Two Monetary Worlds Are Crashing Together

Economics, Geopolitical, Premium POM27 Comments

Renminbi, Dong, SDR, USD, and the Flood of Central Bank Money onto the Blockchain

Two monetary worlds are crashing together.

The old fiat currency world which is structured around exchange rates and foreign exchange reserve accounts is being shattered by the new world of blockchain assets. The history of socioeconomics has proven that the less advanced cultures and economies are fragmented and absorbed into the more advanced systems which are expand under the exciting momentum of ingenuity and endless opportunity.

The beginning of 2018 has become a sort of holding area, or panic induced quicksand, for most of the cryptocurrencies. The value explosion that started in the second half of 2017, and continued at the beginning of 2018, has substantially reversed. Values are fluctuating within a wide band which varies by asset.

Understanding the deficiencies and imbalances in the old system helps us understand the value attraction to the new blockchain based architecture. The central bank accumulation of the sovereign domestic currencies of the G7 countries, with the American dollar making up the largest majority, is quickly becoming obsolete. This includes the exchange rate methodologies which have been the underlying contributor to geopolitical tension and regional wars.

These exchange rate practices are difficult to maintain and manage, with a whole Forex industry built upon the value gaps and geopolitical predictions. The trade imbalances between America and China is just one example. These imbalances between trade surplus and trade deficit are directly correlated with the value of the each national currency.

The United States has the worlds largest trade deficit because of the exchange rate which is forcibly maintained through geopolitics and military mobilizations around the world. China has the worlds largest trade surplus because it has maintained a trading band between the renminbi and the USD. The dollar is overvalued and the renminbi is undervalued.

Every other nation which functions within the same international monetary system has a trade deficit/surplus and exchange rate which is under pressure between these two giants. Nations like Vietnam have seen the value of their domestic sovereign currency depreciated to the point of non-existence because the exchange rate methodology cannot allow for the sovereign currency with the largest market capitalization, being the USD, to depreciate.

The economic fundamentals of Vietnam have been stellar for over a decade and yet the exchange rate of the dong is only pennies on the dollar. At one point Vietnam had the fastest growing GDP in the world. Something is definitely wrong when its currency has been depreciated to the point of being the punchline of a joke. The potential of the dong to appreciate has always been, and would have been made possible when China completely ended the exchange rate peg it holds with the dollar. At that point Vietnam would have ended its own dollar peg and anchors the dong to the Chinese renminbi.

Such a scenario could still happen of course, but the growing crypto asset market is making such a monetary adjustment redundant.

Whether the value of the renminbi, dong, or any other emerging market currency, appreciates against the USD, it is a developing fact that all fiat currency will depreciate against the relentless appreciation of cryptocurrencies. This means there is still opportunity and gains to be made with the Forex markets and the forthcoming value fluctuations between currency pairs. But the better opportunities and gains will be made in the world of blockchain and crypto assets.

Central banks are well aware of this growing threat. Some have even threatened making crypto exchanges illegal. But this will be temporary as the blockchain explosion continues and all banks and institutions don’t want to be left behind. The first to market in many situations will gain leverage over those who enter the market late.

Consider, all of the circulating fiat money in the world, being coins and banknotes, is estimated to be around $5 trillion. A large percentage of this is USD which has been the primary reserve currency in the world since 1944. All central banks hold vast amounts of dollars and the majority of international trade and energy sales are transacted in USD. This has been somewhat changing over the last few years as China and Russia have been working with other nations on building currency swap arrangements and non-USD denominated trade agreements.

When you include equity markets, sovereign wealth funds, real estate, bonds, SWIFT accounts, debt, and derivative markets, the total wealth of the world is measured in the hundreds of trillions. Some have attempted to put an exact number on this, but it is impossible, as exchange rates and market values will forever be fluctuating.

Central bank foreign exchange reserves are the next obvious target for cryptocurrencies. China has a foreign exchange reserve of around $3 trillion measured in USD. Now consider that China has the largest trade surplus in the world.

