On the most recent episode of the All-In podcast Chamath Palihapitiya went on a rant opining about the irrelevance of Fitch's downgrade of the US government's credit rating. According to Chamath, the US doesn't have to worry too much about the national debt because, relatively speaking, there is no better option for countries to store their wealth in if they must hold foreign reserves. This is true if you believe that sovereign bonds or currencies are the only assets countries can store their wealth in and therefore should be the only assets that one considers when thinking about storing value.
It can certainly be argued that the US economy is the strongest in the world and will remain in the pole position for the foreseeable future, but that doesn't mean that the dollar isn't being terribly managed and that the mismanagement won't have negative consequences for its status as the reserve currency of the world into perpetuity. To understand this better we should dive into the two ways that the dollar is being mismanaged and why the mismanagement will lead to falling demand for dollars moving forward; debasement and weaponization.
It's true that relative to other currencies the dollar may be the most stable fiat currency. However, as the last few years have shown that relative stability hasn't translated to a preservation of purchasing power for anyone using the dollar. The debasement of the currency that followed the 2020 lockdowns has led to rampant inflation that is still elevated today despite that the government is pointing at a falling CPI and saying otherwise. In fact, one of Chamath's co-hosts tweeted about his sticker shock after a trip to the grocery trip earlier this week just days after parroting the government line that inflation is under control.
Relative strength against shitier fiat currencies doesn't mean squat to US consumers who are feeling the pain of rising prices. And if you ratchet the scale of pain felt via debasement up a few orders of magnitude to the level of nation state balance sheets it isn't hard to imagine why some may be seeking alternatives to the dollar. A dollar simply doesn't go as far as it used to and the nature of our debt addicted government is only going to make matters worse moving forward.
If the debasement wasn't bad enough, over the last two years the US government has shown it will weaponize the dollar and the rails it runs on at a moment's notice to push its political agenda forward. This, in my opinion, is the nail in the coffin for the dollar as the reserve currency. Even if the Fed and the federal government were to get their respective acts together and enact sane monetary and fiscal policy other nations will be seeking alternatives because the counterparty risk is simply too high. The fact that hundreds of billions of dollars can be frozen and/or seized on a political whim is an untenable position for any sovereign nation to be in. And with the US government becoming increasingly belligerent with their activism it isn't hard to conjure up reasons why they might freeze or seize assets in the future.
"Hey India, it looks like you guys are hindering our ability to reach our global net-zero carbon emissions goals. Looks like we're going to have to freeze your reserves held in US treasuries until you come back to us with a solid plan to transition away from coal plants."
"Hey Congo, we don't like the anti-LGBT stance many of your citizens hold. We're going to work with our international partners to freeze your reserves until you figure that out."
These fabricated headlines aren't that farfetched and probably aren't that far away at the rate the clown world is currently accelerating.
With the reality of debasement and weaponization in mind, it isn't surprising that many countries are attempting to band together to create their own reserve currency that operates outside the confines of the dollar system. The BRICS+ nations will be meeting later this month to discuss their plans to launch a BRICS+ currency that will allow them to do just this. Whether Chamath wants to recognize it or not and call anyone who tries to point this out "chicken littles" doesn't negate the fact that the de-dollarization ball is in motion and gaining momentum quickly. And to his credit, asking the question, "Where is everyone going to park their reserves?" is a good one if not asked rhetorically.
The US - via rapid debasement and weaponization - has forced the hands of its counterparts to go find or create those assets. Many are speculating that the BRICS+ nations are about to launch a gold backed or multi-asset basket backed currency to facilitate their settlement trades and provide an alternative reserve asset vehicle. This is unlikely to work because it will come with the same coordination, logistical, and trust problems that gold backed currencies faced in the 20th century. Who will hold the gold and the other assets? How can anyone be sure that it is actually gold and that it is actually where people think it is? And how long will it take for some BRICS+ infighting to materialize that evaporates the political trust necessary to make it work in the first place?
What the world needs is an apolitical monetary system that cannot be controlled or corrupted by one nation or a group of nations. That monetary system needs to be transparent and it needs to be able to facilitate the settlement of large amounts of money in a timely and efficient manner. Bitcoin is the only monetary system that comes close to fufilling all of these needs at the moment. Its liquidity profile isn't quite where it needs to be to facilitate the settlement of large international trades right now, but as bitcoin continues to monetize and gain adoption the liquidity profile will only improve and at some point it will be the most liquid market in the world. The only thing preventing bitcoin from reaching that level is the hubris of governments who think they are architecting a better monetary system than the dollar reserve system that comes with all of the same inherent risks. Bitcoin completely eliminates the risks inherent in fiat systems and those who adopt it first will benefit massively. Eventually, when it becomes undeniable that bitcoin is the best place for individuals, corporations and nation states to store their wealth, it will be glaringly obvious that the fiat concoctions of today and the attempts to validate them are utterly insane.
Nothing like live music at a bar on the beach.