Could This Be The Death Of The Dollar?

            Jim Reid of Deutsche Bank has joined the World Economic Forum,[1],[2] and a chorus of bankers, economists, and financial professionals in expressing serious reservations about the continued viability of the U.S. Dollar. A number of factors including the inflationary nature of fiat currency, the increasing significance of China's role in global affairs, and increases in automation have led many to question how much longer the Dollar will last as the world's reserve currency. The U.S. Dollar has been the world's reserve currency for over seventy years since the Bretton Woods Agreement in 1944 so it would be difficult for most people to remember a time when the Dollar didn't dominate the world's stage.[3] Could there be something to the idea that the Dollar could be gone sooner rather than later?
            The crux of this speculation rests upon the idea that Richard Nixon's decision to remove gold-backing from the U.S. Dollar in 1971 should have resulted in massive inflation, but the emergence of China as an international powerhouse since the '70's gave that extra money a place to go – until now. Falling labor participation has signaled a slowdown in China's rampant growth over the past few decades and increasing concerns about the role of workers in an increasingly automated future could point to a catastrophic disruption in the global economy and the ultimate demise of the U.S. Dollar.[4] China also made waves recently by signaling their intention to leverage their status as the world's largest importer of oil to force Saudi Arabia to accept the Yuan instead of the Dollar, a move that would significantly hurt the dollar's status as the world's reserve currency.[5]
            Another major source of concern regarding the health of the dollar stems from concerns over the long-term effects of increasing automation on the global economy. The rate at which new technologies displace workers appears to be far outpacing the rate at which industries can create new jobs, so once 3D printing and driverless cars can displace workers at an affordable cost we will enter a situation where economic inequity will skyrocket.[6] The prospect of an economy running while so many live without jobs has led some to look into Universal Basic Income or other unique fixes but until a solution can be found the spread of automation will increase the risk that the global community will lose faith in the dollar.
            Before jumping to any conclusions, we have to understand where the value of money comes from in order to evaluate whether or not the collapse of the dollar seems reasonable. The value of money or a monetary system comes from its legal status, its ability to be exchanged for other valuables, and the scarcity of its supply. Most fiat currencies benefit from being backed by a government and regulations provide investors with a degree of reassurance when speculating on securities but what makes cryptocurrency unique has to do with the fact that its governance comes from the code issued by the developers and not necessarily an “official” government. The legal status of cryptocurrencies does affect their value, but digital currencies can be issued whether or not governments approve of or choose to regulate them.
            While we certainly need some form of money to facilitate trade, a report from the Federal Reserve Bank of St. Louis argues that the economy does not necessarily require fiat currency to function.[7] The collapse of the dollar would have global repercussions, to be sure, but if the world doesn't actually need fiat currency then perhaps we can view the potential demise of the dollar as an evolution toward a more decentralized global economy. Calls to “End the Fed” have typically been associated with conspiracy theorists but as the report from the Bank of St. Louis notes, professional economists continue to speculate over whether or not control over monetary supply should be publicly or privately regulated.
            If the Dollar collapses, support for privately-regulated currency will increase along with interest in decentralized digital currencies. Governments can regulate the financial instruments used to exchange goods and services without having centralized control over the supply of fiat currency. An economy of commodity-backed currencies would be vulnerable to manipulation by speculators and those producing the commodities,[8] but a decentralized digital currency (like Bitcoin) could be crafted to avoid those pitfalls while replacing fiat as the primary currency for exchange.
            With 97% of all new currency created as debt,[9] many agree that inflation has gotten out of hand but in spite of the alarmist nature of many of the reports analyzing the potential demise of the Dollar, the backing of the U.S. Government and a long history of stable usage render it highly unlikely that anything drastic will happen soon. It will however be exciting to see what role cryptocurrency plays in the evolution of the global economic system.


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