With great power comes great responsibility. When it comes to the country that issues the international currency, with great responsibility comes great benefit.
For the period 1990-2010, the World Bank estimated that U.S. seigniorage income derived from the greenback’s international status has averaged $15 billion per year. When foreign demand for dollar assets was factored into the equation, U.S.-based borrowers enjoyed an extra annual cost of capital advantage of $33 billion a year:
Gains from the international status of USD
Can Bitcoin, the newfangled underdog in the currency arena, put an end to all this, and throwAmerica’s exorbitant privilege out of the window?
Triffin knew what he was talking about
Back in 1960, when the American dollar was the only currency directly convertible to gold, Robert Triffin, a Belgian economist, wrote a book called “Gold and the Dollar Crisis: The Future of Convertibility”. In his book, Triffin explained why the Bretton Woods system was doomed, and how dollar’s incumbency was causing the U.S. a painful and ever-growing current account deficit.
Today, Triffin’s Dilemma refers to a governments’ inconsistency in maintaining a balance between domestic economic goals, such as keeping unemployment low, and its responsibilities associated with issuing the international reserve currency. In other words, the world needs an easily accessible, and, at the same time, strong dollar.
But, how can the U.S. boost the domestic economy and push exports higher without undermining the value of its currency? With real interest rates bumping along the bottom, quantitative easing measures have become the norm in today’s world, leading to the emergence of an unprecedented currency war.
Over the past couple of years, the Fed revved up its money-printing machine aiming to get the U.S. economy out of its jam. Where has this expansionary monetary policy led us thus far? According to a recent study by San Francisco Fed’s research department, “surprise unconventional policy easing has pushed down the value of the dollar roughly as much as similar surprise downward moves in the federal funds rate did before the crisis.”
Yet, the dollar’s supremacy is not threatened – at least for the foreseeable future – simply because the alternatives are just not good enough. Euro enthusiasts have been proven wrong, now that the Eurozone is engulfed in its own chaos, and the euro is steadily losing its charm. The USD continues to claim the lion’s share in global official reserves, as well as foreign exchange market’s transactions backed by positive network externalities effects: The more people use thedollar, the more it is worth owning it.
Could Bitcoin be the answer?
The million-dollar question is whether Bitcoin – a digital currency based on mathematical formulas, and stored in computers around the globe – could be the solution to Triffin’s Dilemma on the structural issues arising from a national currency’s double role.