The dollar is the most important price in the world. Former Fed Vice Chairman Manuel Johnson asserts the latter in his book on monetary policy, though one gets the feeling he wasn’t the first to say something so blindingly true.
The dollar is the world’s most important price precisely because it factors into just about every global transaction in the world. Put another way, when Argentinians transact with Egyptians, the official currency of each country (the peso and the pound respectively) is almost certainly not the currency in which any exchange is denominated in.
What’s true for cross border transactions is similarly true for domestic exchange. While the toman, won, and bolivar are the official currencies of Iran, North Korea and Venezuela, the dollar is the currency of choice for aboveboard and illicit exchange in all three countries.
That the dollar is the referee of so much buying and selling well outside the United States is a reminder of what’s so true, but so ignored: underlying all monetary exchanges and transfers is the exchange of goods and services for goods and services. Which explains the dollar’s outsize role in so much global exchange. Precisely because the Argentine cattle farmer wants to import goods and services equal to his export of much-revered beef, he takes dollars in the trade on the reasonable assumption that those dollars will command equal value in the marketplace.
The dollar is the most important price in the world simply because the dollar is what global producers most use to facilitate the exchange of goods and services. Its price is important simply because if it moves a lot or even a little, commercial contracts denominated in dollars are vitiated a lot or a little. In other words, if an Argentine cattle farmer signs a long-term contract to sell his cows for a fixed number of dollars only for the dollar to collapse, the cattle farmer is ripped off.
Extrapolate the singular impact of a dollar devaluation globally with the dollar’s frequent use around the world top of mind, and it’s easy to see what Johnson meant. Money flows once again signal flows of goods and services, so if the dollar moves all manner of agreements are compromised on the way to winners and losers. What’s mutually enhancing exchange suddenly becomes anything but.
These simple truths rate mention ahead of Treasury Secretary Janet Yellen’s recent call for regulation of stablecoin. Stablecoins are private forms of money (call them cryptocurrencies if you like), and their purported value is derived from their peg to the dollar, or other monetary concepts established with stability the goal.
Notable about the purported “stablecoins” is that they’re not all performing in dollar-like fashion. TerraUSD (pegged to cryptocurrecy Luna) saw its price fall as low as 23 cents recently, and then Tether recently broke the buck as it were. In response to TerraUSD, Yellen called for government to help fix the alleged problem. In her words, “We really need a consistent federal framework.” Very disappointingly, Sen. Pat Toomey joined Yellen in his expressed desire to regulate stablecoin issuers. Yellen replied “I think that would be highly appropriate” to Toomey’s question “Do you think we could shoot for a goal of getting legislation done this year.” Something’s wrong with all this.
For one, failure is the norm when new concepts enter the marketplace. Thousands of automobile companies formed in the early part of the 20th century, and nearly every one of them went bankrupt. Was the U.S. economy weakened? Fast forward to the end of the 20th century, thousands of internet companies formed only for most of them to similarly fail. Was the U.S. economy weakened? No. In each instance, it was advantaged by “growth spasms” (George Gilder) born of feverish, information-producing speculation. Imagine a world today without cars and internet. Getting to where we are with both required a lot of experimentation and failure along the way.
Cryptocurrencies are no different. The intent of their issuers is to force a rethink in the markets about how we should think of money. For so long we’ve accepted government issued notes, yet crypto concepts want us to shift. That there’s going to be failure or the breaking of the buck should be a statement of the obvious, as opposed to an instigator of concern or regulation. Furthermore, the very notion of regulation reveals the superfluous nature of same. As evidenced by troubles at TerraUSD and Tether (it's now back to dollar parity), the markets themselves are regulators par excellence. Based on the price of TerraUSD and other flailing cryptocurrencies, it’s not unrealistic to say that their days as well-circulated measures are numbered? Markets work. Would Yellen and Toomey prefer something else? What could government do?
Of course, what’s most nauseating about Yellen’s conceit is her inability as Treasury Secretary to see the major why behind the rise of crypto. Though the dollar is the world’s currency, and broadly trusted as evidenced by its substantial circulation globally, the simple truth is that there’s something like $7 trillion worth of currency trading taking place on a daily basis. What the previous number tells us is that while the dollar is the most trusted money form of them all, producers around the world still don’t fully trust the U.S. Treasury to oversee a sound, credible dollar. If they did, there wouldn’t be so much trading. The $7 trillion/day is a certain symptom of the dollar’s instability.
Looked at through the prism of crypto, it’s no insight to say that a lack of trust in government-issued money like the dollar instigated the proliferation of private money. Yellen wants to regulate the latter, but as usual she’s focused on symptoms. The real problem is the dollar that Treasury is mouthpiece for. Were Yellen serious she’d communicate clearly her desire for a stable dollar. If so, the raison d’etre for crypto wouldn’t be as pressing, but even if pressing for reasons unrelated to stability, imagine how much better stablecoins would be if they were stable.
Something to think about. Markets are regulating private money. They’re doing so very well. What’s most needed now is better oversight of the mouthpiece for the world’s most important price.
