It seems that the more intense the chaos, the deeper the changes that emerge from it. In the current post-Covid-19 chaos of supply disruptions, 40 years of high inflation and a war in Europe, we appear to be on the verge of a major monetary tipping point. To understand the impact and how digital assets fit in, we first need to look at the previous reset.
The Second World War as the first great new start
When the chaos of World War II ended in July 1944, it created a new paradigm that we still live in today. 44 nations live in the Bretton Woods Mountain Resort set up a new international monetary system. The arrangement was simple.
As an economic and military power, the US would become the currency center as other nations would peg their currencies to the dollar. In turn, the dollar itself would be pegged to US gold reserves at $35 an ouncee. Other nations would then contract or expand their USD supply within the 1% fixed rate range used by investors forex broker exchange foreign currencies.
President Richard Nixon abandoned the gold peg – and virtually the Bretton Woods system altogether – in 1971frame it as “There is no longer a need for the United States to compete with a hand on its back.” Still, the legacy of Bretton Woods endured. Both the International Monetary Fund (IMF) and the World Bank have served as key wheels for the post-Bretton Woods era – the petrodollar.
The USA as world money controller
President Nixon was right that the gold peg was hampering US expansion. On both sides of the equation, the gold bond has a number of issues:
- Since 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.
- Also, the gold stake was a double-edged sword. Although countries that had their currencies pegged to the dollar abandoned some of their national economic policies, they could also exchange dollars for gold.
- While the gold itself is rare and expensive to mine, its supply is not fixed. Despite this, its supply does not correspond to the economic growth of the world economy.
- When a nation runs into a deficit, when government revenues are lower than its expenditures, it has fewer opportunities to correct course around the recession storm.
Overall, it was the final point that caused Nixon to cut off the gold bracket. He needed the Federal Reserve to provide a cheap supply of money through lower interest rates. That way, the economy would be flooded with cash, meaning it would grow enough regardless of the dollar to weather a recession devalued included. Sound familiar?
We’ve certainly seen record gains in stock markets thanks to the Fed’s trillion USD injection that started a new era of retailer usage commission-free stock trading platforms. Needless to say, the 1970s were, as it now appears, a time of Great Inflation after the cessation of the stabilizing gold peg.
Source: MacroTrends.net
Nonetheless, it would have been worse if the USD hadn’t grown into its petrodollar status. In short, the USD has become the world’s global reserve currency because the US spends almost as much on the military as the whole world.
With its WWII influence over Europe firmly entrenched and its control of the Gulf States, the US has used the petrodollar as a vehicle to offset the downsides of tapping into its money supply and relentless spending. Both OPEC (Organization of Petroleum Exporting Countries) and non-OPEC nations like Russia and Qatar use dollars to trade oil and gas.
Such a system harbors a glaring flaw, which the West pierced this March when it launched unprecedented financial moves against Russia.
Emergence of a new world monetary order
As the nation with the largest landmass in the world, 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.
In addition, acc National Geographic, Russia and Ukraine provide the world with 12% calorie intake over 30% wheat production. So what happens when these two nations go to war with each other?
Much of this depends on the West’s response – which has so far been sanctioned. It would take time to list all the sanctions against Russia so far. Suffice it to say, the key was the confiscation of foreign exchange reserves of Russia from G7 countries. This marks a clear break with established international norms, which China and India as well as Saudi Arabia have taken note of. Consequently, they have expressed any plans or considerations to start trading energy products in currencies other than the petrodollar (USD).
Likewise, President Putin accelerated these deliberations by signing an executive order requiring unfriendly nations (those that imposed sanctions) to pay not only for oil and gas imports, but also for wheat in Russian rubles. In other words, Putin pushed the ruble to become a commodity-based currency.
As Zoltan Pozsar, former Federal Reserve and US Treasury Department official put it:
“A crisis is spreading. A commodity crisis. Commodities are collateral and collateral is money, and this crisis is about the increasing attractiveness of external money over internal money.”
So far, the G7 ministers declined Russia’s requirement to pay for its energy products in rubles. Conversely, Germany and Austria are already preparing for gas rationing with the former often referred to as Europe’s economic engine. In addition, the CEO of the German concern BASF SE, the world’s largest chemical producer, said warned of a complete supply chain collapse.
“To put it bluntly: This could plunge the German economy into the worst crisis since the end of the Second World War and destroy our prosperity. For many small and medium-sized companies in particular, it could mean the end. We can’t risk that!”
Between the US and Russia, Europe is at a turning point, just as it was in 1944 with the establishment of the Bretton Woods monetary system. Yet 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 guy
Amid the current state of the world monetary order, new assets have emerged that have the potential to remain neutral. This is a key advantage that Bitcoin offers the world – a sovereign, stateless, digital currency with a fixed supply.
In contrast to gold, bitcoin cannot be attached. By remembering your recovery seed phrase, you can always restore access to your assets on Bitcoin’s blockchain network. While a new EU proposal tries to crack down on non-hosted walletsLegal words are far removed from technological reality.
Corporate investors are already seeing bitcoin in this light as a new bitcoin standard emerges beyond the gold standard. Last week Michael Saylor’s MicroStrategy raised a $205 million BTC-backed loan from Silvergate Bank. Why? To buy more BTC, of course, on top of MicroStrategy’s already impressive 125,051 bitcoins (~$6 billion).
Such leverage can only be trusted by either party if they view Bitcoin’s rise as inevitable. For the same reason, the foundation is owned by Terraform Labs gradually increasing its bitcoin supply with the ultimate goal of surpassing $10 billion worth of BTC.
This is significant as Terra aims to replace both Visa and Mastercard as a global payment system with its algorithmic stablecoin TerraUSD (UST). Just as Russia is in the process of expanding its ruble collateralization with commodities, Terra’s UST is collateralized by bitcoin.
Terra’s own ecosystem, in turn, is bolstered by its Anchor Protocol, which produces an annual interest rate of about 19% on UST deposits. The environment makes yield farming attractive Means of generating passive incomeespecially considering the current CPI inflation rate in the US, which is approaching 8%.
The difference is that Russia now has complicated deals to negotiate with other nations, which means several hurdles lie ahead. In 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 the way out, no matter how long that may take, the cost of the Fed’s endless money supply will no longer be mitigated.
With so much uncertainty in this new monetary world order, Bitcoin’s underlying appeal and track record speaks for itself.
Guest post by Shane Neagle from 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 remains fascinated by the growing impact of technology on business – and daily life.
Learn more → 
Get one edge on the crypto market 👇
Join CryptoSlate Edge and access our exclusive Discord community, more exclusive content and analysis.
On-Chain Analysis
Price Snapshots
More context
Sign up now for $19/month. Discover all the advantages
Learn Crypto Trading, Yield Farms, Income strategies and more at CrytoAnswers
https://nov.link/cryptoanswers
Comments are closed.