(or How A Burgeoning Technology Became A Global Necessity, Resulting In A Shift To A Multipolar Global Trading Regime All Because Central Bankers Tried To Control Something They Never Could BUT In The End, Our Lives Improved)
Goal #1 for this essay was to create the longest run on title ever. Judges?
Onward.
After World War II, the global economy was in shambles. Hundreds of millions dead, economies exhausted by the unbelievable demand that the war machine had generated, global leadership was in complete turmoil, and saddled with a very unclear challenge of what to do next. The United States had been spared in a way that would come to define global economics for the remainder of the 20th Century. The factories that had converted to meet the increased need for items of war now could be converted back to their original civilian use. Some were even converted to new uses. The returning military was looking for employment, and that meant these factories would have no shortage of labor. As the contents of military supply lines halted, a switch was flipped and these supply lines became supply chains. Products to rebuild the world found their way to Europe and Asia. New consumers were serviced with American Made products through the same pathways. But there was something much more profound happening…much much more profound.
The way that the world conducted business or perhaps a better way to put it, the way value was acknowledged, became standardized.
The Creation of The Bretton Woods System
In July of 1944 around 730 delegates from 44 countries gathered to hash out how the world economy was going to come back from the devastation wrought by WWII. The International Monetary Fund (IMF) and the World Bank were both created. The former was tasked with creating an efficient monetary exchange system such that currencies played nice with each other and the latter to help structure financial arrangements to rebuild the nations that needed rebuilding. But perhaps the most important aspect was that the role of the U.S. dollar was elevated immensely. The dollar was to be pegged to gold and the rest of the currencies of the world were to be pegged to the dollar.
While the true power of Bretton Woods would not become a reality until 1958 when the international currency system became operational, the stage was set for dollar dominance.
This showed in the Post-War economy as all the world purchased American products with the US dollar. The US economy ripped and things were good.
But then countries wanted to start trading US dollars for the underlying peg — gold.
Nixon Says “No”
During this time the United States began spending more in Vietnam and on social programs at home. The rest of the world was a little spooked by the increased spending and wanted to redeem US dollars for gold. The Gold Pool collapsed in 1968 and Nixon decoupled the dollar from its gold peg in 1971.
That’s when we began the art of the float. The US dollar then was pegged to the perceived strength of the US economy and the government’s global influence. The Age of The Hegemonic Buck was here.
Let’s get back to stablecoins…
The Hegemonic Buck Giveth, The Hegemonic Buck Taketh Away
During the time discussed above, the world economy grew very quickly. There was one game in town: The US Economy and the US dollar. Both have been a pretty damn good bet. Both still continue to be. But there is a problem just over the horizon.
As the world grew over this time it also became more complex. Other countries economies grew and they began to specialize in things too. They too wanted more influence over the world. And even though that may have been the hope, the truth was that the base money of planet earth was still the dollar. Ostensibly this may seem like a good position for the United States to be in but many many challenges arise from supporting such a system. Specifically, most of the dollars that used to be distributed and boomerang right back home to purchase American Made products, were now being spent in other economies on other non- American products.
This is challenging for two very important reasons:
- The United States still had to support the infrastructure of a global base currency.
- The complexity of managing a currency that extends far beyond the controllable aspects of an economy is immense.
This is one of the reasons that we find so many aspects of commerce insanely inefficient. US dollars are the default. And frankly, based on the domestic monetary policy in the United States, it is clear that US central bankers have lost control. They have lost control because attempting to steer a currency that operates as a global base currency through domestic manipulation with a dose of foreign policy, is an impossible task.
There are simply too many variables.
And so now the US dollar has become unstable in the sense that stability demands predictability and predictable models do not look like this chart of the M1 money supply:
Weren’t we getting back to stablecoins?
Yes, yes we were.
How in the hell is anything supposed to be pegged to the above chart? Sure we can technically do it, but then what? We are now pegged to an underlying target that is erratic. That my friends, is anything but stable.
Now What?
I am not suggesting that the dollar is worthless. I am not suggesting that the dollar will not remain an important (if not THE) global base currency for quite sometime. I believe that it will.
But I also believe that the dollar and more specifically, the absolutely out of control monetary policy that has created this situation, needs to work itself out. I do not believe that DeFi needs to peg the notion of its existence (because stablecoins are fundamental in these ecosystems) to a legacy system with insane people at the controls.
Here’s where things might get pretty interesting. Stablecoins like DAI and UST are crypo native and maintain pegs through an algorithmic solution (Typically through arbitrage). The algo for the US dollar is the FED. Remember: When we say stable what we mean is predictable. That’s what matters. We are interested not in maintaining a dollar but a unit of one. That unit could be any peg, so long as it is stable.
What This Means For The Global Economy
So let’s say that we embrace these jurisdictionally neutral (or more neutral), crypto native, algorithmically managed stablecoins — well that is where the sparks will fly.
If these assets get traction they will enable, literally overnight, a multipolar global trade system. At current the dollar is the base currency and the most important commodity in the world, oil, is pegged to it. This is the petrodollar. (Whether you like this or not it is a fact — if you want to forecast any global economy start with how they consume Number 2 Diesel.)
These new instruments would be intra jurisdictional and near zero friction. It is straightforward to then imagine that it may make more sense for some transactions in far corners of the world to substitute hard to get US dollars for easy to get algo stablecoins.
If that happens, we now have the very real potential for a multipolar trading regime. What’s more as the FED makes the predictability of the dollar ever harder to model through the implementation of experimental economic policy, the use of crypto native stablecoins could create magnitudes of order of transactional. Why? Because they are blockchain native and thus pegged to the resiliency, predictability, and anti-fragility of a distributed, no trust necessary environment.
I want to be very clear — the dollar will not be deposed from its position in the foreseeable future. The hypothetical scenario I am creating is a non-zero game and could actually lead to more efficiency altogether for both the US dollar and algo stablecoins. Those that can get the US dollar, get the US dollar and use it. The US has fewer dollar customers to service and a smaller more efficient footprint in terms of dollar logistics. Anywhere else in the world that is tough to service with US dollars simply uses another parallel algo stablecoin value. And because these stablecoin ecosystems are hyper-efficient even if ultimately a trade participant wanted to trade back into dollars they would still theoretically experience a much more efficient trade.
Think of a system such as this as a scalable last mile value delivery network. That is to say it can be big and efficient or small and efficient. But it is always efficient.
This is where we wrap up. In the title there is the line “BUT In The End Our Lives Improved.” The reason is that inefficient financial systems literally make everything less efficient for everyone, everywhere. Said another way, they make all economic action more expensive. We shoulder that cost in someway or another.
Through thoughtfully crafted, algorithmically managed, crypto native stablecoins we have the ability to unlock magnitudes of order of efficiency in global trade. The consideration is even more compelling when we factor that our current system is an artifact of a reality that changed long ago.
If we want to build an anti-fragile world we need to use anti-fragile systems.
- The TTLG Crew
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