When the recent surprise downgrade of the US credit rating by Fitch came into spotlight, it sparked discussions surrounding the tangible links between money, debt, and power, as well as the potential disruption Bitcoin and cryptocurrencies could pose to these dynamics. Note that, although a downgrade denotes a modestly worse forecast for the US government’s finances, actual default by the US is seemingly unfeasible, regardless of the sporadic congressional tug-of-war concerning the debt ceiling that occasionally prompts “technical default” speculations.
Currency-issuing countries seldom dishonor their nominal debt payments since they can effortlessly print money for repayments. Even so, this ‘shortcut’ does not leave governments completely unscathed; it degrades the exchange rate and triggers inflation by diminishing the currency’s purchasing power. This subtle form of taxation adversely affects both the domestic populace and foreign creditors, eroding the former’s trust and sparking apprehension among foreign investors.
In an ideal world, these detrimental economic repercussions would motivate governments to refrain from utilizing expansionary monetary policies for debt payment. However, this requires democratic accountability, a principle judged differently across various governments by international debt markets. A significant number of emerging-market governments are compelled to issue bonds in foreign currency – mainly dollars, due to unaffordable interest rates demanded by foreign lending institutions.
The catch here is, international debt markets, which predominantly trade in dollar-denominated debt, are not a level playing field. In a peculiar twist, the US, recently downgraded by Fitch, substantially influences these assessments, causing distortions in the supposedly free market. This emphasizes the ‘exorbitant privilege’ that the dollar’s reserve status grants the US, most notably the power to mold geopolitical outcomes and advocate its banks’ profit-interests.
Echoing this point is the way in which the US, as the only country with sole veto power within the international monetary fund (IMF), exerts its influence. The IMF’s offer of help to countries in the wake of a looming debt default often comes with strings attached. These politically unpopular policies, mostly dictated by the US and varying in intensity, either apply pressure on a political adversary or uphold an ally.
Consequently, the unbalanced international system that developing economies are ensnared in is undermined by their local corrupt, domestic government models and a self-serving power nexus between Washington and Wall Street.
This introduces the intriguing role of Bitcoin and other cryptocurrencies, enabling citizens to opt-out from this undemocratic and skewed international sphere. The decision by El Salvador to declare bitcoin legal tender, grant citizens the freedom to opt for bitcoin, and as asserted by President Nayeb Bukele, sever its dependency on dollar reserves, is indicative of bitcoin’s influence in strengthening citizens’ financial rights and sovereignty.
Meanwhile, China and its allies are exploring methods to decrease their reliance on the dollar, primarily via central bank digital currencies (CBDCs). These drastic shifts in the global financial spectrum, propelled by the fiscal predicaments in Washington and the rising parallel system led by China, could potentially trigger a significant financial transformation.
In response, the US could encourage the principle of free choice and open monetary systems, such as bitcoin or stablecoins, reflecting its core values of human and property rights. This would ensure the dollar maintaining its global preference, even amidst deteriorating credit portfolios and pressures from competitors like China.
Ultimately, this highlights the dire need for the US to consider these emerging monetary systems, especially as the fate of two integral crypto legislations currently awaits decision in the House and possibly the Democratic Senate or the White House.
Source: Coindesk
