Race to the Bottom
The term currency war gained prominence in 2010 when Guido Mantega, Brazil’s Finance Minister, complained that quantitative easing (QE) was weakening the US Dollar and prompting other countries to respond so they wouldn’t lose their export competitiveness. This led to a “race to the bottom” in which all countries were engaged in trying to weaken their own currency as much and as quickly as possible in order for their exports to compete. Fast forward to today, and the opposite situation holds true. The USD has strengthened dramatically since 2011 and is sitting at decade highs. As the chart below shows, the trade weighted USD sits at multi year highs.
The biggest part of the move has come since the summer of 2014. This has happened as the US stopped its QE cycle, its economy has seen major improvements vs all other economies, and there has been a perception that the US will begin normalizing monetary policy by increasing US rates for the first time in 9 years. A strong US dollar accompanied with global growth fears have led commodities prices to fall dramatically.
Emerging Economies Hit Hardest to the Bottom
This has greatly impacted emerging market economies. This fall in commodities prices has greatly impacted nations in emerging markets. Many of these countries issue a majority of their local debt priced in USD and have commodity-driven economies. This has been an extremely toxic mix.
This has resulted in their currencies being down substantially. The chart below shows how badly emerging markets have performed over the past year.
Over the past year, they have seen the cost of their debt rise dramatically at a time when the commodities they produce are yielding lower returns. They have also lost a tremendous amount of purchasing power.
It is also putting enormous pressure on those who are pegged to the dollar. China had to devalue the yuan and may be forced to depreciate at some point if dollar strength continues. Below is a chart of Kazakstan which has a large amount of dollar denominated debt and was forced to depreciate.
The average citizen who is trapped in their local currencies and has no options to diversify out of it has been hurt badly. This has not been specific to emerging markets as the Australian Dollar has shown over the last few years. Australia is a commodity intensive country that is strongly tied to emerging market growth.
Ironically, Brazil one of the BRIC economies, and poster child of growth regarding how one goes from a developing country to a developed country, is the prime example of this and a prime example of a country who’s citizens could use bitcoin to diversify out of local their currency. Their debt is now rated junk.
The chart below shows how Brazil’s credit rating was intertwined with the commodity cycle and the booms and busts associated with it. The collapse has directly impacted its credit rating.
As the USD has strengthened, their local currency has been decimated.
And their debt has the highest amount denominated in USD. This will cause Brazil to struggle with extremely high debt levels as the weakness in their local currency causes their dollar denominated debt to reach new highs.
This has led to bond yields blowing out, leaving Brazil in peril when it comes to financing their debt and managing their domestic liabilities.
Bitcoin is a Viable Option
While Brazil was used as a textbook example, it is not the only country experiencing this right now, as shown in the charts above. In fact there are many countries in this same situation and the average citizen is the one who is most affected by this.
So what do the currency wars and bitcoin have to do with each other? The resulting economic uncertainty in emerging market nations could help bitcoin gain additional traction as a viable investment option. Citizens could use bitcoin to diversify and protect their portfolios.
According to a report by BitValor, August ended with the highest number of monthly transactions in Brazilian market history and the highest daily volume at US$ 204,576.75. The monthly volume was 41% above the monthly average of the first 7 months of the year and 2015 was on target to double the volume of 2014 in USD.
The volatility in the fiat system based on central bank monetary policy has caused massive misallocations of global capital and unintended side effects to emerging market currencies. Since this is a global economy every single move by global central banks has far reaching effects upon all countries and their ability to control their own domestic monetary policy. In these countries, it makes sense to diversify into other asset classes like bitcoin as a hedge against currency devaluation. While it’s a tossup as to what the Federal Reserve will do with interest rates its clear that the damage has already been done and will continue for some time.
The volatility in the fiat system based on central bank monetary policy has caused massive misallocations of global capital and unintended side effects to emerging market currencies. Since this is a global economy, every single move by global central banks has far reaching effects upon all countries and their ability to control their own domestic monetary policy. In these countries, it makes sense to diversify into other asset classes like bitcoin as a hedge against currency devaluation. While it’s a tossup as to what the Federal Reserve will do with interest rates, its clear that the damage has already been done and will continue for some time.