The almighty dollar

I am a little bit concerned about our dollar. I’m not tremendously worried, but I am watching carefully. The dollar’s status as a global currency is extremely strong. It will continue to be the international monetary device of choice during our lifetimes, but those of our children? I’m not so sure.

The Chinese have made no secret of the fact that they would like their currency to someday replace the dollar. The Yuan, sometimes called the renminbi, already plays that role in east Asian countries. We would expect as much, but the Yuan is also becoming the currency of choice in many parts of Africa. As China invests in African infrastructure on a scale that exceeds that of any post-colonial power, there’s a lot of Chinese money in circulation. When compared with the stability of smaller, third-world governments, China-backed currency presents a desirable alternative. China is clearly gaining ground, but with all of that going for them, the Yuan remains only the eighth most-traded currency.

Further up the ladder and second to our American Dollar is the Euro, which accounts for 16% of international trade. Following the Euro are the Japanese Yen and the British Pound Sterling, which combined with the Euro still do not equal the dominance of our Dollar, currently estimated at 44% of international trade. Again, we should have no immediate concerns, but other currencies backed by reliable economies would be more than happy to take our place.

A second concern is the value of our dollar, which has had a tough time lately. Any bullion or gun salesman will tell you that ours is a “fiat” currency; money with no intrinsic value and is destined to collapse any day now. They have been saying that for at least twenty years and fear is, after all, a super salesman. Regardless of their motives, they raise valid questions about our debt.

The United States carries a high debt-to-GDP ratio, currently pegged at around 128%, but we are not the highest by far. It shouldn’t surprise anyone that Venezuela tops the list, carrying a debt of 350%, but surprisingly, Japan is a strong second with 266%, so we aren’t the very worst. We are, in fact, the 12th worst (ie. highest debt ratio) out of 195 recognized countries.

“Printing” enough money to carry that debt comes at a high cost. We’re feeling the effects of it now, but even with double-digit inflation and a new debt ceiling, the strength of our currency is holding. That’s good, but maintaining that strength forever should not be taken for granted. We have seen failed economies before. We have studied them closely and our economy is showing a few familiar precursors.

More recently, we have stumbled onto a third threat. The otherwise good news is that our ability to put a significant stranglehold on Russia’s economy is enabled by the dominance of our currency. That’s our big stick and we are proud of it, but if you were another country watching Russia suffer, what would you be thinking? Who wants to be vulnerable? Even friendly countries are taking note and proactively diversifying trade channels.

That’s not going to be a fast process and we still have a big lead. I’m not at all worried in the near term, but the fundamentals don’t favor us staying on top indefinitely.

What I am NOT concerned about is cryptocurrencies. I know people who are having fun with them, and I’ve read about people who became super-rich from them (I don’t know of any personally). I can also appreciate the demand for a legal, safe way to trade funds without going through government-regulated banks. That part appeals to me because the IRS has been staying up all night figuring out how to get their hooks into private transactions. Options outside the regulated sphere might slow those ambitions, which is more than I can say for our representatives.

I’m not a code guy, but I am told by reliable sources that blockchain technology is super-smart and can’t be hacked … and that’s where they lose me. Saying that any technology will remain secure indefinitely sounds to me like something that should be framed and nailed to the wall for posterity. I would hang that next to “Everything that can be invented, has been invented,” and “If man could fly, he would have wings.”

It’s an apples-to-oranges comparison of sorts. Dollars and other conventional currencies are traded electronically too, they just have central banks, a few stacks of paper and a government behind them. Cryptocurrencies, however, are backed by the full faith and credit of a code developed before the advent of quantum computing. All things considered, the full faith and credit of the USA looks pretty good in comparison – for now.