My brother-in-law Jules sent me this article. It is good, and I am glad he sent it.
Bretton Woods, New Hampshire, is where the agreement was reached. It was the first international agreement on currency and its backing. Forty-four nations agreed to maintain their currency based on their gold reserves. It lasted until the early 70s.
There are conditions that require more currency than can be supported by gold. By the late 1960s, gold was too scarce. As the world economy grew, a new method was needed.
In this version, the Americans delinked from gold and other currencies linked to the US$ because it was easily acceptable throughout the world and was available in sufficient quantity. Ideally, it was, or at least had been, stable.
The key to this success was the idea of a “petro-dollar.” The US dollar became the only way to pay for oil by agreement with OPEC and Saudi Arabia particularly. That automatically created a demand for it, which tended to keep the dollar’s value high.
Many countries hold US Currency and US dollar-denominated bonds and other securities as the foreign exchange reserve.
Today, only about 60% of oil purchases involve US dollars. As it depreciates in value, many have decided a new method must be found.
A key feature of a currency is knowing what it will be worth in the future. Without that knowledge, saving becomes a gambling game, and no one can live with that. If currencies move radically, it would be like having the size of a gallon change. You lose your intuition.
So what is the potential backing for world currencies?
As gold and silver are too limited to work, people have proposed a basket of commodities. These could be anything so long as they are somewhat limited, easily recognizable, and easy to verify existence. OIl is one of the pieces frequently discussed.
That may be a good solution, but there is a flaw. Historically currency backing assets had few if any other uses. When other commodities are used, market forces can affect their relative values. For example, if the world’s currency had been linked to lithium in 1950, the link would have been stable for decades. Now, not so much.
A basket of commodities might solve that in much the same way as diversifying your stock portfolio reduces volatility.
The article does not discuss cryptocurrencies. I think it should. If the quantity of a cryptocurrency can be made limited, it will behave like a scarce commodity. The unlimited ones are really not of any value as a currency. Just as it is with paper money. So long as a country has ink and paper, it can make its currency available but only by reducing its future value because of inflation. Thus the reason to replace the US Dollar.
Cryptocurrencies also address the need for a useless backing commodity. If people begin to think a Bir=tCoin has no value it will promptly demonstrate that value. It is good for nothing else but permitting stored value and in exchange. The perfect tool for a reserve asset.
If cryptocurrencies become reserve assets, their value could easily be pegged. Governments are quite capable of making that happen. Gold was $35 an ounce for forty years, even though people thought it should be worth more. Within 8 years of Bretton Woods 2, it had appreciated to more than $800 an ounce.
It may be risky to hold dollar-denominated investments. They may appreciate in dollars but lose value in terms of spendable assets.
Many years ago, an economist told me that from 1950 to when we spoke, (likely the early 90s,) the most valuable export from the United States was inflation. There are trillions of dollars and US treasury bonds that will not buy as much as the money that purchased them would have bought. Who got the value for that loss?
People don’t yet fully understand how cryptocurrencies will become useful. Pay attention; that could happen quickly.
As always, understand the economic environment your investments live in now and will live in in the future.
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I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Business Development Bank.
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