When Money Stinks

Bill Mayer

The phrase “pecunia non olet” (money doesn’t stink) is said to have been coined (no pun intended) by the Roman emperor Vespasian who ruled from 69 to 79 AD. It is generally taken to mean that the value of money remains the same regardless of how it was obtained. (Well, tell that to the money-laundering squad!) Vespasian had a point: Roman money was mostly in the form of silver coins which derived their value from their silver content rather than anything else.

But even then Roman money was already starting to stink a little bit: in 64 AD emperor Nero debased the denarii by 25% by mixing in copper. This process ran its course in the 3rd century AD, by which time a typical denarius was over 50% copper. And then emperor Caracalla introduced a two-denarii coin that weighed 1.5 times as much—an additional 25% debasement. No doubt the Roman legionnaires who were charged with protecting Rome’s frontiers from the ever more numerous barbarians, and who were paid in this increasingly worthless money, thought that it did indeed stink, and acted accordingly, as did the barbarians.

Fast-forward to today, and the coin of the realm is the US dollar. Unlike Roman money, which lost 75% of its money over three centuries, the US dollar lost 96% of its value over just one. It was, for a time, tethered to gold, but that was ended in 1970 after a massive run on US gold reserves. Since then it has been tethered to nothing but sustained by several forces. First and foremost of these is sheer inertia—the bulk of international trade is settled in US dollars—followed by the threat of violence against anyone who tries to escape from the US dollar system (as exemplified by Iraq and Libya). But these forces are bound to weaken over time. As the US represents an ever-smaller share of the world economy and other players start to claim an ever-larger share of world trade, the inertia is dissipating. And threatening violence against Russia, China and even Iran is not particularly effective because all of these countries are perfectly capable of threatening the US right back.

The US dollar stinks in a number of other ways. Foremost of these is the terminal financial condition of the US as a whole: it is, by all reasonable estimations, a bankrupt country that can only sustain itself by taking on debt at an ever-accelerating rate. There are no pretenses at all that it will ever be repaid; the only ways forward are through devaluation or default (or a combination of the two). Even just rolling the debt over will become impossible if interest rates return to their historical average. As Putin put it at the recent international conference in Vladivostok, with the leaders of all the major Asian nations in attendance, this is “a problem without a solution.”

Second in line are the increasingly onerous legal and regulatory requirements in transacting in US dollars. Any transaction of any size that uses US dollars automatically comes under US jurisdiction. In turn, the US government has been using this jurisdictional creep to its advantage by punishing economic and geopolitical rivals. The most recent scandal is over the sanctions the US saw it fit to impose on the Chinese for buying weapons systems from previously sanctioned Russian companies. China is banned from buying US-made weapons, so here it isn’t even a matter of hurting competitors; rather, it shows a willingness to hurt everyone in an attempt to prevent Russia from taking first place in weapons sales (it is currently number two after the US). Add to this the ever-present threat of having one’s US dollar funds frozen at any time and for any made-up reason, and there is every reason to stop using the US dollar. But how?

“Dedollarization” is currently a very hot topic of discussion around the world. Quite a few countries, most notably Russia and China, Russia and Turkey and several others, are determined to start trading in their own currencies, circumventing the US dollar. But there are 180 currencies in circulation throughout the world that are recognized by the UN, and this creates a bit of a problem. As long as everyone transacts using the US dollar, what results is a hub-and-spoke system with the US dollar at its center. To trade, everyone converts their currency into dollars, then converts back. Since it is usually more expensive to buy dollars than to sell dollars, there is a sort of built-in “dollar tax” that everyone has to pay, while the US gets to make money simply by making US dollars available. This doesn’t seem all that fair.

On the other hand, there are some benefits to using the US dollar. First, it is very liquid: if you need to come up with a large sum of dollars in a hurry, all it generally takes is a single phone call, whereas with some of the minor currencies it may take considerable time and effort to come up with the needed sum. Second, it has been relatively stable, with relatively low volatility compared to some other currencies, making it less risky to hold dollars than other, more volatile currencies. Lastly, for a company that trades internationally, maintaining just one price list, in dollars, is a lot less effort than maintaining separate price lists in every single national currency.

However, it stands to reason that while the benefits to continuing to use the US dollar in international trade are finite, the potential disadvantages are incalculable: if the US, and the dollar system, were to fail catastrophically, the damage to everyone’s trade relationships would be catastrophic as well. More and more countries are becoming appreciative of this fact, and establishing currency swaps and other means for facilitating international trade in their own currencies. The problem here is the sheer complexity of such a system. With the US dollar out of the picture, the network diagram of world currencies becomes like this, except with 180 nodes instead of just a few.

An alternative is to just let China take over. It is already the world’s second-largest economy after the US, and the world’s largest economy by their purchasing power parity (the Chinese earn less but can afford more than Americans). China’s financial position is almost a mirror opposite of the US: it is the exact opposite of bankrupt, with large surpluses and reserves and an ever-expanding hoard of gold. But China tends to be a cautious player and prefers gradualist approaches, making a sufficiently rapid replacement of the USD with the CNY unlikely.

When it comes to issues that may affect the stability of the entire global financial system, being prudent and cautious does sound good. On the other hand, you may ask, What stability are you talking about? The current intellectually challenged resident of the White House likes to wake up in the morning and start another trade war. He has endowed various other individuals within the US government with the authority to single-handedly impose financial sanctions on countries, companies and individuals anywhere in the world. The US federal budget deficit is zooming toward a trillion dollars a year—and this while the economy is supposedly doing well. But of course it isn’t: there are close to 100 million long-term unemployed; inflation (if you include housing, education and medicine) is running wild; the country is full of insolvent municipalities and states and so on. Wealth inequality in the US is reaching levels at which countries tend to explode politically. Perhaps most importantly, the quality of the governing elites in the US, which was quite high just a few generations ago, has now become absolutely abysmal. It isn’t just Trump who is intellectually subpar; so is just about everyone else. They will do all they can to perpetuate the fiction that the US is still wealthy and powerful—until the lights go out.

Still, it would be unwise to panic, because in a panic everyone gets wiped out in a hurry. The right approach to dedollarization is to work at it dilligently, every day, pursuing a strategy that will minimize your losses. The collapse of the US dollar system is not going to be a money-making opportunity for most people around the world. Instead, the choice is between losing something and losing everything, and I would advise the former. And so here is a handy dedollarization flowchart I have put together. If you follow it faithfully, in the fullness of time you will find yourself fully dedollarized. I leave it up to you to decide how aggressively you should act, based on your own subjective feeling of when the deadline is going to suddenly arrive.