Bitcoin must replace the dollar

Bitcoin must replace the dollar

Sat 10 February 2024 ▪ 10 min reading ▪ acc Nicholas T.

The most important developing countries are slowly but surely leaving the dollar. Bitcoin will be the next international reserve currency.

bitcoin

Dollar bill

The dollar has been the world’s main medium of exchange since the end of World War II. It is the international reserve currency par excellence.

A reserve currency is a foreign currency that a central bank holds as part of its country’s official foreign exchange reserves. The dollar represents the majority because it dominates international trade.

Central banks usually hold their reserves in the form of government bonds. US Treasuries in the case of the dollar. US debt is by far the largest and most liquid bond market in the world. Its size ensures that nations will have access to their money at any time.

The International Monetary Fund recognizes eight major reserve currencies. Canadian and Australian US Dollar, Pound Sterling, Chinese Yuan, Euro, Japanese Yen and Swiss Franc. The US dollar represents 59% of the world’s foreign exchange reserves.

China has the largest foreign exchange reserves with the equivalent of more than $3 trillion. The exact composition of these reserves is confidential information. However, we do know that the Middle Kingdom holds approximately $800 billion of US public debt.

We also know that Beijing is gradually reducing its dollar reserves. These have increased from 59% of the total in 2016 to 25% in 2023. They represent 10% of the total dollar reserves held by central banks worldwide.

China is the second largest holder of US public debt after Japan. India, Russia, Saudi Arabia, Switzerland and Taiwan also have large stocks, as do all major exporting countries.

How did the dollar become the world’s reserve currency?

The dollar rose to prominence after World War II. A key event was the Bretton Woods conference in 1944, at which 44 countries created the IMF and the World Bank.

We choose a system of fixed exchange rates. Each country had to peg the value of its currency to the dollar, which was exchangeable for gold at a rate of $35 per ounce. This was to ensure that the United States would not use its printing money to finance its imports.

The threat was realized in the 1960s when European countries began converting their dollars into gold. For two reasons. The first is that at that time the gold from Fort Knox was no longer enough to cover the dollars in circulation abroad.

The second is less told. The Old Continent knew that peak oil in the United States was approaching. It was predicted in 1956 by geophysicist Marion King Hubbert for 1970. The event actually occurred in 1971.

It was therefore a foregone conclusion that the United States would begin importing large amounts of oil, which would inevitably worsen its trade deficit.

It is no coincidence that President Richard Nixon suspended the dollar’s convertibility for gold in 1971, the year of the peak of US oil. The order of things would then be that gold would again become the international reserve currency par excellence. Obviously it wasn’t.

Another little-told story is that Washington forced Saudi Arabia (and all of OPEC) to sell their oil exclusively in dollars. Dirty story…

Oil was the lifeblood of any industrialized nation’s economy, and European countries had no choice but to continue using imperial currency. And here you have..

Other factors caused the US debt to become an international reserve currency. The size of the American economy and the geopolitical weight of Washington are definitely not related.

“U.S. Treasuries Can Be Considered the World’s Leading Reserve Asset”explains Brad W. Setser in a recent article by an American think tank Council on Foreign Relations (CFR). “It’s hard to compete with the dollar unless we have a market like the Treasury bill market ($22.5 trillion). »

What are the benefits of “excessive privileges”?

Major reserve currency status was described by President Valéry Giscard d’Estaing as an “excessive privilege”.

This privilege is due to the fact that the United States is the only nation in the world that can run a chronic and abysmal trade deficit without its currency collapsing. Why ? Because instead of converting their dollars into their own currency, countries with trade surpluses pile them onto US debt.

Some would argue that nations are free to sell the US debt they hold. But go tell that to the Russians, the Iraqis, the Iranians, or the Afghans. The United States disconnected Russia from the SWIFT network and “froze” $300 billion that the Russian central bank kept in reserve.

Who’s next on the list? China? Emerging economies have taken the message and are now scrambling to get rid of the dollar. “De-dollarization” is clearly underway.

For example, the yuan has become the most traded currency in Russia. All BRICS countries now have a strategy of trading in their own currencies. There are even rumors that a return to the gold standard is on the cards.

“The dollar has ended as the world’s reserve currency”said veteran financial markets Dick Bove at NY Times this week.

President Putin, in an interview with Carlson Tucker, stated:

“The world understands very well that no matter how many dollars are printed, they are quickly dispersed throughout the world. (The result is) minimal inflation in the United States. (…)

But look what is happening in the world. Even US allies are reducing their dollar reserves. The fact that the United States is sanctioning some countries by restricting transactions, freezing foreign exchange reserves, etc., is a serious concern and sends a signal to the whole world. Everyone starts looking for ways to protect themselves. (…)

Other countries, including oil producers, are already considering and agreeing to sell their oil in yuan. Do you realize what is happening? »

You can find a transcript of the entire interview in French HERE.

Bye Bye Dollar, Welcome to Bitcoin

More than 20% of oil is traded in currencies other than the US dollar. This number is expected to rise as the BRICS countries control 45% of the world’s oil reserves after the arrival of Iran, Saudi Arabia and the United Arab Emirates. Noting that Russia – which chairs the BRICS club in 2024 – has reaffirmed its goal of de-dollarization.

However, there are not many alternatives. The euro is the second most used reserve currency. It represents about 20% of the world’s foreign exchange reserves. Europe has all the assets to compete with the United States on a monetary level. Unfortunately, our vassalization is such that we refused Russia’s offer to pay gas bills in euros. We even sell Airbus in dollars…

Yuan? China is trying to use it more and more in bilateral trade. However, according to CFR member Zongyuan Zoe Liu, “China has neither the intention nor the capacity to dethrone the dollar.

That leaves the gold that China and Russia have been hoarding unaccounted for for years. This trend is a very good sign for Bitcoin, which is gold, but better. For two main reasons:

-The amount of Bitcoin is limited to 21 million units. On the contrary, the amount of gold that comes out of the country continues to grow year by year. This distinction is crucial!

-Moving gold is very expensive. Bitcoin is both a currency and an international payment system. Two in one. It is possible to instantly send the equivalent of tens of billions of dollars to the four corners of the world for a few tens of cents in transaction fees.

Sooner or later, Russia, China, Saudi Arabia and others will realize that Bitcoin is the stateless, uncensorable, anti-inflationary currency they have always hoped for. No Barbarian Relic. He intended!

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