The writer, Morgan Stanley Investment Management’s chief global strategist, is author of ‘Ten Rules of Successful Nations’
When the pandemic hit, the US dollar was as mighty as ever. Despite talk of faltering American supremacy, the dollar ruled as the medium of international trade, the anchor against which other nations value their currencies, and the “reserve currency” most central banks hold as savings.
Before the US, only five powers had enjoyed the coveted “reserve currency” status, going back to the mid-1400s: Portugal, then Spain, the Netherlands, France and Britain. Those reigns lasted 94 years on average. At the start of 2020, the dollar’s run had endured 100 years. That would have been reason to question how much longer it could continue, but for one caveat: the lack of a successor.
There are contenders. Europe had hopes for the euro, introduced in 1999. But the currency has failed to gain the world’s trust, owing to doubts about the effectiveness of the eurozone’s multi-state government. China’s aspirations for the renminbi have been stymied for the opposite reason: concern about the arbitrariness of a one-party state.
US officials were thus confident that, in response to the Covid-19 lockdowns, they could print the dollar in limitless quantities without undermining its reserve currency status, allowing the country to keep running large deficits without apparent consequences. But a new class of contenders is emerging: cryptocurrencies. Operating on peer-to-peer networks ungoverned by any state, cryptocurrencies such as bitcoin are being pitched by their champions as decentralised, democratic alternatives.
The pandemic has made those crypto-pitches sound less like pure digital hype. Fearful that central banks led by the US Federal Reserve are debasing the value of their currencies, many people have bought bitcoin in bulk. Its price has more than quadrupled since March, making it one of the hottest investments of 2020.
From its launch in 2009, bitcoin’s builders have aspired to establish it as “digital gold,” a trusted store of value that offers a safe haven in tumultuous times. But doubters find it hard to feel safe investing in an asset that is so volatile: the last bitcoin bubble popped less than three years ago, and its daily price swings are still four times larger than gold.
The sceptics are particularly well represented among those who did not grow up with digital technology. They tend to prefer gold, which has been purchased as protection against the decline of standard currencies for hundreds of years. In a recent survey, only 3 per cent of baby boomers said they own a cryptocurrency, compared with 27 per cent of millennials. Still, those numbers are rising, and there are reasons to think this bitcoin rush has deeper roots.
It comes at a turning point for the dollar. Last year, after mounting for decades, US debts to the rest of the world surpassed 50 per cent of its economic output — a threshold that often signals a coming crisis. Since then, with the government borrowing heavily under lockdown, those liabilities have spiked to 67 per cent of output, deep in the warning zone. The dollar’s reign is likely to end when the rest of the world starts losing confidence that the US can keep paying its bills. That is how dominant currencies fell in the past.
Moreover, the US and other major governments show little enthusiasm for reining in the mounting deficits. Money printing is likely to continue, even when the pandemic passes. Trusted or not, bitcoin will gain from widening distrust in the traditional alternatives.
Bitcoin is also starting 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, particularly in countries where dollars can be hard to come by (such as Nigeria) or the local currency is unstable (Argentina). And in recent weeks PayPal and its Venmo subsidiary have started storing bitcoin with an eye towards accepting it as payment next year.
Bitcoin’s surge may still prove to be a bubble, but even if it pops, this year’s rush to cryptocurrencies should serve as a warning to government money printers everywhere, particularly in the US. Do not assume that your traditional currencies are the only stores of value, or mediums of exchange, that people will ever trust. Tech-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, may only accelerate this populist revolt.
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