Bitcoin: Gold 2.0? Try Reserve Asset 3.0
On Monday, some people (like me) were struck by a brief note published by Zoltan Pozsar, Credit Suisse’s short-term interest rate strategist, about a new world monetary order. At first glance, the full note (available here) appears to be unrelated to Bitcoin (but more on that later).
Pozsar sees the “birth of Bretton Woods III – a new world (monetary) order centered on commodity-based currencies in the East that will likely weaken the Eurodollar system and also contribute to inflationary forces in the West” . Here’s what it could mean for us if his assessment of the world is accurate and how it relates to Bitcoin.
The Bretton Woods system was a monetary management system established in 1944 at the end of World War II. He set the rules for financial relations between countries and created the International Monetary Fund, the World Bank and the World Trade Organization. In short, Bretton Woods described the rules that central banks and governments enforced financially.
Whole books have been written about Bretton Woods, so I won’t pretend this article is an exhaustive history of how things happened, but it helps to remember (as easily as possible) how we went from Bretton Woods I to III.
First, we need to explain an important concept. The term “country reserves” is often used with little explanation. It simply means that governments hold different types of currencies, securities or commodities (aka “stuff”) to react to events happening in the economy. For example, if your currency looks weak, you sell foreign currency and buy your own. Without “stuff” in reserve, governments and central banks cannot react. Countries are free to keep whatever they want in reserve.
The first iteration of Bretton Woods, now called Bretton Woods I, was a gold-based system where the US dollar dominated and was freely convertible into gold at $35 an ounce (about 5,600% below its current price) . This is where the “US dollar is backed by gold” hijack comes from. In 1971, a confluence of factors led the United States to change currencies so that the dollar would float freely and be backed by the full faith and credit of the government, not to mention a massive military and oil.
From there, Bretton Woods II was born, where the dollar still dominates, but in a system that mainly uses “internal currency”. Inner money is made up of claims that are someone else’s responsibility, while outer money is the type of money that is nobody’s responsibility. In other words, the monetary system has become largely debt-based. So when China holds US Treasuries, it’s domestic money. When Russia sells US dollars to buy gold, it is foreign money.
The regime we have been living in for some time can cause a lot of confusion. Is it necessarily bad for Americans that China holds its debt and owes it a lot of money? Maybe, but maybe not since the US controls it (Treasuries are inside money, after all).
It also makes the workings of international finance extremely complicated. Fierce economic rivals fight (dirty, sometimes) for dominance in any industry, while relying on each other for economic robustness. Proof of this is that China holds $1.1 trillion of Treasuries in its own reserve. On the one hand, we cannot live with each other, and on the other hand, we would have died without each other.
Given the war in Ukraine, the world has swung into action and seized a large chunk of Russian reserves. As Castle Island Venture’s Nic Carter put it, US President Biden “has dropped a financial nuclear bomb on Russia.” A significant designation was made excluding energy-related payments, given Europe’s dependence on Russian oil and natural gas. This is important because the prices of commodities like oil and wheat have skyrocketed. Thus, China is in a fortuitous position to strengthen its currency in the face of a commodity crisis.
Russia is one of the biggest exporters of raw materials in the world and, because of the sanctions, Russian raw materials are less sought after than raw materials from other countries. The People’s Bank of China, which has huge amounts of now seizable domestic funds based in the United States, could defensively sell Treasuries to finance the purchase of “subprime” Russian commodities. In addition to giving China control over inflation, such action could lead to commodity shortages and a recession in the West.
This should not be taken lightly. Although Russia has been selling US dollar assets for gold (and other things, see chart below) in recent years, the foundation of Bretton Woods II has fragmented.
Add Russia’s partial ban on SWIFT – a messaging system that supports international banking transactions – to the new risk of confiscation associated with US domestic money and we could be looking at the start of a new monetary regime, a Bretton Woods III. Today we face a world where more emphasis may be placed on external money, such as gold and other commodities, as countries increase their reserves.
Or they can turn to bitcoin.
This point is exactly the impetus to write about this topic for the newsletter. To end his note, Pozsar wrote:
Once this war is over, “money” will never be the same…
…and Bitcoin (if it still exists then) will likely benefit from all of this.
While not exactly a bitcoin support signal, I would still call it a mic drop.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.