V. BITCOIN AND A MULTIPOLAR WORLD
U.S. foreign policy has kept the petrodollar dominant for many decades, but its power is inarguably beginning to wane. Many Americans, including this author, have been incredibly privileged by this system, but it will not last forever.
Luke Gromen calls the petrodollar system a “company town,” where the U.S. has enforced control over oil pricing with threats and violence. After the fall of the Soviet Union, he says, America could have restructured the system and held another Bretton Woods, but it held on to the unipolar moment. Beyond protecting the system against disruptions like the petroeuro, Gromen says that America extended the life of the system by launching NAFTA and helping China join the World Trade Organization in 2001. These steps allowed the U.S. to continue exporting manufacturing and treasuries abroad in exchange for goods and services. He notes that in 2001, China’s treasury holdings were $60 billion, but rose to $1.3 trillion a decade later. From 2002 to 2014, America’s biggest export was treasuries, where foreign central banks bought 53% of the issuance, using it as a new form of gold. But since then, China and other governments have been divesting treasuries and pushing us toward a new system, in expectation of that gold losing value. According to Gromen, they realized if dollars were still priced in oil as the U.S. continued to run higher debt-to-GDP ratios (up from 35% in the 1970s to more than 100% today), the price of oil would eventually skyrocket. Europe was not able to disrupt the petrodollar system in the early 2000s, but over time the U.S.’s hegemony and ability to stop other nations from pricing oil in their own currencies has eroded.
More and more countries are denominating oil trade in other currencies, like euros, yuan and rubles, partly because they fear reliance on a weakening system, and partly because the U.S. government continues to use the dollar as a weapon. The American sanction system is incredibly powerful, as it can cut enemies off from the SWIFT payment network or from the World Bank or IMF. As the Financial Times reported, “by using American banks as a cudgel against Russia, Joe Biden has shown a willingness to weaponize the U.S. financial system against foes, continuing a tactic honed during the Obama years and dramatically ramped up under Donald Trump.”
This month, President Biden publicly denounced the Nord Stream2 Pipeline project, which would build on the momentum Russian President Vladimir Putin already has with Rosneft, pricing more than 5% of the world’s oil in euros by connecting Europe and Russia. Team Biden reportedly wants to “kill” the project, and its officials have commented that dollar primacy remains “hugely important” to the administration and that “it’s in our national interest because of the funding cost advantage it provides, [because] it allows us to absorb shocks… and gives us enormous geopolitical leverage.” This is a striking indication of just how important the petrodollar system remains politically to the U.S., 50 years after its creation, despite critics who say the world uses dollars for pure market reasons.
Many countries want to escape from U.S. financial control, and this desire is accelerating global de-dollarization. For example, China and Russia are, as of last year, transacting in dollars just 33% of the time, versus just 98% seven years ago. China is expanding oil trading denominated in yuan, and many worry about the Chinese Communist Party’s new “DC/EP,” or digital yuan project, being a ploy for increased international use of the yuan. Meanwhile, former European Commission president Jean-Claude Juncker has said “it is absurd that Europe pays for 80 percent of its energy import bill — worth 300 billion euros a year — in U.S. dollars when only roughly 2 percent of our energy imports come from the United States.” While the dollar is still dominant, trends point to other major currencies gaining traction in the coming years.
Beyond a shift to a multipolar currency world, another threat to the petrodollar could be the SDR, or “Special Drawing Right,” employed by the IMF, which is based on the dollar, euro, pound, yen and yuan. Inspired by Keynes and his failed bancor idea from Bretton Woods, the SDR has achieved more traction in the past few years, with more than 200 billion units in circulation and another 650 billion possibly being created. But few governments in a position of economic power would willingly hand their monetary control over to an unelected alphabet soup organization.
As for gold, the world is not going back. As Jacques Rueff wrote in the 1960s, “money managers in a democracy will always choose inflation; only a gold standard deprives them of the option.” The left-wing historian Michael Hudson explains that in the 1970s, he tried to make an apolitical case for the U.S. government to revert to the gold standard, teaming up with the right-wing scholar Herman Khan: “He and I went down and gave a presentation to the U.S. Treasury, saying, ‘gold is a peaceful metal because it’s a constraint on the balance of payments. If countries had to pay their balance-of-payments deficit in gold, they would not be able to afford the balance-of-payments costs of going to war.’ That was pretty much accepted and that was why the United States basically responded, ‘That’s why we’re not going back to gold. We want to be able to go to war and we want the only alternative to hold central bank reserves to be the United States Dollar.’” Gold is, by the account of most economists today, simply too restrictive.
