It seems that the more intense the chaos, the deeper the changes come from it. In the current post-Covid-19 chaos of supply disruptions, 40 years of high inflation and war in Europe, we appear to be on the brink of a major monetary pivot. To understand its implications and how digital assets fit into it, we first need to revisit the previous reset.
World War II as the first major reset
As the chaos of World War II came to an end in July 1944, a new paradigm was born in which we still live today. In the mountain resort of Bretton Woods, 44 countries set up a new international monetary system† The arrangement was simple.
As an economic and military powerhouse, the US would become the monetary center while other countries would peg their currencies to the dollar. In turn, the dollar itself would be pegged to US gold reserves, at $35 an ouncee. Other countries would then contract or expand their USD offerings within the 1% fixed rate range, as investors used forex brokers exchange foreign currency.
President Richard Nixon abandoned the gold pin in 1971—and, in fact, the Bretton Woods system altogether—frame it as “The United States no longer has to compete with one hand tied behind its back.” Still, the Bretton Woods legacy remained. Both the International Monetary Fund (IMF) and the World Bank have served as key cogs for the post-Bretton Woods era – the petrodollar.
The US as the world’s money controller
President Nixon was right that the gold pin stood in the way of American expansion. On both sides of the equation, the gold pin has a number of issues:
Because the money supply was constrained by a fixed exchange rate, so was the government’s expansionary policy. These ranged from unemployment interventions to military spending. Furthermore, the gold pin was a double-edged sword. While countries that pegged their currencies to the dollar ceded some of their domestic economic policies, they could also exchange dollars for gold. While the gold itself is rare and expensive to mine, the supply is not fixed. Yet the supply does not match the economic growth of the global economy. If a country falls into a deficit when government income is lower than expenditure, it has fewer options to rectify its course around the recession storm.
All in all, it was the last point that caused Nixon to cut off the gold pin. He needed the Federal Reserve to provide a cheap money supply through lower interest rates. In this way, the economy would be flooded with cash, meaning it would grow enough to offset a recession, regardless of the dollar devalued in the process. Sounds familiar?
We certainly made record gains in equity markets thanks to the Fed’s injection of trillions of USD, which ushered in a new era for retail traders who commission-free stock trading platforms† Needless to say, with the stabilizing gold pin gone, the 1970s was a period of Great Inflation, just as it seems to be happening now.
Nevertheless, things would have been worse had it not been for the USD’s petrodollar status. In a nutshell, the USD has become the world’s global reserve currency because the US spends almost as much on the military as the entire world.
With the influence on Europe stemming from World War II firmly entrenched and in control of the Gulf States, the US has used the petrodollar as a vehicle to offset the drawbacks of unlocking its money supply and relentless spending. Both OPEC (Organization of the Petroleum Exporting Countries) and non-OPEC countries such as Russia and Qatar have used dollars to trade oil and gas.
Such a system contains a glaring vulnerability that pierced the West in March as it took unprecedented financial steps against Russia.
New World Monetary Order on the rise
As a nation with the world’s largest land mass, Russia has an abundance of energy reserves. Accordingly, Russia’s main exports are energy-related products, at 63%, of which 26% and 12% are crude oil and gas, respectively. This puts Russia in a dominant position over Europe, which is largely dependent on Russian energy imports.
Furthermore, according to National Geographic, Russia and Ukraine provide the world with a calorie intake of 12%, through 30% wheat production. So, what happens when these two nations go to war with each other?
Much of this depends on the response from the West – which has been approved to date. It would take quite some time to list all the sanctions against Russia so far. Suffice it to say that the main one was: the seizure of Russian forex reserves by G7 countries. This marks a clear break from established international standards, which China and India have taken note of, as well as Saudi Arabia. Therefore, all of them have expressed plans or considerations to start trading energy products in non-petrodollar (USD) currencies.
Likewise, President Putin accelerated these considerations by signing an executive order requiring unfriendly countries (those who imposed sanctions) to pay in Russian rubles for not only oil and gas imports, but also wheat. In other words, Putin has primed the ruble to become a commodity-based currency.
As Zoltan Pozsar, the former Federal Reserve and US Treasury official put it†
“A crisis is emerging. A commodity crisis. Commodities are collateral and collateral is money, and this crisis is about the increasing attraction of money from the outside over money from within.”
So far, G7 ministers have disapproved Russia’s requirement to pay for its energy products in rubles. Similarly, Germany and Austria are already preparing for gas rationing, with the former often referred to as the economic engine of Europe† In addition, the CEO of the German multinational BASF SE, the world’s largest chemical producer, has warned of a complete collapse of the supply chain.
“To put it bluntly, this could send the German economy into the worst crisis since the end of World War II and destroy our prosperity. Especially for many small and medium-sized companies, this could mean the end. We can’t risk that!”
Between the US and Russia, Europe is at a turning point, as it was in 1944 with the creation of the Bretton Woods monetary order. While these cycles seem to repeat themselves, one novelty cannot be dismissed: decentralized networks capable of creating sovereign digital money.
Bitcoin – the global reserve currency for the little man
Amid the current state of the world monetary order, new assets have emerged that have the potential to remain neutral. This is a crucial advantage that Bitcoin brings to the world: a sovereign, stateless, digital currency with a fixed supply.
However, unlike gold, Bitcoin is also non-seizable. If one remembers their recovery seed phrase, they can always restore access to their assets on Bitcoin’s blockchain network. While a recent EU proposal tries to tackle unhosted walletslegislative words are far removed from technological reality.
Business investors are already seeing Bitcoin in this light as a new Bitcoin standard evolves beyond the gold standard. Last week, Michael Saylor’s MicroStrategy took a $205 million BTC-backed loan from Silvergate Bank† Why? To buy more BTC, of course, on top of MicroStrategy’s already substantial 125,051 bitcoins (~$6 billion).
Both parties can only have confidence in such debt leverage if they view Bitcoin’s rise as inevitable. Similarly, Terraform Labs’ foundation is: gradually increasing the supply of Bitcoin with the ultimate goal of surpassing $10 billion worth of BTC.
This is quite important as Terra wants to replace both Visa and Mastercard as a global payment system with its algorithmic stablecoin TerraUSD (UST). Just as Russia is expanding its ruble collateral with commodities, Terra’s UST is being collateralized by Bitcoin.
In turn, Terra’s own ecosystem is supported by its Anchor Protocol, which produces an approximately 19% APY on UST deposits. The environment makes yield farming attractive means of generating passive incomeespecially if we look at current US CPI inflation approaching 8%.
The difference is that Russia now has to negotiate complicated deals with other countries, meaning multiple hurdles lie ahead. By contrast, blockchain assets are native to the Internet, where decentralized and secure environments can potentially create conditions without geopolitical or ideological constraints. Most importantly, if the petrodollar is on a wane, however long that may take, the cost of the Fed’s endless money supply will no longer be alleviated.
With so many uncertainties in this new monetary world order, Bitcoin’s fundamental appeal and track record speaks for itself.
Guest post by Shane Neagle of The Tokenist
Shane has been an active supporter of the movement towards decentralized finance since 2015. He has written hundreds of articles on developments around digital securities – the integration of traditional financial securities and distributed ledger technology (DLT). He continues to be fascinated by the growing impact technology has on the economy – and everyday life.
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