Uncle Sam is Broke - long-live Uncle Sam
/A blog by Martin Erasmuson
Back in November 2017 I penned a blog ‘RIP Uncle Sam - How to survive the Post-America World’ where I opined that the US’s decades-long hegemony was in jeopardy as the dominance of the US dollar as a reserve currency diminishes.
That said, the US dollar still maintains it’s #1 slot. In March 2020, more or less 90% of foreign-exchange transactions involved US dollars, over 60% of all global central-bank reserves are held in US dollar-denominated assets and almost 40% of the world’s debt is issued in US dollars. Such has been the omnipresence of the US dollar that most commentators, when discussing it, simply use the term ‘dollar’, and assume everyone knows they are talking about the US currency. But the winds of change have been swirling for some time.
In that 2017 blog I reported Russia and China planned to reduce their dependence on the US dollar and with it, US influence. How has that panned out? On June 3, 2021, the Business Standard reported that Russia was reducing its US dollar holdings to zero; so Russia’s dollar divestment is now complete. Meanwhile, China has also pressed ahead with its own plans, introducing a blockchain-enabled, digital version of its currency, the yuan.
The fact that the yuan is purely digital seems to be a point of concern for some people? More on that later. What is important is to realise that China’s digital yuan is not like other cryptocurrencies that, as we’ve seen with Bitcoin over the last 12 months, are highly volatile. The yuan is run by the Central Bank of China (CBOC) and is essentially a digital version of their ‘normal’ currency (notes and coins) and as such, is not subject to that volatility.
So what? The US dollar substantially maintains it’s value and dominance because, well, it’s the US dollar; and, as the figures above suggest, remains the dominant unit of exchange. To level the playing field with the US dollar, the CBOC backs the yuan with significant holdings in foreign currency reserves (around US$3.22 trillion) and vast physical gold reserves, around 62.64 million fine troy ounces or around US$119.02 billion (I tried to work that out into metric tonnes, but my head nearly exploded – you try, and happy for a comment on that).
The US has been getting increasingly tetchy about these moves by Russia and China in the last several years. You may have noticed that Russia and China are negatively portrayed, almost constantly in the US-dominated mainstream-media. It is way less about China building military bases on South China Sea atolls; or Russia completing the Nord-Steam 2 gas pipeline into Europe; and more about Russian and Chinese moves to unshackle themselves from the US dollar and with it the US’s ability to manipulate and penalise Russia and China.
But as I reported in that 2017 blog, that has been going on for some time. The kicker for me, and with potentially the biggest risk to $US hegemony, was some ‘side-bar’ news almost completely unreported by mainstream media. That story involves Bitcoin. Many commentators, including the US, have been scathing of Bitcoin, rightly pointing to its volatility; mostly driven by private, global investors. Unlike other digital currencies like the Yuan, Bitcoin is not ‘controlled’ by a Central Bank like the US federal Reserve or the Central Bank of China which also upsets various central banks. But I digress. The Bitcoin news was reported on 10th June 2021 by Reuters with ‘In a world first, El Salvador makes bitcoin legal tender’. This could be a game-changer, certainly for bitcoin, and possibly for the US dollar.
First Bitcoin. The move brings the crypt o-currency in from being a ‘fringe’ fad for geeks and establishes it as ‘official-money’, at least in El Salvador. More on ‘money’ later.
So why would the US be concerned about El Salvador’s move? Above I referenced that (in March 2020), more or less 90% of foreign-exchange transactions involved US dollars. Al Salvador will now accept transactions in Bitcoin. This will bypass the US dollar, and with it US controls, and could redefine global currency markets. By way of some context, the US effectively took the world off the gold-standard in 1971 (50 years ago in August 2021). El Salvador’s move to Bitcoin, even being one of the smallest economies in the world, is potentially the first step in taking the world back to a hard-money standard, albeit in the form of a crypto currency. So again, the US gets a bit tetchy about any that threatens the hegemony of the US dollar.
Many commentators have been quick to point out El Salvador’s ‘Big Mistake’ in trusting Bitcoin. In my view they have a fundamental ignorance regards this purely made-up construct we call ‘money’. As Yuval Noah Harari sets out in his superb book ‘Sapiens’: “Money is anything that people are willing to use in order to represent systematically the value of other things for the purposes of exchanging goods and services”. As the figures above suggest, 90% of global exchange for goods and services (world trade) is conducted systematically in this construct we call the US dollar.
If you think that is a bit of a stretch, and needed some evidence of the ‘made-up’ notion of the systemic representation of value encapsulated in the US dollar, and ‘money’ generally; Harari points out that cowry shells (the hard calcium exoskeleton of a group of sea snails and marine molluscs), were used as money for about four millennia all over Africa, Asia and Oceania. And, incredibly; taxes could still be paid in cowry shells in British Uganda right up until the early 20th-century! Harari states further that the sum total of money in the world is about $60 trillion, but physical coins and banknotes comprise only $6 trillion of that meaning $50 trillion; more than 90% of the ’money’ appearing in bank accounts around the world, exists only digitally; on a computer server; some-place.
Based on that, is it ridiculous or a ‘big mistake’ to believe El Salvador could use 100% digital Bitcoin to ‘represent systematically the value of other things for the purposes of exchange’?
Will El Salvador pull it off? The US will be hoping ‘no’. Indeed, wait for El Salvador-based news stories in the coming months as the US looks to make an example of them, so stay tuned. Notwithstanding that, over the next 12 months I believe we’ll see a significant upsurge in the El Salvador economy (GDP). The main impact, and the nightmare scenario for the US, is if other, larger economies follow suit and adopt Bitcoin or other cryptos as a step towards dropping the US dollar. Russia is already there; Japan, Iran and Venezuela have all been flirting with the same idea.
The US’s cupboard where it keeps its implements to coerce and bully other countries is all but empty when it comes to Russia (and China). Both can foot it militarily with the US, at least in their home-waters. What about sanctions? Just this week the NYT reported the US is preparing another round of sanctions against Russia, perhaps in the hope that repeating the failed sanctions-strategy of the previous decade, may somehow work this time. It all has the whiff of desperation.
As the US has spent the last several years naval-gazing, infatuated with its own domestic soap-opera, much of the world; Russia, China, Iran and now El Salvador, has been quietly unshackling itself from the US dollar and moving on. If ‘Uncle Sam hegemony’ were an actual, elderly uncle; you’d be assembling the family, administering last-rights and preparing to switch-off life-support.
Whatever happens, significant change is upon us. What will that change mean for us? Your guess is as good as mine. Suffice to say, change it will.