A 2020 study in the Journal of Institutional Economics posited four potential future monetary outcomes for the world:
- continued dollar hegemony,
- competing monetary blocs (where the EU and China act as counterweights to the U.S.),
- an international monetary federation (where at the top of the international hierarchy stands no longer a state, but the BIS and the SDR), and
- international monetary anarchy, where the world shrinks into less connected islands. The authors, however, miss a fifth possibility:
- a Bitcoin standard where the digital currency becomes the global reserve asset.
Since its creation in 2009 by Satoshi Nakamoto, bitcoin has grown in value from less than a penny to more than $50,000, spreading to every major urban area on earth as a store of value and, in some places, a medium of exchange. In the past year, Fortune 500 companies like Tesla and sovereign wealth funds like Singapore’s Temasek have started to accumulate bitcoin on account of its inflation-resistant properties. Many call it digital gold.
We are very possibly witnessing the birth of not just a new ultimate store of value but also a new global base money, neutral and decentralized like gold, but unlike gold in that it is programmable, teleportable, easily verifiable, absolutely scarce and resistant to centralized capture. Any citizen or any government can receive, store or send any amount of bitcoin simply with internet access, and no alliance or empire can debase that currency. It is, as some say, the currency of enemies: adversarial parties can use the system and benefit equally without detracting from each other.
As bitcoin’s value goes up against fiat currencies, more and more corporations and individuals will begin to accumulate. Eventually, governments will too. At first they will add it as a small part of their portfolio alongside other reserve currencies, but eventually, they will try to buy, mine, tax or confiscate as much as they can.
Born at a time when the previous world reserve currency had reached its apex, Bitcoin could introduce a new model, with more possibilities but also more restraint. Anyone with an internet connection will be able to protect their wages and savings, but governments, unable to so easily create money on a whim, will not be able to wage forever wars and build massive surveillance states that contradict the wishes of their citizens. There could be a closer alignment between the rulers and the ruled.
The big fear, of course, is that America will not be able to finance its exorbitant social programs and military spending if there is less global demand for the dollar. If people prefer the euro or yuan or bonds from other countries, the U.S. in its current form would be in big trouble. Nixon and Kissinger designed the petrodollar so that the U.S. could benefit from global demand for dollars tied to oil. The question is, why can’t there be a global demand for dollars tied to bitcoin?
No matter the base money, there could still be fiat currency and government debt, priced according to the economic power and bitcoin position of those countries. And in the emerging Bitcoin world, America is leading in many categories, whether it is infrastructure, software development, actual holdings by the population, and, increasingly given current trends, mining. America is also built on liberty, equality of opportunity, free speech, private property, open capital markets and other values and institutions that Bitcoin reinforces and reverberates. If Bitcoin did eventually become the global base money, then America is in a position to capitalize on that transformation.
This means no more reliance on dictators and secret pacts in the Middle East, no more need to threaten or invade other countries to preserve dollar primacy, and no more opposing nuclear or renewable energy technology to protect the fossil fuel industry. Unlike the petrodollar system, Bitcoin could very well accelerate the global energy transition to renewables, with miners always choosing the cheapest sources of electricity, and trends pointing to cheaper renewables in the future.
Under the Bitcoin standard, everyone would play by the same rules. No government or alliance of governments can manipulate the monetary policy. But any individual can opt into a nondiscretionary rules-based currency and control a savings instrument that has historically appreciated versus goods and services. This would be a dramatic net benefit for most people on earth, especially when considering that billions today live under high inflation, financial repression or economic isolation.
This transition may not be so pleasant for authoritarian regimes, which are more closed, tyrannical, violently redistributionist and isolated than liberal democracies. But in this author’s view, that would be a good thing, and one that could force reforms where activism alone has failed.
The world’s multipolar drift is inevitable. No one country can, in the near future, gain as much power as America had at the end of the 20th century. The U.S. will still be a powerhouse for a long time to come, but so will China, the EU, Russia, India and other nations. And they may compete in a new monetary system that moves away from the petrodollar and all of its costly externalities: a neutral Bitcoin standard that plays to the strengths of open societies, does not depend on dictators or fossil fuels, and is ultimately run by citizens, not the entrenched elite.