The present moment is dire for the international dollar-denominated economy. Since 2008, real debt levels have grown 400% and have outstripped real productivity and wealth (with incomes rising only 30% in the same period). The pandemic has devastated the real economy and accentuated the difference between debt and value creation levels. To compensate for this, governments across the Western world have resorted to massive money printing efforts. According to one estimate, for example, almost 25% of all dollar bills ever created were printed this year alone. Major monetary policy organizations like the Fed and the IMF seem to have thrown caution to the wind, focusing on avoiding immediate undesirable symptoms with loose cash rather than worry about the potential of this to rip the economic jugular in the future. Inflation is the inevitable consequence of such facts on the ground. The only question is how much and when.
Inflation is like a fire. It can be a tool to do other useful things, but if left unattended or taken for granted, can soon prove all consuming. Hyperinflation (inflation above 50% in a given month) is what one gets when this mistake happens, and is invariably the result of poor government management of the real economy. Current examples of hyperinflation are the economies of Sudan, Venezuela, and Lebanon. The phenomenon destroys the ledger-like quality of a currency in a market that tracks debts owed and paid — and destroys the currency. Reckless debt-funded spending and aggressive liquidity injections remove an important backstop protecting us from this situation. Making things even more dangerous, hyperinflation is almost impossible to reverse as the empirical and theoretical record shows. (For a good simulation of why, see this hyperinflation calculator). After the complete collapse of the economy, the country is forced to use an external currency to bring back trust into the market.
But what if the world’s anchor currency, the US dollar, turned rotten? For one, this would cause the largest and quickest ever destruction of wealth in world history. Taking Bank of America’s estimate that levels of inflation beneath the technical definition of hyperinflation could destroy $40 trillion in wealth, then the collapse of the dollar could cost more than a nuclear war and happen as quickly. Moreover, as there would be no strong candidate for replacing the dollar-denominated economy, a lack of a backup currency could prolong hardship by forcing the world to work through a currency the ghost of its former self.
But clearly, remaining in such a shambles would be unacceptable for market actors who would demand a stronger currency. At this point it would seem two categories of options for where to go next would present themselves to the global community. First, it is possible the world would return to the gold standard (abandoned over 40 years ago). As far as world history is concerned, a return to a metal anchor is a return to normal. Another option is the potential future of cryptocurrencies.
Gold is one of the oldest friends of states and other complex human groupings. It’s universal standard of purity, ease of transport and divisibility, and universal recognition makes it an exceptional tool in which to etch a ledger of transactions and trades into the minds of all mankind. For this reason, it has also proved quite amenable to abetting conquest and realpolitik diplomacy.
In today’s world, gold attracts the skeptics and those who seek to undermine the power of the present order — reflecting the deep marriage between power calculations and wealth in metal form. Russia and China, two principal challenges of US national security, have made concerted efforts to acquire more gold, with China possibly advancing a digital currency backed by gold in the not too distant future. A return to gold would mark a shift from an optimistic currency regime backed by the implicit guarantee of a superpower to one backed by a more basic reality. And while debt-fueled spending would not go away, it would take the zero-gravity feel out of a market which can be totally controlled by government manipulation. When governments run up against raw constraints, they have to play by some rule they do not control. Gold is the stubborn yellow skeptic that proves harder to manage than the state-run paper press.
But going back to gold is not the only potential destination for a global economy post-dollar bust. Cryptocurrency is also an option. It’s theoretically sound underpinnings and its wildly expansive capabilities could make a more elastic definition of value that might also be accepted by modern market actors. A recent coin desk article put it well: “rather than stories of Kings and Conquest (crypto) is about human engagement under governance by mathematical principles.” Even as recently as last month, the New York Times ran a story about how a shortage of metal coinage is giving rise to a new generation of crypto investors and shaping expectations for the future.
The kernel of difference between a gold and a crypto-based currency regime is this. Gold speaks to something raw and acquisitive within us, but especially to those of us who run powerful political cartels, such as most states can fairly be accused of being in history. Cryptocurrency in contrast seems to come down from the heavens, Platonic-style, based upon the concept of decentralized consent and an ethereal and elastic concept of value built to the expectations of a modern world. And while I am generally skeptical of BitCoin or any other currency today being the next replacement for the dollar, it has certainly created an environment in which one can expect to someday find such a replacement. In a future collapse of a dollar-based fiat system, we may be left with a dilemma as deeply rooted as our own psyche. On one side is the baggage of our evolutionary history and instinctual attraction to gold at all levels of human society. On the other side is a technology tied to systems of interdependence and consent that have, in some measure, washed out the deeper inbuilt tendencies of man’s nature to destroy and control and instead leaves him free to pursue his more enlightened instincts to trade.