History tells us that no international monetary system lasts forever. And as Barry Eichengreen, the leading thinker in this arena, has repeatedly reminded us, those systems tend to collapse very quickly, whether it was the dominance of Rome's coins, the British pound's status as the common unit of international trade, or the various periods in which the world aligned around the gold standard.
The same will be true for the dollar's unofficial status as the international reserve currency. Its hegemony will at some point disappear and, when it does, the fall will be swift as the world scrambles for a new commercial anchor.
Below I will make the case that the trigger for this decline, whether it happens in the next four years or not, could well have been put in place last Tuesday. A Trump presidency could hold the right ingredients for a dollar collapse.
I will also argue that this time, when the dollar system collapses, it won't be replaced by another outdated fiat currency like the euro, yen or Chinese yuan. Neither will we go back to a precious metals standard, however much gold bugs hanker for it.
In the interim, we may anchor world trade to a transitional, multilateral combination of these paper and commodity currencies, but soon enough it will prove to be too unwieldy and out of touch with a changing global economy.
The fact is we now operate in a digital economy in which economic activity is increasingly decentralized, with transactions happening peer-to-peer and, when the Internet of Things is in place, machine-to-machine. That online, decentralized economic architecture will require a digital, decentralized system of monetary exchange that bypasses the inefficient financial intermediaries of a broken banking system.
The solution might not be bitcoin per se, but the distributed, network-run system of value transfer that it represents will, I believe, provide the template for the future model. It's one possible explanation for why the digital currency got a bump on Tuesday evening through Wednesday.
Change is coming
Why might Trump set this chain of events in play? To be sure, we don't know what changes the next president will introduce, but he has definitely stoked uncertainty around the direction of US policy. And uncertainty, the enemy of efficient markets, can often have a self-fulfilling effect.
That's an unsatisfying answer, however. So let's also break down some of the ideas that Trump has floated and how they might change the international perception of America's commitment to the dollar-based international system:
Rights determined by ethnic background
Trump suggests we should discriminate against external foreigners (Muslim visitors to the US), domestic non-citizens (undocumented Hispanic immigrants) and domestic citizens (judges deemed unfit to serve for being of Mexican descent.) This is not just a moral issue; it goes to the heart of whether the law is impartially upheld in the US.
