Monday, June 11, 2018

Visualizing the end of USD

With FOMC, North Korea meeting, G7 trade issues buzzing on the hashtags, I wanted to present a thought experiment:
What would be the actual path/logistics/mechanics of USD ending as the reserve currency?
You may have seen this type of chart here and there (most commonly with Bitcoin being the next bar surpassing USD), with the assumption that Russia or China would be the next bar? If not, who?

In the same way that the end state of capitalism is a single company which absorbs any theoretical competition, there is a kind of macro capitalism where a country/economic system (namely the most liquid/deepest/free-est) has the potential to absorb other systems just based on that liquidity.  A way bigger picture way to think of this is the end state of capitalism anywhere being a single company everywhere, in the sense that private industries/ government entwine to where the line is blurred or indistinguishable.

The first theoretical path is war, external challenge, etc.  I just don't see how true nation vs nation war can exist anymore.  The level of mutually assured destruction/ mutual deterrence must almost cap at some point, and now the entire focus is on diplomatic paths to reducing nukes (except for the US, a coincidence?)  Additionally, with the amount of nukes/ drone strikes, cyber attacks, we have entered the full Pyrrhic victory zone where any war would end the future concept of currency or 'economy'.  In practical terms as we are looking for an investment thesis, no alternative investment would matter anyway in this scenario so its almost something to disregard when comparing ROI on different country exposures, etc.

The next path to consider is the type of internal degeneration that would lead to some currency crisis.  While I agree on every indicator that all assets are garbage, subprime auto loans, etc going back through the roof, household debt, I think the doom and gloom articles disregard how bad the alternatives are.
I think back to the Network scene of "no countries, only corporations," and it is more true everyday how entwined the global economy is.  The current "trade/tariff war" will just cyclically lead back to opening up trade again, probably spurring equities to all time highs.  In this way I really don't think "internal collapse" can be represented in the same way that has come up before with the collapse of past civilizations.  As US "debt" is held by most of the world, and an equal web of debt swaps going the other way, there is a similar mutually assured destruction in the credit sense as the above missile example.  All this means that an "internal collapse" really can't happen in isolation, there is no true "internal" anymore.  The global financial system is "too big to fail," with USD sitting at the top.

Additionally, lets think prophylactic-ally, what is the point of having the most military spending and biggest military stationed the heaviest around the world, if only to let it all go if the USD is challenged?  If such a deployment keeps the USD/ petrodollar supremacy, then it almost transcends the notional price required for it.  Its like a meaningless purchase inside a game going outside its own scope, in a monopoly game "hey I'll give you $100 Monopoly bucks for the game itself."

Anyway, given just these points, how can we even visualize China/Russia taking the reins?
-It would start with an end to the petrodollar, which
  • Will be defended to the end by the above military
  • Can potentially be replaced by the next mandatory resource (electricity? other element?) with a similar USD agreement
-It would require either system to fully reinvent to allow more liquidity and market depth than US markets, which they haven't even tried (Chinese daily govt intervention in markets, Oligarchic business control in Russia)
If we have learned anything from the crypto show, its that liquidity is the true metric of usage, seeing actual usage shift from BTC to Monero as a response to a need for function was eye opening when compared to the initial thesis of the value proposition of the longest chain.  Even security takes a back seat to liquidity in this sense.

There is probably another hour to go on this (the end of revolutions, no single castle to attack, 100% cashless economy) but the quick takeaway is that the combination of a global digital economy and the technological level of warfare seem to prevent the end of USD, because USD is really across borders, and reflective of the entire global monetary system.

1 comment:

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