The mountain of American debt
There is currently considerable tension in the US stock markets. Interest rates are rising as corporate debt in the United States has exploded. Executives have taken advantage of balance sheets so that less than 10 of the S&P 500 companies now have positive cash positions. Meanwhile, the US government continues to borrow with the abandonment of homosexuals and, despite nearly ten years of uninterrupted economic growth, the size of the mountain of American debt is higher than ever. Unfortunately, it will become increasingly difficult to repay this debt as interest rates rise and historic overseas buyers begin to question the logic behind Uncle Sam’s overdraft.
It is reported that the United States will have borrowed more than $ 1.3 trillion in 2018 and that the cost per day to meet its current debt is now $ 1.5 billion per day!
Source: https: //www.zerohedge.com/news/2018-10-29/americas-true-deficit-us-borrow-over-13-trillion-2018
Economic power moves
Given that we are witnessing a potential trade war with the United States and China and the increasing sanctions imposed on Iran, Venezuela and Russia, how long will it take before we see d other countries follow the example set by Venezuela? Venezuela recently launched the Petro crypto coin as a way to try to raise capital for its cash-hungry economy. Although it may sound like a crazy idea a year ago, how difficult would it be for a country like Saudi Arabia to do what Venezuela did and to launch a Saudi play backed by its large oil reserves ? In the 1970s, the United States entered into an oil deal in exchange for a US dollar. They told the Saudis if they valued the oil in U.S. dollars, then used their surplus U.S. dollars to buy U.S. treasury bills, then the U.S. would provide military protection and the Saudis could keep control of their reserves oil. Almost 50 years later, the world is a different place. In a dynamic global market where economic power is changing, is this agreement still as attractive. In 2014, oil accounted for 90% of Saudi Arabia’s revenues, but by 2035 they intend to reduce their government deficit to zero and their dependence on oil. It is suspected that a number of countries would be happy not to have to buy and sell oil at the price in US dollars, but doing so would certainly put additional pressure on the US dollar.
US sanctions could backfire
With more than 40% of US bonds (i.e. their debts) held by foreign investors, US sanctions in various countries could backfire. Countries like Russia have sold their US Treasury holdings as shown in the charts below and have steadily increased their holdings of gold.
Russian President Putin recently said about the sanctions imposed by the United States “I think this is a major strategic mistake because they are undermining confidence in the dollar as a reserve currency.”
Nothing lasts eternally
Concerns about the future of the US dollar are not only voiced by foreign countries, but also by the world’s largest fund management company. Larry Fink, CEO of Blackrock during a speech at the New Economic Forum in Singapore, said that “the United States risks undermining the reserve status in US dollars and being the dominant currency would not last forever.”
As the United States uses sanctions as a means of influencing and controlling events, in our increasingly digital global economy, the old regional and geographic boundaries are becoming less and less important as capital can be moved literally at the push of a button
America’s economic importance in modern times is largely based on the use and power of its currency. Great Britain retained the status of world reserve currency from 1815 to 1920. Before that, it was the French franc in the Napoleonic period from 1720 to 1815 and before that, it was the Dutch currency from 1640 to 1720. All these currencies finally gave way to a new currency and generally after 100 years. The US dollar has been the world’s reserve currency since 1920, 100 YEARS – nothing lasts forever!
A new order
Interestingly, in a speech, Putin said in November “that the world will look for alternative payment systems…. Due to the volatility of dollar transactions, many economies around the world want to find other reserve currencies and create payment systems that are not dependent on the dollar…the world will be looking for alternative payment systems.
Although it is not explicit and does not mention cryptocurrencies, using language like “alternative reserve currencies, payment systems, alternative savings and transaction methods”, one cannot think of Putin looking at the Petro Venezuelan with considerable interest. Putin would surely like to find a way to bypass US sanctions and allow Russian companies to access capital and develop the Russian economy.
It is not only Russia that sells the US treasury, but the two largest foreign holders of US bonds, China and Japan, have reduced the amount of their American debt. This could spread the contagion. While this is not surprising as US interest rates rise and bond values fall to reflect rising interest rates, this is cause for concern. Rising interest rates generally put pressure on the stock markets, as it becomes more difficult for organizations to repay their debts. Investors then demand higher interest rates to compensate for potential defaults and a vicious cycle is triggered. In an increasingly globalized world, contagion and loss of confidence can spread very quickly as we saw in 1987 and then in 2008.
Interestingly, we have seen two recent examples of large companies exploring alternatives to traditional currencies. In Russia, Nornickel, one of the world’s largest producers of nickel, plans to launch a Stablecoin supported by the metals it produces. Companies with credibility, resources and a global footprint like Nornickel will increasingly look for other ways to access financing, especially if U.S. sanctions continue. Meanwhile, other companies like Japanese shipping giant NYKare are currently exploring how they can pay their staff globally with a NYK coin instead of paying them in yen.
A new asset class
If we are to see greater adoption of cryptocurrencies, the entire user experience must be made more user-friendly and secure. Governments will demand KYC and AML checks to ensure that cryptocurrencies do not become the preferred means of money laundering and other harmful activities to move money undetected. However, as we begin to see trusted global brands like Sony of Japan offering cryptocurrency wallets, more and more institutions will be encouraged to engage more, and gradually we may see them move away from traditional currencies like the US $ for daily life. day transactions.
For the past 100 years, in times of economic uncertainty, the US dollar has been a refuge and investors have sold stocks and bonds and often hold cash in US dollars. However, when we experience the next big economic shock and a stock market correction, there is now an alternative to holding a heavily indebted investment that the US dollar has become. We can see investors looking to divert capital to cryptocurrencies that have not been correlated with other asset classes. This may explain why we see more institutions showing interest in this sector, such as Fidelity, which has $ 6.8 trillion in administration, which recently announced that it plans to increase the number of cryptocurrencies which it offers to institutions. It is not only Fidelity that is active, Binance, the largest cryptocurrency exchange operator, believes that stablecoins will be an important market as they launch a platform to trade these assets.
Cryptocurrencies backed by tangible assets offer a viable alternative. Historically, many currencies have been supported by gold such as the U.S. dollar since 1800, when the U.S. dollar gold standard was introduced. Potential cryptocurrency investors will have a much wider choice as to where to invest and will be exposed to different assets, be it commodities, diamonds, palladium, nickel, crude oil , real estate or rare collectibles – potentially a Stradivarius violin – all available via globally tradable digital cryptocurrencies.
The US dollar continues to be the global reserve currency for the time being, but a combination of a mountain of US government and corporate debt, rising interest rates, monetary and economic sanctions and now of a new alternative asset class in the form of cryptocurrencies, we wonder how much longer?
CEO TeamBlockchain Ltd