A New Currency System Is Emerging for Global Trade
Kmart was a very big part of my childhood.
When summertime rolled around, I and my friends in the neighborhood would hop on our bikes and ride 10 minutes or so down College Blvd., and wander through Kmart, looking for the things we needed for whatever we were up to.
One time, that was a metal detector for which my friend Mike and I had pooled our money to afford after cutting a bunch of lawns. Another time, it was plywood and padlocks to build our own “safes.” On a different occasion, it was fishing gear for a trek to a large pond we’d discovered on a huge tract of undeveloped property.
And then…we stopped going to Kmart.
I don’t know why. We got tired of it. We outgrew the need for it. We moved from bikes to cars and suddenly all of Baton Rouge was at our disposal.
The utility of what had seemed indispensable faded.
Which brings me to Nigeria—obviously.
The West African country earlier this year banned cryptocurrencies. Today, Nigeria is the first African nation to have launched its own central bank digital currency, the eNaira, a digital version of its sovereign currency based on the same technology as bitcoin and all other cryptos. Ah, the irony of flip-floppery. (By the way, this is not, per se, a crypto story, though crypto plays a necessary role in today’s tale.)
On the other side of the planet, Chile has announced it will look to test-drive an e-peso in the new year.
And still further around the globe, Thailand has announced the same—it will test an e-baht in 2022.
You probably already know that China has soft-launched a digital yuan, and maybe you’ve heard that the Bahamas launched its digital “Sand Dollar” earlier this year. In all, there are at least 16 pilot projects underway—from Jamaica to Malaysia to Sweden and Saudi Arabia.
And it’s here we take a moment for a related interstitial…
On Oct. 6, the Federal Reserve released a new research paper dully titled: The International Role of the U.S. Dollar.
Trust me when I tell you it’s Ambien on paper.
There are two items of note I wish to bring you.
In a section with the super-sexy sub-head: “Diminution of the U.S. dollar’s status seems unlikely in the near term”…the Fed notes this:
…over a longer horizon there is more risk of a challenge to the dollar’s international status, and some recent developments have the potential to boost the international usage of other currencies.
Those recent developments…digital currencies.
A shifting payments landscape could…pose a challenge to the U.S. dollar’s dominance. For example, the rapid growth of digital currencies, both private sector and official, could reduce reliance on the U.S. dollar.
Interstitial done, we return to today’s dispatch…
No offence to those involved, but countries such as Chile, Saudi Arabia, Jamaica, et. al. would not seem terribly relevant in terms of launching/piloting digital currencies.
Alas, that’s like saying plankton aren’t really that relevant when all you care about are whales.
The reality is that these smaller countries are signs that tidal patterns are changing. What was once normal is no longer necessarily the norm.
They are, in a way, the Kmart Effect.
When a preponderance of smaller economies no longer needs the dollar, the dollar’s role in global finance changes.
Right now, if a buyer in Thailand needs copper from a Chilean mine, that transaction almost always happens in U.S. dollars. That—greasing the gears of global trade—has been the dollar’s preeminent role since the Bretton Woods accord in 1944 that established a bunch of dead presidents as the world’s reserve currency.
But soon enough, Thailand and Chile will transact across the blockchain directly—using a third crypto such as Ripple (XRP) as their common medium. That will absolutely happen, that’s the future of global trade and finance.
And it means less-than-good things for the dollar.
Demand for the dollar today is artificial, simply because world trade requires greenbacks.
When that’s no longer the case, or when that case is severely reduced, dollar demand declines…which causes the value of the dollar to decline relative to other world currencies…which jacks up the price for pretty much everything in your life.
And then there’s the impact on Uncle Sam.
He desperately needs other countries to need his money. When they don’t, they will reduce/stop buying his debt. But it’s not like America’s cost structure is going to reduce to match its means.
Treasury will have to pay higher and higher interest rates on the debt it sells just to attract enough demand to fund America’s ongoing need to keep the lights on. Yet that means it just becomes more and more expensive to run the country…which has its own column-worthy impacts we’ll come back to at another time.
So…when you see that Nigeria has launched a new digital currency, or that Chile, Thailand, and bunches of others are piloting their own digi-currency program, don’t toss that aside as pointless information. Realize instead that it’s the Kmart Effect in action.
Soon enough, countries all over the world will realize they don’t need to shop at Kmart anymore.