A Currency Upheaval Is Coming

Wednesday, June 26, 2019
By Paul Martin

By Jeffrey A. Tucker
JUNE 26, 2019

Sometimes forces line up in just the right way to mark the end of an era. That era is dollar supremacy.

Colin Lloyd has marshaled some impressive evidence that the dollar’s status as the global reserve currency may not last. Indeed, its status is weakening. Should it come to lose its monopoly status, the place of the U.S. on the world stage will undergo a substantial change. The ability to call the shots, as it has done in the entire postwar period, will be weakened. Monetary policy will no longer be able to presume infinite markets abroad for dollar creation. The market for U.S. currency could come into question. All the implications here are impossible to foresee.

Let’s consider five trends that make the prospect very real.

The Trans-Pacific Partnership Pullout
One of the first actions of the Trump administration was to pull out of the Trans-Pacific Partnership (January 23, 2017). The pact involved 12 nations including Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. There was plenty wrong with the agreement – and I would list its burdensome treatment of intellectual property to top the list. However, that’s not why Trump pulled out. His problem was that the U.S. has a technical (but inaccurate) “trade deficit” with some of these countries, from which he concludes that “they” owe “us” money, so no deal.

The presumption of this walkout was that the agreement would die. Not so. Later in the year, the remaining 11 carried on and struck a deal without the U.S. The great irony is that the deal was immediately made better by virtue of the U.S withdrawal. The intellectual property provisions that had been such an imposition were made far less threatening and more friendly to market innovation. The new deal was actually quite radical: it removes more than 98 percent of tariffs for trade between Canada, Mexico, New Zealand, Malaysia, Vietnam, Singapore, Brunei, and Peru. It covers 500 million people and represents 13 percent of global trade.

The end result was exactly what had been predicted: a huge gain for China and a loss of export markets by the U.S. As just one example, the Los Angeles Times points out that “Australian wine entering Japan is taxed at 5.6% and will eventually drop to zero. There’s no duty at all for wine from the EU and Chile. But for California, it’s 15%.” As it turns out, all these countries did have other options besides complying with every demand by the U.S. and dealing only in U.S. dollars. The loss from the pullout: forgone gains of $131 billion and a direct loss of $2 billion due to advantages remaining partners enjoy by trading with each other.

The Libra and the Bitcoin Rally
Cryptocurrency keeps being declared dead, even from the time Bitcoin was worth less than $1. Even the “crashes for the history books” result in new gains over time. The crypto sector in general is now sporting a $330 billion market capitalization. These are non-state money-like assets that are not just tradable in dollars but any money, good, or service. They are also global assets not restricted by the geographic lines of the nation-state. They are uncontrolled by any nation’s central bank. Whether Bitcoin or some other crypto can emerge as a serious global power is the stuff of speculation. But that these market-based tools have a future is no longer in doubt.

A key indication of this is the introduction of the new global currency connected with the Facebook platform, the Libra. Those of us who have long followed the crypto markets know with confidence that money can emerge from outside the state and be well managed by protocols that operate without human volition. For mainstream opinion, this is still quite the shock. They are appalled even.

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