12/06/2020
With Western governments printing money at record levels in response to the coronavirus crisis, where will this lead us in the future?
What’s happening right now in Lebanon gives us a clue.
In March, as the coronavirus crisis hit, Lebanon defaulted on $1.2 billion in Eurobond debt. With no way to access more funds, it began printing Lebanese Pounds to fill the gap.
As a result, the currency has lost over 50% of its value in April and is now in hyperinflation, with its value projected to halve again this month. Over 75% of the population is now in dire need of financial support.
On Friday, protestors staged a funeral for the local currency complete with a coffin paraded through the streets. These protests have now turned into deadly riots, with banks being the main target. The Lebanese Military is now firing on protestors with live ammunition.
Lebanon’s Prime Minister, Hassan Diab, submitted a rescue plea to the IMF at the end of last week that opens with: “The Lebanese economy is in free fall.”
Lebanon is not alone. The IMF has received distress calls from over 100 countries. Egypt, Argentina, Chile, Mexico and Venezuela have all seen massive spikes in the demand for bitcoin and other cryptocurrencies as citizens try to exit their local currencies.
Argentina, Ecuador and Venezuela have all also defaulted on sovereign debt repayments. All three countries have also experienced hyperinflation. The Venezuelan Bolivar is worth 750 million times less than its value in 2012.
Zambia, Bahrain, Angola, Sri Lanka, Tunisia, Mongolia, Oman, Jamaica, El Salvador, Ukraine, Panama, Jordan, Hungary, Senegal, Iraq, Turkey, Pakistan, Kenya and Ethiopia are the most likely to be the next countries to follow.
Also on the high-risk list, Botswana, Nigeria, Mauritius, Gabon and South Africa have all had their debt rating downgraded by Moody’s and S&P in the last month, with South Africa now being at junk status.
Will this contagion of debt defaults and hyperinflation extend from developing countries to developed countries?
Trillions of US dollars have been printed in the last two months, with the US forecast to cross the mark this year of its national debt being more than a full year’s GDP - the highest percentage since WWII.
What holds up the US dollar value in the face of such massive debt and money printing is its status as the world’s primary reserve currency. As with every other instance of a government debasing its own currency through massive printing, the end comes only when there is a better alternative that people can use.
That alternative is quietly being launched this month largely unnoticed in these crisis times. This May China launches its Digital Yuan - the world’s first CBDC: Central Bank Digital Currency.
The Digital Yuan, known as the “anti-bitcoin” as its is centrally controlled and issued, has benefits over the US dollar in that it is blockchain secured, has no transaction charges and enables immediate, real-time transfer between users. So it has all the benefits of a cryptocurrency with the added legitimacy of being issued by a major country.
China’s ambition is to make the Digital Yuan the better alternative to the US dollar for all international trades. They start this month trialling it in Shenzhen, Suzhou and Chengdu with 38 million citizens. All government employees are being paid with Digital Yuan, issued by China’s four major banks and retailers including McDonald’s and Subway are part of the trial.
China’s national paper, China Daily, reported: “A sovereign digital currency provides a functional alternative to the dollar settlement system and blunts the impact of any sanctions or threats of exclusion both at a country and company level.”
All it takes once China has rolled out the Digital Yuan is for it to insist that all trades with China now be transacted with their cryptocurrency and that would guarantee the beginning of the end of the US dollar as the world’s reserve currency.
With that, demand for the dollar will drop and the kind of hyperinflation we are seeing in Lebanon would be seen in the US in the coming years.
It’s no longer a question of whether this will happen, but when.
What can we do about it?
If you have cash, follow Investor Ray Dalio’s advice:
“Cash is trash. Get out of cash.”
Or at least move it to currencies that aren’t being binge-printed.
