On dollar hegemony and currency democratization -- part one


#1

The influence of the dollar on the global economy is vast. US treasury bond yields are approaching 3 percent, and the federal reserve is expected to continue hiking rates throughout 2018 as well as reducing it’s balance sheet. This is known as a tightening cycle in economics, and out of the past five tightening cycles, four have eventually triggered financial crises in the emerging markets.

This is not merely a correlation. There is reason to believe that the current global economic system contains much room for democratization. This short series will explore the dimensions in which the dollar exerts dominance around the world, as well as it’s effects.

Most transactions around the world are dollar denominated. It is known as the reserve currency of the world, but what that actually means is every government and corporation needs US dollars. The best example of this is oil. Aside from the recently opened Shanghai commodity exchange, oil is sold exclusively for dollars worldwide. Any growing economy looking to industrialize that does not produce enough oil domestically must buy oil on the international market, which means they are required to purchase dollars to buy oil with.

There are two ways to acquire dollars: first, export goods to exchange for dollars and second, to borrow dollars from the US. The first has been the Chinese economic strategy. As China exports large quantities of goods to the US, it then acquires dollars that can be used to buy essential inputs like oil. Not a bad trade off, but as we can see historically with events such as the Irish potato famine, a unlimited incentive to export can have consequences. The second for the most part is not a strategy. When essential inputs like oil are expensive, exporting may not be a viable strategy to acquire dollars, and for many governments, the alternative is debt. This has been the case historically in the 1973 oil crisis. In order to keep the engines of the economy running, emerging economies turned to accumulating ever larger amounts of dollar denominated debt. In the short run, this provides relief. In the long run, dollar denominated debts must ultimately be repaid in dollars. Since many loans are based on floating interest rates instead of fixed, when the fed raises interest rates, dollar debts become unserviceable and turn into defaults and currency crises. This has been the case for Argentina as well as many other latin american states.

Emerging economies are essentially bottlenecked by the dollar. The market for inputs like oil is the first of many factors that maintain the status quo. This is slowly changing with the rise of the Yuan as seen in the newly opened Shanghai exchange. However, the solution to the dollar bottleneck is not to replace it with the yuan. The solution lies in a trustless, decentralized marketplace that allows for free exchange. Intercoin’s ecosystem is a starting step to creating that marketplace because it removes the need for economies to hamstring themselves for dollars to funnel through the bottleneck in every part of the process. Intercoin’s supply is fixed, and there is no central entity to print more intercoins, manipulate interest rates, or enforce exchange bottlenecks. This makes it better than the status quo.