Table of Contents
SPEECH TITLE: The currency caste system
SPEAKER: Alex Gladstein
CONFERENCE: Pacific Bitcoin 2023
I hope you’re doing well today. Major shout out to the Swan team for hosting us here. “The currency caste system” is going to be a story in five parts. What is the currency caste system? Who built it? Who benefits? Who loses out? And how can we overcome it?
What is the currency caste system?
The best way to think about the currency caste system is to think about something like the Hunger Games, where you have the people who run the world in the capital, and then you have people in much poorer districts stretching all the way out to District 12 where there’s basically nothing. This is actually a pretty good approximation of what the world currency system looks like.
At the top, at the heart of the system, you have the dollar issued by the US government, which has all kinds of special privileges and benefits. Right below the dollar, you have maybe the Euro, the Yen, the Pound, the Australian Dollar or the Swiss Franc. And then maybe you have the rising RMB from China. And then you keep going; there are more than a hundred currencies below these rungs, and they all get weaker and weaker. At the bottom, you have the completely collapsed currencies. You have currencies that are friends in countries like Iran, Venezuela, Zimbabwe, Turkey. And that is part of their everyday life—wanting dollars, wanting just the simple privilege of having a currency that doesn’t collapse so fast that when they go to the grocery store, the price changes before they’re on their way out. That is the spectrum of this currency caste system.
Much like in The Hunger Games, the people in DC get to make the rules for money for the whole world. They get to set the cost of capital, they get to control world markets, and they have a very, very special privilege. That is the fact that the US government can print money to buy oil or to buy machinery, industry, commodities. This is not a privilege that people at the bottom of the caste system have. If you’re a poorer nation, let’s say Ghana or Thailand, you cannot print your fiat currency to buy something like oil or fertilizer or the things that your country needs to develop. And if you try to print your own money to buy dollars, you’re going to go into hyperinflation.
So what you have to do is you have to trade with the US or Europe to get dollars or dollar substitutes so that you can pay back your debt, which has to be paid back in dollars, so that you can buy the things that you need. And this means you, as a country, are engineered or steered towards making stuff that we want instead of making things that your people need. This preserves the structure of the currency caste system, and it results in the outcome of so many billions of people in the world today, facing not just the 5-6-7-8-9% inflation that we saw here recently, but 10-20-30-50-100-1000% inflation sometimes in countries around the world.
Who built the currency caste system?
Who built the currency caste system is a good question, right? In my view, it’s two things: politics and markets. It’s important to point out that the world does want a common currency. Markets express this preference, just like we want a common language. There’s a great demand for dollars for reducing friction in business. We can see this expressed in what is known as the Eurodollar market. The enemies of the United States figured out ways to do business in dollars that weren’t even controlled by our government because that was sort of the easiest way to do business in the world and there’s like a common standard of money.
But that’s not a sufficient explanation to explain dollar hegemony and how powerful the dollar has been in global financial markets. To complete the picture, you also have to look at what the US did, for example, in the 1970s when we made a political deal, a pact with the government of Saudi Arabia and all the energy producers so that they would price oil sales in dollars. And then from there, you go to futures on oil, you go to insurance and contracts on oil, and then it went to other industries, and the network effects of something like that are incalculable. They’re very, very, very important.
So, you have a situation where markets want a common currency, and the US made it that way. It could have easily been… Well, maybe we had currency blocks, or maybe the Chinese currency could’ve been powerful over here and the Brazilian currency powerful over there. But the US government took political steps to make sure that one currency was chief in the world, and we made it very clear when another country tried to sell oil in a different currency, we treated them very harshly. This is something we wanted to protect.
At the end of the day, some people say that the currency caste system is a market outcome, some people say it’s entirely political, this was a scheme by the US government. You know what? At the end of the day, it doesn’t matter for the people who have to live under it, who suffer under these very weak and collapsing currencies. Why it’s the case? “The why” is something we can talk about, but ultimately it doesn’t really matter for the people who have to live in it and through it.
Who benefits from the currency caste system?