Compare that to the crypto market capitalization at the peak in January of 2018. The market cap was $700 billion and has since dropped to around $500 billion. In comparison the total market capitalization of the Special Drawing Right (SDR), a basket of sovereign currencies issued by the International Monetary Fund, is less than $300 billion.

China and other nations had been promoting the SDR as the replacement of the USD in its international function. The amount of SDR liquidity was always an issue and a lot of monetary engineering would have had to be put into the SDR to make it function as a reserve asset and exchange rate anchor for all sovereign currencies. But the growing crypto asset market has changed all of that.

Central banks will soon have to start adding crypto assets to their foreign exchange reserves. This will hedge the depreciation of fiat currencies as the crypto assets accelerate and appreciate. As the value of the fiat currencies drop each bank will increasingly exchange it for cryptos in order to maintain appropriate reserve valuations. As the crypto market cap expands, the central banks could even see a huge increase in reserve valuations. But the function and reason for both foreign exchange reserve accounts and central banks will be smashed in the coming years as the world of blockchain and FinTech remove the need for such archaic institutions.

2018 is shaping up to be a huge year for crypto assets. All of the top cryptos, such as Bitcoin, Ethereum, LiteCoin, Ripple, and a host of others, will begin to be added to the central banks reserves. Ripple is uniquely positioned to replace the USD in the transaction and payments function internationally.

Over the next few years old institutions and processes will fade and die like Blockbuster Video. This includes SWIFT, and perhaps even Forex markets, with equity markets being completely redesigned to function in the crypto world. Ripple XRP will surpass all others and will lead the charge on changing the financial and monetary world. – JC

This article is copyrighted by POM Media©2017. As Premium content permission is not given to be copied and re-posted.

JC Collins can be contacted at jcollins@philosophyofmetrics.com

27 Comments on “Two Monetary Worlds Are Crashing Together”

  1. JC,
    thanks for another outstanding article.

    I´m a total ignorant when it comes to things like this, so would you please (or any of the other well informed POM subscribers) explain briefly what should be done to invest in that company?
    Is it possible to buy shares of Ripple in the stock market?

    Sorry for my very high ignorance in this matter, and thanks in advance for any help from anyone.

    Cheers.

    1. Hello DavidB, so far Ripple seems to be a private company, so no stocks thus far. Every search regarding Ripple stock I’ve done so far returns XRP.

      1. Hi dane,
        thanks a lot man.
        I´ve been doing some research on the internet and, as you say, it seems there´s no chance of investing in the company… yet.
        I´ll have to keep on waiting…

        Thanks for your help and for all the insightful comments you post on this web site.

        1. Your very welcome DavidB. I’m seeing most of Ripples activity hovering around the developing world. It will be interesting when that empire gets traction and the USD being the worlds unit of account becomes….obsolete.

          So far Ripple seems to be the institution level solution. Any ideas on what’s developing for the consumer level solution or solutions?

          As the world becomes more fragmented and each fragment seeks to be self sustaining it just seems this could be a possible future.

          If this is a viable thought Ethereum (ETH) could be a good fit. As it has the ability to be used as a foundation for offshoot tokens.

          Has anyone given any thought as to how we will pay for goods and services with cryptos at the street level? By smartphone wallet like Apple pay, Google pay or Samsung pay?

          How about these trending social media tokens like POW token? It seems the POW lite is based from the ERC20 platform.

          https://powtoken.com/?ref=POW223

          The ERC20 is a criteria for tokens to be created from the base coin Ethereum (ETH). Here is a good link to see a piece of this growing world.

          https://steemit.com/ethereum/@raggs2rich/what-are-erc-20-coins-and-erc-20-token-list

          And its list of the current tokens under the ERC20 or ETH coin.

          https://etherscan.io/tokens

          I love the coin ticker you added JC.

