The closing words of a recent Credit Suisse report reads: “After this war is over, ‘money’ will never be the same again…and Bitcoin (if it still exists then) will probably benefit from all this.”
If this was just another cringe post on Twitter, we could have very well ignored it. But these are the words of no less than Zoltan Pozsar.
Pozsar is a well-known investment strategist with the aforementioned Switzerland-based investment banking company and was formerly associated with the Federal Reserve, the US Treasury Department, and the IMF. Surely his words must count for something?
Besides, the report’s timing makes it all the more relevant—geopolitical tensions in Eastern Europe, a commodity crisis brewing in the West, and governments racing towards cryptocurrency regulations.
The Prediction: Bretton Woods III
In the report titled “Bretton Woods III”, Pozsar predicts the emergence of new monetary world order. According to him, if such an order comes into existence, it will do two things:
- Weaken the existing Eurodollar monetary system, and
- Stroke higher inflation (already pretty high!) in the West.
Now let’s try to break that down with the help of some history.
Bretton Woods I
In July 1944, when World War II was in its final stages, a group of 44 nations met at Bretton Woods, New Hampshire. They aimed to create a new international monetary system, moving away from the prevailing gold standard.
The system that emerged came to be known as the Bretton Woods System.
Before Bretton Woods, people used the classic gold standard. That is a monetary system in which a country’s currency had to be backed by the value of physical gold.
The Bretton Woods system by contrast established the dominance of the US dollar, instituting it as a prominent reserve currency instead of gold. Essentially, it did this by pegging the dollar’s value to that of gold, and that of all other currencies to the value of the dollar.
The currencies were still backed by some form of a physical commodity, though (that’s why they are known as “commodity-backed currencies”).
But not for long.
President Nixon; goodbye gold backing
The Bretton Woods agreement collapsed in 1973 when US President Richard Nixon did away with the “backing of gold” completely.
Countries were now free to link the value of their currency to any other country’s currency, or a basket of currencies, and the market forces determined its value. Such a system that exists today is known as the Fiat System.
The current system gives central banks a free hand to print the money needed to boost their economies as they do not have to be backed by an equal value of gold or other commodities. This is where the problem lies. Because printing money indiscriminately leads to inflation—as witnessed in the US.
Pozsar calls this the Bretton Woods II, a monetary standard backed by “inside money” (that is, based on the central bank’s assurance).
Bretton Woods III: The Fall of the Eurodollar System?
The new monetary world order predicted is named Bretton Woods III. Pozsar believes it is likely to emerge soon, ushering in an era backed by what he calls outside money. This “outside money” is essentially backed by the usual commodities like gold. And the likely beneficiary? Bitcoin. (More on that in the last section.)
An excerpt from the report sums it up as follows:
A crisis is unfolding. A crisis of commodities. Commodities are collateral, and collateral is money, and this crisis is about the rising allure of outside money over inside money. Bretton Woods II was built on inside money, and its foundations crumbled a week ago when the G7 seized Russia’s F.X. reserves.
The ominous signs of a potential recession in the US are getting clearer and less ignorable each day. A dicey situation is emerging—interest rates are being increased to control inflation, but the risks are accelerating a recession or allowing inflation to ravage millions’ ordinary lives.
Zoltan Pozsar’s Credit Suisse report is all about answering “what next” in this context. To sum it up in his words:
Do you see what I see? Do you see inflation in the West written all over this like I do?
This crisis is not like anything we have seen since President Nixon took the US dollar off gold in 1971—the end of the era of commodity-based money.
When this crisis (and war) is over, the US dollar should be much weaker and, on the flip side, the renminbi much stronger, backed by a basket of commodities. […]
…and Bitcoin (if it still exists then) will probably benefit from all this.
Do All Roads Lead to Bitcoin?
It remains to be seen whether Zoltan Pozsar’s analysis comes true. And if it does, to what extent it will impact cryptocurrencies.
But we do know this much: Bitcoin is believed to be the “digital gold” by its backers. As a neutral currency with no single country or entity controlling it, Bitcoin competes with traditional fiat for global payments. And the weakening of today’s dominant currency, the US dollar, as predicted by Pozsar, could help contribute to a surge in Bitcoin usage.
And if Bitcoin does emerge as a key player, its supply cap of 21 million will help the largest crypto by market cap overcome “inside money” problems such as inflation. So at least that will be something to look forward to.
Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.
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