Why People in Developed Nations Should Care About Stablecoins, Too
In the developed world, people generally don’t lose sleep over currency devaluation. The presumption of functioning government, responsible debt management and sound central bank policies has largely insulated the industrialized world from monetary panic for most of the last century. Meanwhile, many emerging and frontier market populations live with the constant anxiety of foreign-exchange (FX) tremors that can decimate their life savings by 10 percent or more every single day.
However, an unprecedented geopolitical risk landscape threatens to burst the bubble of monetary stability that generations have taken for granted in the developed world. According to former U.S. Treasury Secretary Henry Paulson, growing populism and protectionist trade policies, particularly in the U.S., “threaten(s) to disturb the foundations of the global system.” Paulson is primarily concerned with the U.S.-China trade rift, which has escalated to the point of both nations imposing hundreds of billions of dollars in tariffs on each other’s exports.
According to Washington D.C. think tank The Brookings Institution, trade hostilities between the U.S. and China “are likely to have significant contagion effects around the world,” due to the interconnectedness of markets and global supply chains. In the backdrop of this dispute, Market strategist and Financial Times contributor Russell Napier believes the “global monetary system is collapsing.”
Napier points to the global ratio of non-financial debt to gross domestic product (GDP), which stands at 234 percent, compared to 210 percent in December 2007, right before the financial crisis. “Central bankers have bought growth by sacrificing financial stability,” writes Napier.
The Dollar’s Descent?
In the U.S., the Federal Reserve has largely abandoned the dovish monetary policy it deployed to rescue the economy from the subprime catastrophe. After years of quantitative easing and near-zero interest rates, the Fed has tightened the leash on lending, with Fed Chairman Jerome Powell favoring much more aggressive tapering than his predecessor, Janet Yellen.
As a result, nine interest-rate hikes in the last four years have sent shockwaves through global currency markets. In the wake of the Fed’s hawkish policy reversal, a September 2018 review of 143 global currencies conducted by CNBC contributor Richard Bove found that over 80 percent had fallen in value.
According to Wall Street leaders Ray Dalio and Larry Fink, the U.S. dollar may also be at risk of major devaluation in the near-future. Both financial magnates have sounded alarm about swelling U.S. budget deficits, which could lead to excessive Treasury bond issuances as a means of funding government debt liabilities.
Dalio says that foreign governments will emerge as the primary buyers of these Treasury bonds. In order to cover interest payments to foreign investors, the Bridgewater Associates exec predicts that “The Federal Reserve at that point, will have to print more money to make up for the deficit,” causing “a depreciation in the value of the dollar.” The potential outcome of Dalio’s warning is that the dollar could easily depreciate by 30 percent over the next two years, a nightmare scenario that threatens to displace it as the world’s reserve currency.
Meanwhile, across the pond, growing nationalism and xenophobia in European Union (EU) member states have the potential to undo decades of multilateral political alliances, culminating in the demise of the euro.
A Disintegrating Euro
Given Europe’s broad “ethnic, cultural, linguistic, political, and economic divides,” argues hedge fund advisor and Barron’s contributor Avi Tiomkin, “the imposition of a single currency on a population that now totals 340 million people arguably has been doomed from the start.” Flaring tensions over immigration, a deepening refugee crisis and budget deficits may be accelerating the EU’s unraveling.
Citing Brexit, along with the rise of right-wing nationalist movements in France, Italy and Germany, Tiomkin depicts an increasingly fragmented EU that is unlikely to remain intact. Even if the EU manages to resolve its budgetary disagreements, particularly the standoff between Italy and the European Commission (a supranational government organization that implements and oversees EU laws across member states), Tiomkin believes the euro’s days are numbered.
Just like Great Britain voted to leave the EU in 2016, Tiomkin believes “the most plausible solution” to Europe’s budgetary impasse is Italy’s secession from the bloc. So significant is the Italian economy to the union, writes Tiomkin, that “Italexit” “would precipitate the dissolution of the Euro Zone itself.” If the Italian secessionist movement prevails, then it would spell the destruction of the euro, the currency union that has held the continent together for the last two decades.
Crouching Tiger, Hidden Default
Shifting back to Napier, the FT columnist writes that the euro’s likely demise will be the “key consequence” of a broader macro event: Chinese debt default and its adoption of floating exchange rate to “inflate away these debts.” Napier argues that today’s monetary system, “patched together from the embers of the Asian economic crisis,” cannot sustain itself as China’s debt grows to levels that it will not be able to repay.
The Asian crisis to which Napier is referring is the 1997 financial contagion that swept through the so-called “tiger economies” – South Korea, Thailand, Malaysia, Indonesia, Singapore, and the Philippines. The crisis began when speculators broke the Thai baht’s peg to the dollar, spawning a regional financial meltdown.
As a result, tiger economies, at the time some of the fastest growing markets in the world, saw their currencies plummet by an average of 48 percent. According to some reports, the U.S.-China trade war, along with the American rising-rate regime have left Asia particularly vulnerable to another major debt crisis.
Stablecoins for Economic Resilience
As rising geo-economic tensions, mounting debt, and decaying monetary systems push the world closer to the brink of another financial crisis, stablecoin innovation could make global markets more resilient to a major downturn. While stablecoins’ primary appeal in the developed world revolves around transactional convenience and crypto-exchange arbitrage, their utility in developing nations have transformative implications for the global economy, especially in the event of disaster.
If the global monetary system were to implode, stablecoin adoption in emerging economies will help unlock vital streams of alternative liquidity. Following the 2008 financial crisis, “emerging markets led the recovery in world trade, with demand for imports rising twice as fast as in wealthier countries,” according to ex-World Bank President Robert Zoellick. When the next financial crisis hits, writes Zoellick, “emerging markets are likely to prove even more important than they were a decade ago.”
With some 1.7-billion unbanked people shut out of the global financial system, according to the World Bank, stablecoins can help mobilize some $380 billion in untapped capital. Leapfrogging traditional financial services intermediaries, stablecoins offer the unbanked a volatility-resistant, peer-to-peer unit of exchange that transfers funds directly between web-enabled mobile devices.
More than an industry fad or an arbitrage tool for crypto traders, Reserve believes stablecoins will enable the decentralized flow of hundreds of billions of dollars from financially excluded markets into the global economy. Beyond humanitarian considerations, this tokenized capital will make global markets more resilient when the next crisis strikes.
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