“Globalization has created this interlocking fragility. At no time in the history of the universe has the cancellation of a Christmas order in New York meant layoffs in China.”—Nassim Nicholas Taleb
Taleb is a great source for concise quotes that express big ideas. He is a member of the top “1%” and that has nothing to do with wealth. He is in the top “1%”—actually much less than one percent—who understands what money is and how it works. That is why he is hated by the “Crypto Cultists.”
The reality is that the cryptos are “backed” by the same fiat government currency they say cryptos will replace. The other reality is that fiat currencies are no longer viable. Cryptos rely on the “greater fool” theory to go higher and there is absolutely nothing wrong with that and why they—at least some—are a great speculative investment. But imagine what would happen if suddenly a country went all “crypto”? Oh, wait. It just happened in El Salvador.
Then again, El Salvador has not had its own currency since 1993. The “colon” was pegged (Fixed) at 8.75 per US dollar. Then on January 1, 2001, the US dollar became El Salvador’s legal tender. September 7, 2021: El Salvador officially adopted Bitcoin as legal tender and inflation was 4.5 percent. Now, November inflation is 6.2 percent. Even if goods are priced in Bitcoin, the Bitcoin price of a kilo of corn or rice is 6.1 percent higher.
Having BTC as the currency did not stop price inflation and did not lead to higher wages. The only advantage is to the government, which used its dollars to buy BTC on pullbacks.
Money has always had a value that was dependent on the trust in government, not what it was “backed by.” Japan, Germany, and China, all rose from the ashes of war to become major world economies without gold or tangible resources. Pre-20th century, the British pound emerged as the dominant world currency because of its economic power and imperialism. Back then, bonds were issued even by China in British pounds just as today; nations issue debt in US dollar denomination.
What emerged is that the value of a currency is based upon the economic productivity of a nation. That is what backs a currency—nothing else. We know that from millennia ago.
There were sovereign “imitations” of ancient Greek and Roman coins where the metal content was the same or greater. Yet, a gold Roman coin could be exchanged for more goods, carrying a premium to raw gold or other state-issued gold or silver coins. A national currency can be worth more than its metal content based upon its economic power.
In January 2002, the US Dollar index traded at 120 and reached a low in March 2008 at about 72. Now the USDX is at 96.50.
Dollar-denominated sovereign debt has nearly doubled since 2010 and is 6 times as large as in 2000. We have been looking at a potential doomsday for US dollar debt-burden countries (not the Philippines) in 2015. Two scenarios.
The US dollar appreciates from the current 96 back to the year 2000 level at 115 for a 25 percent increase. If that happens, all US dollar denominated debt due by countries like India (52 percent of its total debt) or Argentina (55 percent) will be at least 25 percent more expensive. Think of the 1997 Asian crisis on steroids.
Then again, the US dollar might depreciate to the 2010 area at 80—or less—down 15/20 percent. Americans will not be able to afford all their imported goods. The US is the most important economy on earth. If they closed their border to trade, within months, much of the world would be eating tree bark and dirt.
Americans, of course, would have that “simpler lifestyle” some people long for—like without gadgets, shoes, and cars. Either way, the next 12 months are going to be exciting.
E-mail me at mangun@gmail.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis provided by AAA Southeast Equities Inc.