May 08 2020


Cash is a safe placeholder, as long as the underlying currency remains solvent. Using money-printing to bounce back from an economic trough is not new. You print, you devalue, interest rates drop, debt becomes cheaper thus giving more leverage to the economy. Printing money lavishly could durably undermine the strength of currencies though, and possibly the US dollar.

Since Bretton Woods in 1944, the USD has gradually become the base factor for world currencies. It established the US as the dominant power in the world economy. Other countries were meant to pay tribute to the US, while the World Bank and the IMF were erected as safekeepers of the benevolent distribution of world economic growth.

As much as countries dislike the necessary peg, it is the reference currency to gauge a country’s systemic stability. As a consequence, the world holds trillions of US Treasuries, with China and Japan holding a combined $2tn alone. Indeed, such pledge of vassality allows the US to issue debt like there is no tomorrow. Outstanding Treasuries currently represents $25 trillion dollars. I know, it is staggering.

Some have tried to find an escape away from the US peg, certainly at a moment the US are clearly stepping away from the international scene, and letting the Bretton Woods institutions go adrift. Even allies have had a tough wake-up call, as they realized that the US power was no longer as benevolent as they might have thought. The EUR has come and gone as a potential challenger, and CNY is trying it timidly through a peg to a basket of currencies as opposed to 100% on the USD. Gold is a fond physical alternative, which is unfortunately not yielding much.

Crypto coins are an interesting departure. There is no question that BTC or ETH are far too volatile to even start qualifying for reserve assets, but what about Stable Coins? Based on the same tested blockchain process, they promise to assuage volatility for developing countries, while being borderless, faster, transparent with lower fees. The holy grail remains adoption, and trust.

In a nutshell, if a base currency adoption relies on the economic clout and worldwide trust of its issuer, we should look at how we could recompose a basket of assets, which combination would more efficiently represent the shifting balance of the world’s economic powers. Who knows, one day we could look at a crypto token that would do exactly just that.

360 Advisory Markets