  2. JC,
    As always, great piece! Finding your site years ago has been one of the most rewarding, enlightening, and educational experiences I have had in a long-time. Thanks for all you do!
    So yes, I agree that crypto/digital currencies are going to be the next exchange currencies. Not sure yet how each coin will trade or survive in the long-term though? That whole market or most likely, certain coins might experience a correction or crash? But, due to Blockchain and other associated technologies, digital currencies will certainly surpass and replace the old, archaic fiat currency arrangements as you suggest. Digital wallets, transactions, currencies will be the future. However, I would suggest that in the global financial arena a sweeping change like this one will come slowly. And, which coins to pick as long-term winners at this time is tough I think?
    Much to consider is cryptocurrency-generated appreciation and liquidity produces no jobs. Plus, we can’t have a drastic swing away from traditional FX markets to crypto markets. Too traumatic and unsettling for that to occur quickly in my opinion.
    Certainly, huge liquidity is and will be required to absorb the USD denominated assets being dumped by the central banks. Through your past educational posts, I envision the liquidity required for absorbing USD assets to occur in all markets. I think equities will be the primary benefactor in the near-term since equities are the holdings of most citizens throughout the world as you documented above. Plus, it creates jobs as the income/balance sheets of corporations grow. Additionally, market stability, market appreciation, wealth creation, job creation, etc. is required to elect Trump for a second term. Will cryptos appreciate in 2018? Yes, certain ones will. And, overall the appreciation and market cap of that market will increase. But, not as much as equities for the reasons stated above. Plus, too many retirement and pension funds pegged to stocks and bonds to boot. Need those votes in 2020. As you know, most people vote their wallets. A world of increased wealth, debt, and inflation will evolve. Cryptos are coming for sure. Gains in some. Losses in others. Just another liquidity market to invest and trade. But, up overall as you suggest. I think there will be more emphasis and clarity in which cryptos will be the reserve currencies in Phase 2 of the international monetary transition. So, traditional markets like equities to rise most first, future markets like crypto specifically in a bit, secondary. Just my 2 cents. Thoughts??

    1. Hello, My Dearest Pieter,

      My sincere apologies for disappearing for a while as I was busy with some personal matters. I have been following JC’s fantastic materials on XRP and other cryptos. I have also been reading your great comments on ways of getting XRP with no bank account and your previous reply on the Deep State.
      The last few days, I decided to stop reading and thinking too much about the civil war we are in through right now as it was doing my head in. I have to say, the way the MSM is portraying the last Florida shooting somehow looks like a trap which may put them out of business for disseminating nonsense and outright deception. That young fellow does not seem to be having a great beginning to his CNN career 🙂 …if his favourite employer will last much longer!

      This morning I managed to listen to this guy (a LaroucPac) and thought you may like it too, I thought he made some interesting points which others won’t mention:

      https://www.youtube.com/watch?v=yEc6UIQQDtM&t=1s

      Which you a great evening,

    2. Hi Pieter,

      I just realized I misspelt again! Sorry!
      I meant to say, “Wish you a great evening” and instead, I wrote, “which you a great…”! 🙂
      I wish you a great day,
      God Bless,
      CD

      1. Hey My Carpe Diem; there is certainly no need to apology from you. If anything I need to ask you to beg my pardon for interrupting your short respite.

        The awareness hit me like a brick when you said you were taking a break from it all. That very moment I realized I also needed one. Thanks for the synchronicity.

        Have a good one
        PTM

        1. Thank you, Dearest Pieter,

          I really appreciated your comment and the need for some respite, I agree. I am feeling somewhat exhausted by all the negativity, arrogance and deception that is coming out of the MSM and in this civil war, their bullets are psychological torture which via an unending UNTRUTH.

          King Darius the Great, (King of Persia 521-486 BCE, Achaemenid density) asks Ahura Mazda, the highest divine spirit, this:

          “save this country from enemy, famine, and lies”

          We are bombarded with Lies at this time and we need to protect ourselves against this vicious assault.

          May the Light of the wisdom of the Creator be our guide…

  3. Not sure if there is any better way to invest in Ripple than to buy the cryptocurrency. These companies now seem to be offering digital currencies and ICOs (initial coin offerings) rather than stocks and IPOs. I haven’t found a way to buy Ripple directly for fiat. What I do is purchase Ethereum or Bitcoin in dollars on a site like GDAX. Then you can transfer those onto an exchange where you can exchange them for Ripple, or whatever crypto you want that that exchange supports.

