On dollar hegemony and currency democratization – part two


#1

Yesterday I talked a little bit about the dollar bottleneck in international trade. Today I want to touch on another area that doesn’t have to do with currencies directly, but is important to dollar hegemony.

Most corporations today run on debt. Debt is not inherently bad; it is simply a source of capital to be used in business. In fact, being able to use debt effectively gives a massive advantage to business. Tesla comes to mind as an example; access to debt is crucial to it’s operations. The hope is once Telsa is able to crack the code of fully automating the manufacturing process, it will benefit from economies of scale and eventually be able to generate strong cash flows to justify it’s current valuation. This is also true for many other businesses as well as governments. You would be hard pressed to find a single government or publicly traded company that does not make use of debt in some way. Above all, debt is helpful because it is cheap. It is commonly accepted that raising a million dollars through bond offerings is going to be less expensive than raising the same amount through equity offerings.

Whether or not an entity has access to debt capital is thus a crucial element to its financial viability. Cut a business off it’s revolvers, term loans, and bonds and its gears will grind to a halt. Turn the tap back on, and it starts growing again.

This is the power the three American credit rating agencies hold over the markets today. Moody’s, Standard and Poor’s, and Fitch ratings taken together comprise of 95% of the ratings business worldwide. The vast majority of debt products go through these agencies one way for the other, be it government bonds, corporate bonds, preferred stock, municipal bonds, and it is a completely centralized decision making process whether or not an entity will have access to the life blood that is debt. Every downgrade makes it exponentially more difficult to take on debt, and a rating of BBB or below is usually a significant burden for a business.

The problems with this system has already been made clear twice: once in the subprime mortgage crisis, and again in the euro zone crisis. In both cases rating agencies were shown to be a key weakness in the global economic system, yet there is no evidence of change in the status quo. With the creation of community coins, Intercoin is able to at minimum relieve some of these pressures by restoring monetary policy to localized communities. Credit ratings are only relevant if capital chooses to respect the ratings. In a community coin system, since capital is localized, there is more democratic access to debt.