Will isolationism force the U.S. government’s currency to compete with other domestic currencies?

Over the past month, Americans have been moving their attention from the pandemic to the war in eastern Europe.  Not fully appreciated by an American public glued to the media scenes of evacuees, missile fire, and troop advancements is the closer economic alliance of China and Russia.  United States government officials have been prognosticating with unfounded confidence that economic sanctions against Russia in addition to stiff resistance from Ukraine’s military will thwart Vladimir Putin’s plans to pull more of Ukraine into the Russian orbit.

What I am seeing is a greater incentive by Russia, China, and other nations to go their own way by expanding alternative payment systems that move capital that underlies trade between Europe and Asia.  Speculation has increased that sometime in the future, the world may go from pricing oil in dollars to pricing oil in yuan.  With Russia being amongst the world’s top producers of oil, accepting yuan as payment for oil would put Europe in a pickle: dumping the long established petro-dollar for yuan.

As the United States continues to lead from behind on the eastern European portion of the world stage, I don’t hear many Americans contemplating what a new world order would look like where the United States issues a currency that finds itself limited to buying Caribbean vacations.

One currency scenario in a post petro-dollar world could see the greenback sharing legal tender status with alternative currencies.  These currencies could be digital, virtual, or actual (paper & coin).  The issuers, from 30,000 feet down, look like competitors, with potentially hundreds of communities issuing, circulating, and using their own currencies.  Right now, I would classify the issuers in this post petro-dollar world into three main entities.

The first entity is the public corporate body or government.  The government issues a currency in exchange for tax receipts.  The public corporate body’s currency is created by its ability to coerce, by law and force, individuals to pay a tax in exchange for protection of property and person.

The second entity is the private corporate body or corporation.  The corporation issues currency to consumers in exchange for revenues.  The private corporate body’s currency is created by its ability to provide the consumer with goods and services that consumers are willing to exchange their work energy for.  The private corporate body’s currency is backed by goods and services.  The greater the quality of these goods and services, the higher the demand for their attached currency.

Last is the private bank.  The private bank’s currency is created by its ability to store and secure its customer’s commodity wealth.  The currency the private bank issues, the tradeable receipt, allows the bearer of the currency to redeem her tradeable receipt in the form of a commodity.  The currency is commodity-backed.

An isolated U.S. government means that the currency it issues will incur reduced demand and a lowered value.  Domestically, the government issued currency will purchase fewer goods as competing imports diminish in availability.  The currencies of private corporations that provide valuable goods and services and private banks may see an increase in their value.  The taxpaying consumer will want to make a switch.

Under this scenario, government, if it is to survive, may have no choice but to enter agreements with private banks and private corporations to set a domestic exchange rate which in turn allows government to collect taxes via the use of alternative currencies.

The war in eastern Europe may set in motion events leading to competing currencies in America. 

Alton Drew

21.03.2022

For consultation on how this political or legal event impacts your foreign exchange trade, request an appointment at altondrew@altondrew.com.

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Disclaimer: The above is provided for informational purposes and should not be construed as financial or legal advice or as creating an agreement to provide financial or legal advice.