A Currency Crisis is on the Horizon: We Need a New Model

The world economy is on the verge of a monetary catastrophe. This has far-reaching implications for the cryptocurrency business.

The COVID-19 pandemic, the Russia-Ukraine war, soaring commodity prices, rising inflationary expectations, political crises in multiple developing economies, and now aggressive interest rate hikes from the US Federal Reserve that draw speculative money into the dollar are creating a perfect storm for emerging-market currencies. It’s all placing severe pressure on currency rates in a slew of countries.

According to Raoul Pal, there is more significant dislocation in Asian currencies now than there was during the region’s 1997-98 financial crisis.

These currency crises impose a vicious cycle on emerging-market countries: The exchange rate falls, , local authorities attempt but fail to limit the impact, and trust in their skills dwindles, further depreciating the currency, increasing worries of default among international lenders, and causing inflation as import costs rise. All of this progressively erodes trust in the currency and the government.

Countries like Sri Lanka and Lebanon have already reached this dark period. Others with less obvious political difficulties might be next as the 1998-style “contagion” spreads.

Cycles of evil

This serves as a regular reminder to me that our dollar-centric international financial system might result in significant global imbalances.

One aspect of that system – certainly a flaw, not a benefit – is that whatever the United States does with monetary and fiscal policy to satisfy its domestic obligations, Objectives frequently have a detrimental impact on the economies of other nations.

This was the situation prior to COVID-19, when the Fed’s “quantitative easing” (QE) designed at bringing the U.S. economy out of a long-term post-2008 crisis malaise produced loads of fresh money that deserted the then-low-yielding dollar for higher-yielding emerging-market assets.

Predictably, hot money is now returning “home” to the dollar, as rate rises make the greenback a far more tempting, higher-yielding store of wealth than it was a year ago, and geopolitical uncertainties strengthen its safe-haven reputation. This reversal has had a devastating whipsaw effect on emerging markets.

Smaller-economy governments find it difficult to implement good policies in the face of such broad influences outside their control.

However, when a crisis occurs, the only prescriptions supplied – most notably by the International Monetary Fund, which recently took its normal crisis-fighting role in Sri Lanka and Argentina – place the onus on those local governments to solve the situation.

The recommended remedies may amount to political suicide. Central banks raise interest rates to prevent capital flight, while governments implement fiscal austerity to appease foreign creditors, pinching local economies at their most vulnerable. It’s no surprise that so many developing countries have become breeding grounds for autocrats who respond to their citizens’ worries with harsh and bigoted laws.

Its foundation is flawed.

We have the ugliest of all worlds: a decentralized system in which countries must fend for themselves while also facing excessive, system-wide susceptibility.
due to the activities of only one of them

Some may claim that the United States is an outlier that benefits from this system in the form of autonomous monetary policy. At the moment, for example, a stronger dollar helps the Fed’s attempts to control inflation by lowering the cost of imported commodities. Previously, demand for dollar assets among reserve managers at central banks permitted the Fed to conduct trillions of dollars in QE without causing consumer inflation – at least not for 12 years.

However, as former Bank of England Governor Mervyn King memorably stated in 2011, these “global imbalances” harm the United States. Excesses in the US economy are typically caused by distortions in the worldwide price of money, such as the low mortgage rates that fueled the housing bubble before the 2008 financial crisis.
In 2019, Mark Carney, King’s successor, proposed a solution with crypto overtones: a new, digital international currency managed by the IMF. (That bold proposal failed to gain support in Washington, which may explain why Carney was not chosen to lead the IMF.)

But Carney was at least thinking about taking action. The existing arrangement cannot be sustained. Looking at the dollar’s recent rise as confirmation of its reserve status is a false comfort. The fear-driven rush into dollars is, in many ways, a signal of the system’s dysfunction and an indication that it must, one day, come to an end.

If this is the case, it is considerably preferable to plan for a seamless transition to a different paradigm now than than risk a dramatic fracture later.
Russia’s and China’s outright rejections of the current one pose a threat.

A new design

How will that future system look? Western countries will not trust a currency created by the Chinese government, and Europe’s coordination issues imply that the euro isn’t a serious candidate. It might be a multi-currency system.

I was in Carney’s camp when I published “The Unfair Trade” in 2011, before I’d had any serious exposure to bitcoin. A international reserve currency regulated by the IMF, in my opinion, was the only way out of our flawed financial system.

But now I see the issue in broader terms: The growth of the internet resulted in a loss of trust in governments and the formation of new transnational communities of power as wealth.
Wealth disparities in the age of globalization have generated discontent of the current neoliberal regime. Whatever system evolves, multi-currency or otherwise, people’s sense of ownership over their possessions and identities must be restored. It must also be digitally native.

This invariably leads to digital currency in some form or another.

While it’s not apparent that bitcoin is the answer, given its inability to decouple from the previous year’s decline in financial markets, I continue to trust in the ideas Satoshi founded it on.

The successor for the dollar system must include some type of digital, censorship-resistant money that is immune to the failings of centralized governments, something that looks and feels more like the internet’s original, decentralized architecture.

Whatever comes next must represent the wishes of the people who utilize it. It should not be up to impersonal foreign bureaucrats to make the decision.

Vote with your money, folks.