Our government benefits from the currency caste system. I’m speaking as an American. The US government is a $33 trillion debt empire, right? Each year we bring in maybe $4 trillion of income and we spend about $6 trillion, right? That difference is made up by borrowing, and the only reason we can really do that is because there’s a massive demand for US debt around the world because we’re at the top of the currency caste system. Poor nations cannot do this, they cannot just borrow and finance a global warfare state and a very expensive and inefficient welfare state. This is not possible for other nations to do. This is the privilege that we have.
The other really important benefit that we get is we can weaponize the financial system. So because we control all of the networks, all the infrastructure and all the rails, if there’s a country or a group of people that we don’t like, we can just basically cut them off. This is something that comes with the benefit of controlling the system, of being at the top of the ladder.
And then the final thing I would bring your attention to is it allows us to do what I would call debt colonialism. So because we can control the money printer and we can print valuable money. Remember, a lot of countries cannot print valuable money, they cannot print money to do things that are good enough, they cannot print money that’s good enough to buy oil, for example. But we can, and that means we can lend and bail out governments around the world. Now, we don’t just do that altruistically, we lend at high-interest rates typically, you know, going back five to six decades. So we make money doing this. Don’t ever think this is altruistic when we bail somebody out, and we also attach conditions which are known as structural adjustment or austerity so that we engineer that country to be more dependent on us for things like agriculture and to be less independent. So we basically extend loans in a way where we are disincentivizing industry and progress in a lot of these countries, again to preserve the structure of the currency caste system.
Who gets hurt by the currency caste system?
Most people, the overwhelming number of humans on this planet, are hurt by this system. If it was a fair system, everybody would have dollars, everybody would earn in dollars, but it’s not a fair system. People earn in worthless collapsing currencies. Billions of people earn in currencies that are not accepted outside of their country, that cannot buy anything at the state level. If you think about the fact that we have 180 plus fiat currencies, it’s a disaster for most people. You can think about the specific case of Africa. In Africa, there are 45 different fiat currencies, right? If you’re in Nigeria trying to do business with someone in South Africa, you have to go through a currency exchange process, maybe you have to go through several, and at every point of exchange, someone comes in and takes a fee. There’s someone seeking rent who extracts value from that transaction.
In Africa, in a cruel way, 80% of all of the international intra-African payments are processed by Western companies. It’s almost like colonialism survives, changes and adapts, but the fact is that it’s really hard to do business and it’s really hard to get anything done in a place where you have 45 different currencies. The other thing that you have to remember is this concept that the government can squeeze the people. Look, if you’re the Egyptian dictator, the system doesn’t bother you at all. In fact, it’s great. You can get a dollar bailout, right? Or you, the government, can earn dollars by selling stuff, and then you can pay the people in your worthless, Egyptian fiat currency which is being devalued against the dollar. It’s good for you because you can devalue the time and wages of the people while you can continue to live in the dollar standard. This is very important. The whole construct of having 180 plus currencies means that these people who live in different countries can get squeezed and basically the stuff that’s produced by them and their time can get devalued and their purchasing power can get reduced. That is something that we obviously want to overcome. That’s not something that any of us want to see, but it’s part of the reality of life, it’s part of the dollar hegemony. It’s part of the currency caste system.
I would also say that some people in the United States even get harmed by the currency caste system. If you think about the fact that our money has a premium on it, there’s so much demand for the dollar all around the world, it becomes sort of artificially inflated so that our workers in our industry cannot really compete on global markets. Like our labor is sort of too expensive, right? This has created what you know as the Rust Belt. This is basically left a situation where you had jobs flee abroad to other countries where there was cheaper labor. So for the average American, the currency caste system hasn’t been that great either. And it’s expressed in the data, in what’s called The Wealth Share. Going back 30-40 years, the wealth share of the bottom 50% has shrunk and the wealth share of the top 1% has increased pretty dramatically. Because if you’ve been in finance, real estate, defense or technology over the last 30-40 years, things have been pretty good for you. But again, if you’ve been in manufacturing, blue-collar labor, it’s not. So, who gets hurt by this system? Definitely, people who live in countries where their currency is really weak and even the average American. So, the rulers of our country and the upper classes have done really well. The dictators have done very well. Don’t forget, one of the most frustrating parts of the IMF, World Bank led system is that these truly horrifying dictators who commit all kinds of human rights violations get bailed out over and over again by the IMF and World Bank, going back decades.
