The United States of America
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Over the past two weeks, the Etherbridge team has shown how the money cycle coincides with the rise and fall of the Dutch Republic and the British Empire. This week we discuss our most recent world superpower in that of America. We show you how they rose to power by controlling the majority of hard currency in the world (gold), why they eventually decided to drop the gold standard and where they currently sit in the cycle.
The United States of America
The Bretton Woods system was established towards the end of WW2. While the war continued, assured of their success, delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, America, to discuss the future of the international financial system. The failure of the Treaty of Versailles to provide long-term economic stability was still in the minds of all planners present. They had to decide on or create a system that would provide a longer period of peace.
America who was in a substantial position of power proposed a system that was eventually agreed upon by all except Soviet Russia. The Bretton Woods system as laid out by the Allied powers was simple, America would continue to hold the gold it had acquired during the war (two-thirds of the world’s total supply) and would issue dollars on top of it (a gold standard), all other nations would be required to hold dollars as a reserve asset and issue their currencies on top of the dollars at a fixed rate (a dollar standard). In theory, if any Allied nations wanted to redeem the dollars they held as a reserve asset for gold they could, however, this broke down within less than 30 years. Yet for now, the dollar had firmly positioned itself as the worlds reserve currency.
Similar to the period after the Napoleonic Wars the world once again entered a period of relative peace and prosperity. America was the world’s leading superpower, they may have had challengers in that of the Soviet Union, but little real fighting occurred, instead, they were involved in what was considered a “Cold War”. The Cold War was important because it placed two vastly different economic and political approaches in the race to either, maintain their power in the case of America, or supersede the current power, in the case of Soviet Russia. This fight manifested itself in things like the Space Race and the Vietnam War, two expensive ventures that cost America a lot of money.
As America built itself out and extended its reach beyond its borders it became more expensive to continue running the country. America also began experiencing what is known as the Triffin Dilemma and inflation started picking up. America in 1965 entered a period known as The Great Inflation. This period occurred due to American policies focused on lowering unemployment, these led to excessive growth in the money supply. A money supply that under the Bretton Woods system was still supposed to be tied to the gold reserves held in America. Countries and leaders were aware that this was happening which can be seen in a speech made by Charles de Gaulle in 1965 where he states that France wanted to convert its dollar reserves back into gold at the exchange rate defined at Bretton Woods. Slowly more and more countries wanted to convert their dollar reserves back to gold. What was soon realised however was that the amount of gold America held could not settle the foreign dollar reserves that other countries had. America had overextended themselves and broken the conditions of the Bretton Woods agreement. As a result of this, President Nixon in 1971 officially banned the convertibility of dollars to gold. The gold standard was no more. The dollar which acted as the world’s reserve asset officially became a fiat currency, just like the Dutch Guilder and Pound Sterling before it.
1971 to Now
Once America was officially off the gold standard it became much easier to extend its own debt and fund further growth. Below is a chart that illustrates the nominal value of debt that the US government had.
In the 1970s America’s debt more than doubled from almost $400m to $900m. In the 1980’s it almost tripled from $1 trillion to $2.8 trillion. This just goes to show the rate at which debt in America was increasing now that they came off the gold standard. American government debt currently sits around $27 trillion, this is a debt to GDP ratio of 138%, when you take into account private debt as well you are now looking closer to 358%.
America is also currently being challenged by an incumbent in the form of China. They have over the years outsourced the majority of their manufacturing to them and this has given China a significant amount of power. Whether they can reduce their debt and expand their economy naturally remains to be seen. However, they have risen to be a serious competitor to American dominance. The following chart helps visualise how the relative power of the empires we have spoken about has changed:
As you go further back in history you start to get a clearer picture of where we might be heading. America has come full circle on its monetary cycle and this period often means a stark change could be on the horizon. History also shows that the periods of time over which these cycles play out can vary considerably. What is true though is that once you have taken your country off a hard money standard the debt that you incur becomes a ticking time bomb. When credit institutions start lending money like there is no possibility for a system or standing world order to end its best to start watching more intently.
The US dollar is under serious strain, what happens next is not known but history tells us its likely not going to be rewarding for currency and bond holders. Over the next few weeks we will move from looking back to looking forward.
Notable Articles and News Stories This Week:
Germany Legalizes Electronic Securities on the Blockchain
On Wednesday the German cabinet passed new legislation that will allow all-electronic securities to be recorded using blockchain technology. The new law will do away with their traditional requirement of paper-based certificates and instead use an electronic version with blockchain as the accounting and coordination mechanism. This is part of Germany’s new blockchain strategy.
Read more about it here
Ruffer Investment Confirms Massive Bitcoin Investment of $744M
The UK based investment manager Ruffer Investment has confirmed a $744 million allocation to bitcoin which equates to 2.7% of its total assets under management. According to a spokesperson from Rutter, the investment was "primarily a protective move for portfolios" to "act as a hedge" against "some of the risks that we see in a fragile monetary system and distorted financial markets."
Read the story here
Fed to Maintain Bond Buys Until ‘Substantial’ Economy Gains Seen
The Federal Reserve has reaffirmed its intentions to continue purchasing U.S. Treasury bonds and agency mortgage-backed securities. In their latest meeting, the board have stated that they will continue purchasing these to a value of $120 billion every month until a ‘substantial’ gain in the economy is seen (their previous pledge was to only do it over the ‘coming months’). They have also affirmed that they will keep interest rates low until at least 2023.
Read the article here
Whilst we all have the option to look, to seek to understand, it’s often easier not to. Bitcoin, Ethereum and distributed ledger technology are complex systems that require significant due diligence. At Etherbridge we aim to lower the barriers of understanding this fast-growing digital economy.
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This is not financial advice. All opinions expressed here are our own. We encourage investors to do their own research before making any investments.