Cryptocurrencies

Why central bank rate control is a boon for Bitcoin – Cryptocurrencies

The United States is doomed to see its debt soar because the dollar, as the international reserve currency, must offer a vast debt market so that nations can place their foreign exchange reserves there. This constantly increasing debt promises ever lower rates to remain sustainable. And when real interest rates get negative, it becomes more profitable to put your money in gold or Bitcoin rather than in the debt of a state on the verge of bankruptcy …

International Reserve Currency

An international reserve currency is the currency with which governments decide to trade among themselves.

Being accepted all over the World, each country will tend to hold the majority of its foreign exchange reserves in this currency ” universal

[Les réserves de change d’un pays étant toutes les monnaies autres que la sienne ayant été obtenues via ses exportations]

“Majority” and not ” all Because there will always be countries that will not accept it. For example, even if the Dollar is still the international currency par excellence, Russia no longer accepts it in exchange for its arms sales …

Which leads us to wonder who decides the international currency? It’s a good question and the answer is simple. The most common currency reliable and the no longer used triumph. Point.

Before the First World War, at the height of the empire on which the sun did not set, almost one in two countries was a British colony. So even if a merchant did not trade with a British colony, the nation in question was happy to be paid in British pounds as there was a good chance that she needs it sooner or later to trade with the huge British Empire.

Many currencies have been used as international currency throughout history. But far from being eternal, monetary domination rarely lasts more than a century … Grail holders always end up abuse their privilege and break trust. A question that does not arise with the Bitcoin which is not based on debt

International Currency in the 21st Century

If a country wants to impose its currency on the rest of the world, it must have several advantages:

  • You have to have things to sell to the whole world (We do not decree that its international currency from nothing. For its currency to be demanded, it is necessary to start by generating a tangible demand).
  • Other nations must be able to place their reserves, which requires having a large financial market (especially the debt market, because liquid is safe).
  • Nations must be able to get this international currency easily.

The United States filled all the boxes at the end of the second world war. They were the first world exporter and had the bigger financial market of the world. It was also easy to get dollars because Washington was very happy to exchange them for gold. And more decisively, there was the Marshall plan…

The plan consisted of a $ 16 billion loan ($ 175 billion in inflation-adjusted dollars, that is, at constant purchasing power). He was subject to the condition of importing an equivalent amount of American goods. We are therefore far from the popular belief that the Marshall Plan was donated. This poisoned gift served primarily to promote the internationalization of the supposed dollar “As good as gold” (convertible into gold).

Assumed Because the United States is going betray the whole world in 1971 by abandoning the convertibility of the dollar into gold unilaterally. We will come back to it.

The Exorbitant Privileges of the International Currency

An international currency offers privileges which carry within them the seeds of its destruction…

The great privilege that the United States derives from the dollar is to be able to afford a chronically deficit trade deficit without fear of a depreciation of the dollar. By what magic? Quite simply because this deficit is offset by money that goes back to the United States. This money is none other than the foreign exchange reserves that the rest of the world places in American debt to earn interest.

So, once the dollar was declared international currency, Uncle Sam was able to import much more with impunity than he exported. In other words, exchanging paper for goods … However, it is only from the end of the Gold Standard that the Americans will really import without counting and adopt a lifestyle beyond their means.

US trade balance 1960 - 2020

The US trade balance remained in balance throughout the Gold Standard period because Uncle Sam was exposed to the loss of all their gold in case of persistent deficit. Indeed, European nations accepted the dollar as an international currency on the sole condition of being able to exchange it for gold without restriction. It’s not the old monkey that you learn to make faces…

But Nixon blew up the Gold Standard 27 years old hardly after the signing of Bretton Woods agreements

Why did you end Gold Standard?

Firstly, because the European countries, France in particular, demanded the conversion of their dollars into gold. The General de Gaulle couldn’t bear the fact that the United States could pay its debts to other nations in a currency that it owed to it to envy. In 1971, date of the end of the Gold Standard, US gold stock has already melted in half.

Second, because the United States reached 1970 their peak of pétrole (conventional). They knew that their oil imports would explode and the deficit in their trade balance would do the same. They then exposed themselves to the loss of all their gold, which, you will admit, creates a blot for a nation claiming to print international currency …

The rest we know: Washington made an offer that the Gulf countries could not refuse: sell their oil exclusively in dollars. And since the bulk of imports from European countries consisted of oil, they had no choice but to keep stacking the dollarss. The petrodollar was born. Nothing has changed since then, except the endless wars in the Middle East so that nothing changes …

“This is what makes us special as Americans. Unlike the old empires, we do not make these sacrifices for the territory or for the resources. We do it because it’s fair. ” Haha ..

Finally, let’s not forget that there are more $ 12 trillion in loans taken out by non-US companies to oil international trade. 12,000 billion on which American banks collect fat interest. At the rate of 3% – let’s be nice – it still makes a seigniorage right of 360 billion, the GDP of a country like Hong Kong.

And let’s not talk about the extraterritoriality of US law …

A Double-Edge Privilege

The larger the U.S. trade deficit grows and the more their debt must swell so that the World can place its reserves there. It’s a vicious circle. A headlong flight allowed by the petrodollar and the fact that oil – the blood of the world economy – either sold in dollars.

In short, the US debt has become clearly unsustainable so that rates must remain close to 0% or risk exploding debt service. The United States paid 600 billions of dollars of interest in 2019 on a debt of $ 26 trillion. And this with borrowing rates at the floor, under 1% …

I let you imagine the bill if borrowing rates go up. The United States can hardly afford it, especially with a population on the verge of the insurrection.

Realize that the US budget deficit is likely to reach 4000 billion in 2020… It’s an increase of almost 20% debt in a year… Usdebtclock.org says US debt is already reaching 130% of GDP and is expected to reach 150% at the end of the year. Greece is 170%…

Unless the system is reset, rates cannot go up again, which brings us to the Bitcoin.

Low rates are bullish for Bitcoin

A real interest rate is the interest rate minus inflation. If you invest in US debt that yields 1% a year and inflation is 2% a year, your real interest rate is -1%.

To put it another way, the purchasing power of your invested money decreases by 1% per year…

Real interest rates and the price of gold are inversely correlated. The more the real rate goes down, the more the price of gold increases because even if you have an investment that does not yield anything, you might as well have gold because gold does not go bankrupt unlike a state in debt up to 130% of the GDP…

US 10-year rate vs Gold price
Inverse correlation between the real US 10-year rate and the price of gold
Source: Goldreserve.com

Bitcoin IS gold. The two currencies each have advantages and disadvantages, but both are a store of value that have a bright future if real interest rates continue to fall.

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