Good examples of this include Venezuela and Turkey.

Both countries have been mired in multi-year struggles with the value of their currencies, especially versus the Dollar. While Venezuela is obviously in a much more dire situation, economically and politically, the citizens of both countries have increasingly turned to crypto.

While we do not know to what extent private citizens in both countries use crypto to conduct trade with each other, we know that at the very least, they see crypto as a valuable means of protecting their purchasing power, at least for now. 

On a lesser degree of seriousness is El Salvador, which has made Bitcoin legal tender, released its own crypto wallet, and installed 200 Bitcoin ATMs.

What all three have in common is their need to find an alternative to the hegemony of the world’s reserve currency, the USD. El Salvador has been explicit about this, publicly stating that it moved towards accepting Bitcoin partly because of expensive Dollar remittances.

Whether the citizens of Venezuela and Turkey realize it or not, their enthusiasm for cryptocurrencies is also underpinned by the same need to escape the harsh realities of the global USD system.

That is, the necessity for every country on the planet to be able to obtain Dollars in order for them to participate in global commerce. The instability within these countries, economically, politically, or both, drives their domestic currencies’ value against the Dollar sharply lower. 

This in turn creates a whole host of problems for their citizens, not least of which is spiraling inflation and the loss in value of what they earn or save.

Crypto provides them with an alternative to being caught in that trap. 

Whatever your view on crypto and its viability is, Venezuelans and Turks are grateful for its existence at this point in time. Which highlights how, under the right circumstances, cryptocurrencies can not only be of use, but also prove to be invaluable.

In this case, it is the accessibility of the blockchain to all who have access to the internet,  and the relative ease of swapping in and out of it. Bear in mind that the market for the currencies of many countries can be illiquid. This makes swapping out of such a currency into another fiat currency an expensive endeavor.

Furthermore, whether or not an asset is a “safe haven” is a matter of perspective. The Venezuelans and Turks flocking to cryptos demonstrates this clearly.    

In addition, there’s a broader point to this discussion.

We know that individual countries with their own domestic currencies already chafe and struggle with having the Dollar as the global reserve currency. This has been the case for the past few decades, where Dollar funding crises have popped up all over the globe.

The American establishment is aware of, and acknowledges this fact. John Connally, a former US Treasury Secretary, summed it up succinctly with his now infamous quip that “The Dollar is our currency but it’s your problem”.

How much worse would the situation be for countries having to use a one world cryptocurrency without having the pressure valve of their own domestic currency?

This means that exporters might not have suffered as steep a fall off in revenues as they did by using the Euro, reducing the need to lay off as many workers.

If this is too confusing or abstract, think of a traditional currency as a pressure valve customized to the needs and idiosyncrasies of a particular economy. When too much economic pressure builds up, it can be released via devaluation, instead of blowing up the economy’s labor force.

Which brings us back to the plausibility of a crypto-one-world currency.

The issue at hand isn’t government irresponsibility with printing (even though central banks do not actually print money) and borrowing in fiat.

It’s whether or not a single currency, traditional or crypto, can act as a pressure valve that encompasses all of the economic peculiarities of the world’s countries.

If the Euro, used by 19 countries in 2021, and is the closest real life example of a modern day single currency we have, couldn’t account for Greece a decade ago, how can any currency account for all 195 countries in the world?

It can’t; economies are simply too diverse in their activities and levels of competitiveness for the idea to be plausible.

Similar to Greece’s experience in the Eurozone, uncompetitive economies using a one-world cryptocurrency will struggle against the deflationary effects of a currency that is too strong for its level of competitiveness.

Compounding matters is the fact that labor suffers the most during deflationary episodes, with massive layoffs the norm.

Without the “emergency release” option of a traditional currency, economic recovery takes place over decades instead of years (post bubble Japan is a good example).

This sets many workers back years in terms of lifetime earnings, and many give up looking for work altogether, resulting in the country’s workforce not only decreasing over time, but also losing relevant skills.

This obviously creates an economic headache, as over time the economy can no longer produce the goods and services the rest of the world demands, leaving the country trapped in the economic doldrums.

On top of this, the country will also have to deal with increasing levels of economic inequality.

As more and more citizens find themselves stuck outside the labor market and unable to find a job that matches their skills, they become trapped in a low (or no) income situation with no way out. This breeds resentment and over time can fester into social and political unrest.

As such, an economy’s choice of currency has far reaching consequences and second order effects, which are not all obvious at first glance.

While the idea of a one-world cryptocurrency (or a one-world fiat currency) is seductive in its simplicity, it really doesn’t serve anyone’s economic interest in the long term, except maybe for the folks promoting their version of it.    

Before we begin, some definitions are in order, for the purposes of clearly delineating the scope and hence applications of this discussion.

Note the use of the term “traditional” currencies as opposed to “fiat”. What’s the difference?

For our purposes, a “traditional” currency is one that is associated with a particular country, and fiat is government backed currency associated with a particular country. In other words, fiat, here, is a subset of traditional currencies.

Why the need to draw this distinction? Because geography really matters.

The geography of a country pretty much determines what its main economic activities are; a nation blessed with natural resources and access to deep coastal waters will gravitate towards the extraction and export of those resources. Australia is a great example of this.

On the other hand, a country with little to no natural resources will have to produce and export something else.In our modern economy that would be financial services such as wealth management and capital markets expertise. Hong Kong, Singapore, Luxembourg, Switzerland all come to mind.

What does this have to do with a crypto-one-world currency?

Consider that, at any one point in time, different economies will have different economic conditions, because of the variety of economic activities they undertake. That is to say, a country focused on digging up stuff from the ground and selling them is exposed to different economic cycles than a country whose economy is focused more on the provision of services.

As such, each country needs its own currency to reflect its own specific set of economic conditions in order to keep its economy in balance.

Greece’s experience with the Euro during the continent’s debt crisis provides a good example. As borrowing costs for the Greek government skyrocketed from 2010 – 2012, global investors refused to lend them any more money.

This exacerbated already poor economic conditions, driving the country into a deflationary quagmire.

If Greece wasn’t using the Euro and had its own currency, the FX market would have driven its value much lower.

While this sounds like a terrifying prospect, and in many ways, currency volatility is terrifying (just ask the Argentines and the Turks), it is exactly what the Greek economy needed to rebalance itself and regain some measure of competitiveness. 

Unfortunately for the country, they couldn’t do so because of the Euro. 

This is most easily seen from the perspective of Greek exporters. As economic conditions deteriorated, the strength of the Euro meant that Greek exporters’ sales fell off a cliff even though their costs did not change.

Greek exporters simply were not competitive enough to be able to stay in business with the Euro trading at the levels it was back then.

Consequently, the only course of action they could take to survive was to lay off their employees. This in turn led to mass layoffs and all the attendant negative second order effects.

What would it have been like if Greece had control of its own currency?

To be continued…