Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Can the Dollar Survive?

Coronavirus and civil unrest could destroy the US dollar; the world’s reserve currency. To elaborate, a reserve currency is the money foreign banks hold as a reserve.

Essentially, a reserve currency is an insurance policy a private or central bank holds against the collapse of other currencies. For instance, the People’s Bank of China (PBOC) holds US dollars in case China’s currency the yuan collapses.

 The International Monetary Fund (IMF) estimates dollars account for over 61% of foreign bank reserves. Additionally, they denominate over 40% of the world’s debt in U.S. dollars, Investopedia estimates.

What is a Reserve Currency?

Ultimately, Mr. Market bases his reserve currency decision on the issuing nation’s power and prestige. 

For instance, the dollar became the world’s reserve currency during World War II. Strangely, Adolph Hitler destroyed the world’s previous reserve currency, the Pound Sterling by exposing British military weakness.

Hitler’s attack on Britain failed, but it showed the world that the United Kingdom was weak and needed American help to survive. Predictably, the world turned to the US dollar as a reserve currency after the Nazis exposed how decrepit the British Empire was.

Will Coronavirus Kill the Dollar?

Today, the invisible enemy known as coronavirus is exposing America’s weakness and inability to deal with its problems.

For example, Worldometers estimates there were 117,241 coronavirus deaths in the United States before 13 June 2020. In contrast, Worldometers estimates there were 9,205 coronavirus deaths in in India and 4,634 coronavirus deaths in China in the same period.

Interestingly, Coronavirus has not affected the exchange rate between the US dollar and the Chinese yuan. To explain the Yuan was worth 14₵ on 10 June 2019 and 14₵ on 13 June 2020.

In contrast, the rupee is worth less than it was in 2019. To explain, the Rupee was worth 14₵ on 10 June 2019 and 13₵ on 13 June 2020.

Hence, coronavirus has not raised the value of the currencies was the two countries most likely to take America’s place as the worlds’ dominant power. However, both India and China’s governments appear to be far more competent than America’s.

Will the Dollar Die?

Hitler killed the pound by exposing the incompetence of the British government. For example, the British Army was incapable of stopping the German invasion of France.

Additionally, British industry was incapable of producing the armaments the country needed. By June 1940, Prime Minister Winston S. Churchill was begging the United States for military aid.

Finally, the German Blitzkrieg exposed Britain’s key ally France as incapable of defending itself. Hitler showed Britain’s leaders were incompetent and their strategy was stupid.

Today, coronavirus exposes America’s leaders as incompetent. For example, the United States did not implement lockdowns or other measures to stop coronavirus’s spread until March 2020.

Additionally, American leaders such as President Donald J. Trump (R-Florida) and U.S. Speaker of the House Nancy Pelosi (D-California) ignored intelligence reports about coronavirus for months. Notably leaders did not take action until people started dying.

Coronavirus Exposes American Incompetence

Likewise, the US Congress refused to guarantee the salaries of US workers idled by coronavirus as the British government did. Instead, Congress went on recess as the number of unemployed people rose to 26 to 27 million, Nick Bunker of Indeed estimates.

 One result of this stupidity was widespread civil unrest in the United States after George Floyd’s death. That unrest included the looting and pillaging of stores and the burning of buildings. Notably, the mobs of looters included large numbers of younger Americans.

Moreover, President Donald J. Trump (R-Florida) displays incredible levels of incompetence and irrationality. For instance, Trump advised Americans to inject themselves with bleach to protect their bodies from coronavirus. Additionally, Trump Tweets bizarre conspiracy theories.

In final analysis, coronavirus shows America’s government is incapable of providing basic services, such as public health, to citizens. Frighteningly, many American politicians refuse to discuss the structural problems that led to the coronavirus deaths.

Coronavirus shows America is incapable of controlling pandemics or leading the world. Just as Hitler showed Britain was incapable of leading the world and defending itself.

What will the New Reserve Currency Be?

Therefore, coronavirus is destroying America’s power, reputation, and prestige. Hence, coronavirus is destroying the factors that make the dollar the reserve currency.

Thus we need to ask what money could become the world’s new reserve currency? Interestingly, Mr. Market undervalues the two most probable candidates the Indian rupee and the Yuan.

To explain, India and China are the only countries with military and resources rivaling the United States. However, India and China’s resources are growing while America’s are stagnating or shrinking.

My prediction is that investment cash will flow into stable lesser currencies until one nation emerges as a credible successor to the United States. Currently, China is the most credible successor, but India is in an excellent position to rival China.

Why India or China will not become the Reserve Currency Nation Overnight

India has many advantages including a growing economy, a working democracy, and a large professional military establishment.

One factor here is that neither China nor India has recently fought a war to demonstrate its military power. The United States; on the other hand, has successfully waged 20 years of continuous war in Afghanistan, Iraq, and elsewhere in the 21st Century.  No great power has waged 20 years of continuous since the 19th Century British Empire.

Notably, India has not fought a war in 50 years, and China lost the last war it fought against Vietnam in 1979. India, in contrast, won an impressive victory over Pakistan in 1970.

