The writer, the global chief strategist of Morgan Stanley Investment Management, is the author of “ Ten Rules of Successful Nations ”
When the pandemic hit, the US dollar was stronger than ever. Despite discussions of hesitant US supremacy, the dollar has reigned as the medium of international trade, the anchor against which other countries value their currencies, and the “reserve currency” that most central banks hold as savings.
Before the United States, only five powers had enjoyed the coveted status of “reserve currency” dating back to the mid-1400s: Portugal, then Spain, the Netherlands, France and Great Britain. These reigns lasted 94 years on average. By early 2020, the dollar’s race had lasted 100 years. It would have been a reason to wonder how long this could last, but with a caveat: the lack of a successor.
There are contenders. Europe had hopes for the euro, introduced in 1999. But the currency failed to gain the world’s confidence, due to doubts about the effectiveness of the eurozone’s multi-state government. China’s aspirations for the renminbi have been thwarted for the opposite reason: concern about the arbitrariness of a one-party state.
U.S. officials were therefore convinced that in response to the Covid-19 lockdowns, they could print the dollar in unlimited quantities without compromising its status as a reserve currency, allowing the country to continue to run large deficits without apparent consequences. But a new class of suitors is emerging: cryptocurrencies. Operating on peer-to-peer networks not governed by any state, cryptocurrencies such as bitcoin are presented by their champions as decentralized democratic alternatives.
The pandemic has made these crypto-pitches sound less like pure digital hype. Fearing that central banks led by the US Federal Reserve would degrade the value of their currencies, many people bought bitcoin in bulk. Its price has more than quadrupled since March, making it one of the hottest investments of 2020.
Since its launch in 2009, the makers of Bitcoin have aspired to establish it as “digital gold,” a trusted store of value that provides safe haven in these turbulent times. But skeptics find it difficult to feel secure investing in such a volatile asset: The last Bitcoin bubble burst less than three years ago, and its daily price swings are still four times larger than gold.
Skeptics are particularly well represented among those who did not grow up with digital. They tend to prefer gold, which has been bought as protection against the decline of standard currencies for hundreds of years. In a recent survey, only 3% of baby boomers reported owning a cryptocurrency, compared to 27% of millennials. Still, those numbers are rising and there is reason to believe this bitcoin rush has deeper roots.
It comes to a turning point for the dollar. Last year, after rising for decades, America’s debt to the rest of the world exceeded 50% of its economic output – a threshold that often signals an upcoming crisis. Since then, with the government borrowing heavily under the lockdown, those commitments have soared to 67% of production, deep within the alert zone. The dollar’s reign will likely end when the rest of the world begins to lose confidence that the United States can continue to pay its bills. This is how the dominant currencies have fallen in the past.
In addition, the United States and other major governments are showing little enthusiasm for limiting growing deficits. Money printing will likely continue, even when the pandemic passes. Reliable or not, bitcoin will gain by widening mistrust of traditional alternatives.
Bitcoin is also starting to make headway on its ambition to replace the dollar as a medium of exchange. Today, most bitcoin is held as an investment, not used to pay bills, but that is changing. Small businesses are starting to use bitcoin in international trade, especially in countries where dollars can be hard to come by (like Nigeria) or where the local currency is unstable (Argentina). And these last weeks Pay Pal and its subsidiary Venmo have started storing bitcoin with the goal of accepting it as payment next year.
The boom in Bitcoin may still turn out to be a bubble, but even if it does burst, this year’s cryptocurrency rush should serve as a warning to government money printers everywhere, especially in the United States. . Don’t assume that your traditional currencies are the only store of value or medium of exchange that people will trust. Tech experts probably won’t stop looking for alternatives, until they find or invent one. And intervening to regulate the digital currency boom, as some governments already believe, will only accelerate this populist revolt.