Economic warfare is everywhere today. Countries wage it against their own people with out of control money printing and lockdowns. Countries also wage it against one another through devaluations, embargoes and sanctions. Perhaps the best example of economic warfare in recent years was how, in the aftermath of the Russian invasion of Ukraine, the west cut Russia off from the global financial markets.
President William Taft introduced ‘Dollar Diplomacy.” In his State of the Union Address in 1912, explaining that his foreign policy was to simply “substitute dollars for bullets”.
This was the President Taft’s twentieth century version of economic warfare, which is a popular choice amongst governments when diplomacy fails. Sanctions and embargoes are some common examples of economic warfare.
During the American Revolution, Britain flooded the market with American currency called “continentals,” which led to inflation in the American colonies. Benjamin Franklin wrote of the phenomenon:
“Paper money was in those times our universal currency. But, it being the instrument with which we combatted our enemies, they resolved to deprive us of its use by depreciating it; and the most effectual means they could contrive was to counterfeit it.
The artists they employed performed so well, that immense quantities of these counterfeits, which issued from the British government in New York, were circulated among the inhabitants of all the States, before the fraud was detected.
This operated considerably in depreciating the whole mass, first, by the vast additional quantity, and next by the uncertainty in distinguishing the true from the false; and the depreciation was a loss to all and the ruin of many.“
In the present day, as China faces a property sector crunch, high municipal debts, and a contraction in manufacturing activity, the world’s second largest economy could choose to devalue the yuan, as it did in 2015. Yuan depreciation would boost China’s exports and allow the People’s Bank of China to decrease interest rates.
The risk would be possible destabilization of the global currency market, sending shockwaves throughout the world. A surprise devaluation would probably lessen appetite for the yuan globally, especially amongst financial traders.
Nevertheless, the People Bank of China has increased gold reserves for seventeen straight months likely as part of a strategy to diversify foreign exchange reserves, in addition to its petroleum accumulation. These acts could be seen as a hedge against future currency devaluation.
In another form of economic warfare many countries, including many US states, shut down in 2020 their own economy while the Federal Reserve lowered interest rates to zero and unleashed the money printer. It was the economic shot heard around the world–a war had commenced. The Fed telegraphed they would not move rates higher until 2024. They hiked rates in 2023, however, which caught some banks like Silicon Valley Bank (SVB) by surprise and may have helped along its demise.
Meanwhile, in countries all over the world, inflation ravages peoples’ savings while their governments impose capital controls in countries beset by inflation. The capital controls mean citizens can’t get their money out of their country nor can they use the stabler US dollars inside their country. A Stone Aged bartering system emerges to substitute for a rapidly declining currency.
In Zimbabwe, hyperinflation preceded the introduction of a gold-backed currency, ZiG, which only went into circulation at the end of April. In Venezuela, where US dollars manage to circulate in retail shops, 2023 inflation hit nearly 190%. In Turkey, inflation reached 70% in April. Nigeria, Africa’s most populous country, suffered as its currency, the Naira, fell to record lows by February after its Central Bank to maintain an artificial peg with the US dollar.
In such economic circumstances, nobody wants to sign, say, a 12-month contract due to uncertainty around the currency’s future value. The people in these countries are too busy playing hot potato with their local currencies because they lose value so quickly.
Mainstream economists refer to money as a store of value, medium of exchange, and unity of account. It’s easy to see based on the above stories of inflation why more than 120 currencies today are mediums of exchange and not units of account. The weak currencies only remain mediums of exchange because governments enforce it as such. The US Dollar, euro, and the Chinese yen are the world’s unit of accounts.
All-in-all, the global inflation rate soared to nearly 9% in 2022. The World Bank expects commodity prices to remain higher than they were before the COVID lockdowns, while the OECD anticipates that global growth will slow next year in part due to inflation.
The roles of gold and US dollar, as safe haven assets are well established. Bitcoin will only become increasingly known as a safe haven over the next decade. It is not tied to any single jurisdiction, and there is no single point of failure. Furthermore, as government’s the world over print their currencies into oblivion and wage economic warfare against each other, Bitcoin is forever limited to 21 million bitcoins ever produced–quite a juxtaposition.
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