History shows military power is essential for a reserve currency. For instance, the Pound Sterling had no rivals while the Royal Navy ruled the waves. Moreover, the dollar emerged as the reserve currency in 1944 when America’s military power was on display on World War II battlefields.

Therefore, it could take a major military victory by India by or China for the rupee or the yuan to emerge as the reserve currency. For example, a successful Chinese invasion. Frighteningly, The Diplomat’s  Rajeswari Pillai Rajagopalan thinks Chinese military forces are making threatening moves near Taiwan.

Where will the Money Go?

The probable outcome is that money will flow into several lesser currencies and stay there until the new reserve currency emerges.

Those lesser currencies include the Euro, the Swiss Franc, the Japanese Yen, and strangely the Pound Sterling. Interestingly, Mr. Market gives those countries more value than the U.S. dollar.

For instance, the Swiss Franc was trading at $1.05 on 13 June 2020. Meanwhile, the Euro was trading at $1.13 to the US dollar, on the same day. The Yen traded at 0.93₵ on 13 June 2020. Interestingly, Mr. Market was paying $1.25 for a pound on 13 June 2020.

Strangely, the Pound Sterling could be in the best position as a dollar alternative. To explain, Britain has an excellent banking system in the City of London and some ability to act independently.

Could the Pound Become a Reserve Currency Again?

To clarify, Britain has just enough military power to protect itself in the form of the Royal Navy’s nuclear submarines. However, the British lack the capacity to wage war outside Europe without American or Indian help.

That makes Britain reasonably secure. Yet Britain lacks the capacity to threaten other nations in the way America, China, or India could. Hence Britain is safe from attack but unlikely to become entangled in a destructive foreign war.

Though Britain is vulnerable to coronavirus. Worldometers estimates 41,662 people had died of coronavirus in the United Kingdom by 13 June 2020.

However, Britain’s count could be more accurate than other nations. To explain the National Health Service (NHS) owns most of the healthcare infrastructure in the UK so it could provide a more accurate count than governments.

Will Coronavirus destroy the EU?

In contrast, the European Union’s military power is theoretical. The European Union (EU) has no army or navy.

Instead, the EU relies on individual nations to provide the military. However, only one EU power; France, maintains a large professional military establishment with a navy and nuclear weapons.

Notably, the EU is vulnerable to coronavirus. In detail, coronavirus has hit three of the four major EU nations;  France, Spain, and Italy, hard.

In detail, coronavirus had killed 34,301 people in Italy, 27,136 in Spain, and 29,301 in France as of 13 June 2020, Worldometers estimates. Conversely, coronavirus had only killed 8,865 people in Germany, Europe’s largest power.

Thus, Germany could have to bail out Italy, Spain, and France to keep the EU going. Hence, I do not consider the Euro stable.

The Swiss Franc as Reserve Currency

A more probable reserve currency in Europe is the Swiss Franc. Switzerland is a stable and neutral country with a sophisticated banking system. In addition, Switzerland is a historic haven for money.

I think enormous amounts of money could flow into Switzerland if either the United States or China becomes unstable. Currently, the USA is experiencing a level of unrest not seen since before World War I.

Another potential safe haven is Japan which is economically stagnant and neutral but politically and culturally stable. In recent years Japan has experienced some economic growth because of Prime Minister Abe Shinzo’s Abenomics policy.

However, Japan is no longer the economic powerhouse it was in the 1980s. Additionally, there is no popular support for increased military power in Japan.

Under these circumstances, I think the most probable scenario is that equal amounts of money will flow into all the dollar alternatives.

Cryptocurrency as Reserve Currency?

A wild card here is cryptocurrency, which can theoretically allow for nongovernment currencies.  

However, only one cryptocurrency; Bitcoin (BTC) has a large market cap. CoinMarketCap gave Bitcoin a Market Capitalization of $174.377 billion and a Coin Price of $9,475.08 on 13 June 2020.

In contrast, most cryptocurrencies have market caps under $3 billion. In addition, the second most valuable cryptocurrency Ethereum (ETH) had a Market Capitalization of $26.549 billion and a Coin Price of $285.46 on the same day.

Thus, I think there is no popular market for cryptocurrencies. I think they will have to make significant improvements to cryptocurrency technologies for it to rival fiat currencies. In particular they will need to solve the blockchain scalability problem and offer fast conversion into fiat currencies.

Bitcoin, in particular, is too clunky and slow to reach a mass market. On the other hand, I think a flexible and scalable cryptocurrency such as EOS (EOS) could achieve widespread use with a smart marketing campaign.

Could a National Cryptocurrency become a Reserve Currency

One final thought here, if a nation such as China, or the United Kingdom, could launch a national cryptocurrency it could become the reserve currency in a year. However, only one central bank China’s PBOC admits it is developing a cryptocurrency.

Conversely, I suspect central banks such as the U.S Federal Reserve and the Bank of England are working on fiat cryptocurrencies but keeping it secret. Notably, somebody is putting up the money for projects such as EOS. In addition, I think Facebook’s (NASDAQ: FB) proposed cryptocurrency project Libra resembles a central bank.

Therefore, it is impossible to say what will replace the dollar. However, we need to think about replacing the dollar because it’s time as the reserve currency could soon end.