  4. Hi JC , Hi everyone of the community ,

    I must say that I globally agree with your analysis , but I think this will be a very bumpy road before reaching the goal . I do believe that XRP will be part of the emerging system after the monetary chaos .
    Chaos which will be at least partially engineered by the actual monetary masters , both to fight against the change as to be part of it and influence its future evolution . As always , they will be on the two opposite fronts .
    I also think that will come a time when the best cryptos will be converted in shares of the next future markets players , as the world economy need markets to find an equilibrium ( sort of ) to avoid a total destruction .
    Can be wrong , but for me XRP will definitively be part of the monetary world , as for gold , and some others blockchain giants like Ethereum , Neo , Vechain and others to come will become the next Google , Amazon and so on ….. Hope it will be for the best , but we have to stay realistic .

    For mattarama1 , XRP can be bought with fiat in some european brokers like BitPanda or LiteBit , for example .
    Yesterday I read that Goldman Sachs will buy Poloniex . One more proof that cryptos are here to stay and be part of the new world …..

    https://www.zerohedge.com/news/2018-02-26/why-bitcoin-soaring-goldman-backed-circle-buys-crypto-exchange-poloniex

    JC , when you have some time , could you give us your thoughts about Vechain ?
    As it seems Vechain will work with the chinese autorities in multiple directions , so I believe they will be part of the future international landscape , as a tool to block US influence and control a part of the blockchain revolution for the benefit of China.

    https://hackernoon.com/china-on-the-blockchain-how-the-vechain-thor-blockchain-is-set-to-revolutionize-governance-2c640b7c512c

    https://hackernoon.com/china-on-the-blockchain-95336b5acbf9

    Feel great to be part of this community ! Thanks a lot , JC .

    1. Hi Ledude, thanks for the heads-up on Vechain, great links!
      I was under the mistaken impression that the Chinese authorities were firmly anti-crypto – indeed I was starting to consider the potential in coming years for some form of mass uprising among the Chinese population (who do love an investment bubble!) due to having been unable to participate in the crypto boom. Glad to see that is not the case – on the contrary, China could even become a world leader in terms of incorporating blockchain tech into their economy; the subsequent article lists various other projects:
      https://hackernoon.com/china-on-the-blockchain-43fd0e0cc2e6

  5. Hi JC, thanks for your wonderful blog encompassing esoteric, political and financial themes. It’s been a great resource for my continued self education.

    Regarding Ripple, all the partnerships that they have use their xCurrent product, which does not use XRP. There is a single partner using xRapid, which does use XRP. Will Ripple be able to move their partners over to xRapid ? Will SWIFT remain on the sidelines or deploy their own blockchain technology ? Although new positive news will continuously bump up the price of XRP in the long term the success of the Ripple payment system may not translate to the success of XRP.

    1. Sorry, I was responding to you yesterday and got pulled away before spending the rest of the day traveling. Here’s the scoop on XCurrent and XRapid. Ripple is building the XCurrent network with the growing number of partnerships. This payments network offers advantages to clients. XRapid is the digital asset which is specifically engineered to capitalize on the XCurrent network. XRP will enhance efficiencies far and beyond just using the network itself. XRP will release trillions in locked up liquidity. Banks and companies that are partnering with Ripple will want to improve operational efficiencies and add to the bottom line. This is the need that Ripple is speaking directly to. XCurrent and XRapid are designed to work together and are being marketed and rolled out by Ripple in a very strategic manner. Anyone promoting the idea that the Ripple partners will not use XRP down the road simply does not understand the dynamic between XCurrent and XRapid, nor do they have a working understanding of the problem which the Ripple strategy is designed to solve.

      Ripple and XRP are a growing threat to many. At first it was felt to be a treat to the existing official institutions. But as these institutions begin to understand the potential of the XCurrent and XRapid dynamic, and incorporate it, Ripple will become more of a threat to the other crypto assets and companies. It will dominant to a degree that most cannot fathom right now. There are so many lies and misrepresentations of Ripple spreading around out there. Ignore most of it. One example is that XRP is not decentralized. It is in fact decentralized and Ripple just published a report last week explaining how they are making it even more decentralized so no one organization or entity can have control over the ledger.

