Coronavirus disease (covid-19) is an infectious disease caused by a newly discovered coronavirus. The disease causes respiratory illness (like flu) with symptoms such as a cough, fever, and in more severe cases, difficulty breathing. Covid-19 has been declared a global pandemic by the World Health Organization (WHO) and has now spread in 210 countries. This has swung countries worldwide into taking drastic measures to contain the virus, including declaring total lockdowns on the public with only essential activities allowed to operate. It is estimated that ¼ of the world population is confined to their homes as a result of the lockdowns. This has caused a global economic shutdown of businesses, restaurants, disruption of supply chains with experts predicting that the covid-19 crisis could lead to an economic recession worse that the 2008 financial crisis. The crisis could have a destabilizing effect to the entire post second world war global economic system based on liberalization of trade and globalization.
The post-world war 2 economic system.
Towards the end of the second world war, the Allied powers came together in 1944 to plan a new economic order for the post-war world which avoid a repeat of disastrous policy mistakes of the 1920s and 1930s. 44 countries met in Bretton woods with the principal goals of creating an efficient foreign exchange system, preventing competitive devaluation of currencies and promoting international economic growth. At the end of world war II, the US accounted for half of the world’s GDP with Europe and Japan destroyed by the war and the dollar emerged as the most powerful currency. The United states also controlled two thirds of the world’s gold. The Bretton woods Agreement decided that world’s currencies could no longer be backed by gold, but they could be backed by the US dollar, which was itself to be backed by gold. The dollar officially became the world’s global reserve currency. The Bretton woods system minimized international currency exchange rate volatility which helped international relations.
Collapse of the Bretton woods system.
However, in 1971, concerned that the US gold supply was no longer adequate to cover the number of dollars in circulation, President Richard Nixon declared a temporary suspension of the dollar’s convertibility into gold. By 1973 the Bretton woods system had collapsed and countries were now free to choose any exchange arrangement of their currency, except pegging their value to gold. This gave birth to the floating exchange regime where the currency price of a nation is set by the forex market based on supply and demand relative to other countries. The US dollar emerged as dominant currency for global transactions due to its attractiveness as a safe haven currency (store for value) and robustness of the US economy. Most international exchanges were ochestrated in dollars making it the defacto world currency.
Bretton woods Institutions.
The Bretton woods Agreement also established the International Monetary Fund (IMF) and the World Bank and later on the GATT presently known as the WTO. They remain the lasting legacies of the Bretton woods conference of 1944. These institutions were to operate in accordance with liberal economic principles , namely a free market economy, and to advance a model of economic development based on private sector led growth, trade and capital liberalization. With most countries currently under lockdown and global supply chains disrupted, this could disrupt global trade which has flourished as a result of increased globalization and integrated financial markets hence posing a challenge to the global economic order.
The emergence of Bitcoin and the libertarian movement.
The aftermath of the 2008 global financial crisis led to the birth of Bitcoin. Bitcoin grew out of a libertarian movement created by an unknown individual or group of individuals identified as Satoshi Nakamoto. It was aimed at supplanting the centralized authority and replacing it with a decentralized system of exchanging value based on peer to peer connection secured by block chain technology. Since centralized institutions like banks and central banks were to blame for the 2008 financial crisis, Bitcoin was created to be a safe haven against fiat currency controlled and manipulated by centralized financial institutions.
The Global recession and intervention of governments: The US stimulus package and its impact on the US dollar.
It is predicted that the current covid-19 crisis could lead to a global recession much worse than the 2008 financial crisis. As a result, governments have made interventions to make their economies to help their economies through reduction of interest rates, loans to businesses, social welfare packages to the people who are unemployed etc.
The impact of the $2 trillion stimulus package on the dollar on other currencies.
The U.S Senate passed a bi partisan piece of legislation (CARE ACT) to backstop the impact of the corona virus. This legislation has authorized the federal reserve to make a $ 2 trillion dollar stimulus package majority of which is to help small businesses, provide income for the unemployed and those in the gig economy in order to cushion them from the financial crisis. The stimulus package has weakened the dollar against the basket of other currencies and reduced demand for the safe haven currency. Investors will less likely reduce dollar exposure with millions of Americans filing jobless claims. It is hoped that the stimulus package will initially weaken the dollar but that it will later recover to stronger levels. However, Bullion Investor Dan Tapiero has commented that the value of money will decrease if the government keeps printing it and distributing. This could devalue savings and people will opt for safe havens for investments. Bitcoin and cryptocurrencies present such an option which is also without its own perks. Initially, it was widely a popular sentiment that Bitcoin was a safe haven asset. But it has not fulfilled that role in 2020 having lost roughly half of its value in a single week in march amidst the global economic crisis surrounding Coronavirus crisis. That said, Bitcoin was not supposed to be a safe haven against any generic form of economic turmoil. Instead Bitcoin was designed as a hedge against a potential collapse of the fiat currency system. The federal reserve has promised made it clear that they are able to create an unlimited amount of cash to respond to the coronavirus crisis. Bitcoin, of course, is immune to this problem since it was designed to have no central authority that can make such decisions to print more cash. This makes it a buffer against such interventions. If governments continue spending money that they do not have, this will devalue fiat currencies and ultimately lead to hyperinflation. In case such a situation arise, Bitcoin will be tested as a safe haven against fiat currency.
The Chinese e-RMB, a threat to the dollar?
As the US continues to grapple with whether to keep the economy in lockdown as cases continue to rise, manufacturing in China has resumed with 80% of firms back in production having successfully contained the virus by undertaking stringent lockdown measures.. Prior to the Corona virus outbreak, China dominated global manufacturing with 20% world’s goods produced in china. Despite China dominating global trade, the Chinese currency accounts for 1.6% of global transactions. By comparison, the US dollar went from 39.4% of all transactions in March 2018 to 44 in March 2020. The dollars dominance stems from the fact that the dollar accounts for 60% of foreign reserves in central banks world wide. Most of the world’s precious commodities like oil continue to be traded in the US dollar earning it the christened name ‘petro dollar'. China itself continues to peg its currency against the dollar and has accumulated approximately $3 trillion in foreign exchange reserves as of March 2020. It could dump the dollar and weaken it but the problem is that China is also the largest creditor to the US owning $1.07 trillion, or about 5%, of the $23 trillion U.S. national debt, which is more than any other foreign country. Therefore, dumping the dollar would be against the short term interests of China. However, the Chinese government has announced its plans to roll out a digital currency, the e-RMB which is set to be tested in China’s major cities. This sovereign digital currency will be pegged against the Chinese Yuan and will be used as an alternative to the dollar settlement system. As a result of Corona virus, digital payment is seen as the popular option of making payments to avoid contact. Previously, Chinese businesses have been using the US dollar to pay for imports. The e-RMB once adopted could become a more attractive option to make monetary settlements. If China adopts the e-RMB, USA could follow suit and come up with its own digital dollar currency.
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