financial crises which makes the dollar more expensive and lowers its supply globally. That the US can’t afford to happen as it will decrease confidence and push up inflation, something we are seeing today due to which this question of toppling the dollar arises.
The dollars price is highly manipulative. One such example in the past has been of the Plaza Accord in 1985 where an increase in the price of dollars is felt as a hit on major economies globally. It is an agreement between the G-5 nations of France, Germany, the U.K., the U.S., and Japan. It is aimed to decrease the value of dollars so that other currencies can have a steady trade flow. The US aimed to reduce its federal deficit and other countries aimed in providing tax cuts. the yen and Deutsch mark dramatically increasing in value relative to the dollar—the dollar depreciated by as much as 25.8% percent in the two years that followed. This has had a positive effect on the Japanese economy by strengthening the yen and decreasing its dependence on the US but eventually because of the Keynesian system of economy we preach, the Japanese economy faced recessionary pressures and had to step in and increase the money supply.
And then comes the Louvre Accord which is signed in 1987 to stop the continuing decline of the dollar and stabilize exchange rates. An ON OFF switch, what else do you need.
So, sell dollars, buy PEPE?
To sum up, manufacturing has seen a major shift from the West to the East and the West now holds power only because of its financial supremacy. In the recent times it has come into question because of a bi polar world being developed. Russia is bent on making a new system for international settlements and lack of inclusivity in the financial networks has made other countries probe into it as well. All eyes are on China but if look at some facts, defense budgets of all the BRICS nations combined come nowhere close to that of US and in this front who wants to mess with big daddy? China has its problems including the demise in its property sector, the fear of decline in population, the censorship that comes with the yuan and the lack of transparency.
A healthy suggestion, choose Bitcoin. It’s for the people. No big dictator dictates its use and you just need a seed phrase to be part of the network. Keep it simple, stack sats.
Hope you made it here and liked the analysis.