      Hope this helps clarify.

  6. I wouldn’t rule out the success of XRP just yet. Check out these two pieces.

    “#RippleNet customer meeting in London bringing banks together to ret-hink and re-define the way how #InternationalPayments are done tomorrow. Great being a (small) part of the future. @Ripple – at The Montcalm Royal London House”

    https://twitter.com/frabob66/status/968853245568405504

    “We regret to inform you that due to a variety of circumstances, we will be closing the following SWIFT bank accounts, as well as our domestic JPY funding accounts at SMBC in Japan. Please note that SEPA Euro funding will not be affected. Cryptocurrency funding will continue as usual. (All dates mentioned below are represented in JST)

    The Following Funding Accounts will be Closed on March 21st: USD, EUR, GBP (SWIFT)”

    https://twitter.com/eladkushnir/status/968853108083261441

  7. I love everything you write. Very enlightening. What will happen with cryptocurrencies when (if) we have an economic collapse in the United States? It seems like something dramatic is going to happen economically and politically to get the USA back on track.

    1. Thanks for the compliment. I don’t expect there to be an economic collapse. There will be varying levels of volatility in certain market segments as things transition. Whether the future was aligned with SDR or XRP leading the crypto pack, the likelihood of a collapse was never on my radar as a possibility. There has been lots of dramatic events taking place over the last year or so. The politics in America is shifting for sure, as the left attempts to redefine itself and the right needs to mature again with the new found power and influence it welds. The American economy is going to do fantastic, as I always predicted it would, with job growth and increasing GDP. The wealth/value shift between traditional fiat and equity markets, towards crypto based markets, will be profound. As well as volatile. But in that volatility will come opportunity. We’ll focus on that in the coming months and years through better understanding the fundamentals.

  8. Seems they don’t want to go silently into the night but also is a reflection of the effects blockchain is causing around the world. Will “huge progress” be enough for them to stick around, will blockchain win out or will the old world and new world find a way to work together?

    “SWIFT Claims ‘Huge’ Progress on DLT Bank Pilot”

    “The proof-of-concept envisioned these “many-to-many” bank transfers, specifically examining how the system could meet requirements around governance, security and data privacy as they relate to the nostro reconcilitation process.”

    https://www.coindesk.com/swift-announces-successful-proof-of-concept-trial-for-dlt-platform/

    “many-to-many” bank transfers sounds like another way of saying peer-to-peer or even a “pool” of banks.

  9. This seems a good example of two worlds crashing together.

    “BITCOIN HURTS GOVT ‘CONTROL’ OF DOLLAR, SENATOR LETS SLIP IN SPEECH”

    “Sherman decried the alleged lack of “social benefit” attached to Bitcoin investment.”

    ““They allow a few dozen men to sit their pajamas and tell their wives they’re going to be millionaires, they help terrorists and criminals move money around the world, they help tax evaders, they help startup companies commit fraud, take the money and one percent of the time they actually create a useful business,” he continued.

    Reacting on social media, the increasingly broad cryptocurrency commentariat condemned Sherman for his shortsighted, specifically highlighting the irony implied by a freudian slip during which he stopped himself from saying Bitcoin hindered government control over fiat.

    “It hurts the US government in two ways: our contr… our ability to have the US dollar as the chief means of international finance is what has underpinned our ability to impose sanctions,” Sherman blundered on.”

    http://bitcoinist.com/bitcoin-hurts-govt-control-dollar/

    Looks like its getting close for the realization that the USD is losing or has lost its “control” as the worlds unit of account, “our ability to have the US dollar as the chief means of international finance is what has underpinned our ability to impose sanctions”. I guess the mindset this Sherman has doesn’t consider the effect the current system imposes on fellow nations.

    Nice dig for the one percent though….”and one percent of the time they actually create a useful business,”.

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