And here’s something that’s timely and also very unfortunate. The other week, one of our elected officials was able to try to freeze aid going to the Egyptian government. Again, a dictatorship that massacres its people, and commits all kinds of different human rights violations. I think that’s great. I think we should reconsider Aid to countries that are being that abusive. But what’s never in question is the loan. We’re not making any money off the aid. The aid, we can freeze. The loans are never frozen. I mean, we gave a bailout to the Egyptian dictator through the IMF. So, it’s all about the money, right? If you think about it this way, I know it’s a jaded way to look at things, but it’s the truth. Like we are not willing to freeze the loans, we are not willing to freeze the bailouts, but we’re willing to freeze the aid. And that’s what this is all about is incentives, right? If you dig even deeper than that, the incentives of the currency caste system are such that the banks at the heart of the system don’t ever want to write off a loan. If there are countries that have been harmed in the currency caste system that can no longer afford Imports that are having currency crises, etc., the incentive of the lenders is never to write off a loan and try to come help someone who’s borrowed, right? That’s not their incentive. That’s not aligned with how they make money and how they do business. Their incentive is to give another loan, right? And all debt in the world is pretty much denominated in dollars. So what happens is you have something called the debt trap. So over decades what happens is that countries who falter, get injected with a dollar loan that they have to pay back, principal plus interest, and that they fall into a deeper and deeper and deeper debt trap. The result of this is expressed in the data when you look at the external debt of the overwhelming number of countries in the world today, whether you want to call them the global South, the emerging markets or even the developing world, which I don’t think is an accurate term because really a lot of these countries are de-developing, a lot of these countries are not becoming more independent, they’re not developing industry, they’re not, they’re not developing indigenous technology, they are exporting raw materials and they’re getting everything else from United States, China or someone else.
So, the data shows that these countries are in absolutely historic levels of debt. We’re talking about the average country the size of something like Bangladesh, might have had a hundred million in external debt in the early 70s. Today, it might have a hundred billion dollars in external debt. That is the debt trap, and there’s been no effort by the leaders of the currency caste system, let’s say it be Washington DC, the IMF, the World Bank, the US Government, or the State Department, there’s no effort to get better monetary technology into the hands of people around the world. That does not exist, that’s not their prerogative. They’re not out there trying to give cash, gold or access to the S&P. This is not something they’re doing. In fact, what they want to do is the opposite. They want to prop up these governments, often dictatorial governments, often corrupt governments, and they want to be able to squeeze the people. They want the people to be trapped in a local currency that can be devalued overnight 50% if they wish. Again, the whole point of the system is for the countries at the top to be able to get cheaper inputs, cheaper goods, cheaper labor from the countries towards the bottom, and there’s no way that this system is going to reform itself. Nobody is interested in reforming this system. It’s been around for a long time and it’s something that has become arguably even more grotesque over time.
How can we overcome the currency caste system?
We can overcome the currency caste system by entering Bitcoin. There’s a pretty reasonable chance that Bitcoin helps stop this, and it’s one of the things I’m most excited about when it comes to Bitcoin. We can break that down in a couple of different ways. Fast forward to 20 years from now and imagine you’re in Egypt. Well, what if most people understand how to use Bitcoin? They understand how to self-custody it, they understand how to access it even if there are heavy restrictions, they’ve figured it out because it’s important for their family. Well, it’s no longer so easy for the Egyptian government to just steal from their people through currency devaluation. And if we have a true shift to a global Bitcoin standard, if we have a shift to a world where everything’s denominated in Bitcoin, then they obviously cannot do this game where over here we’re going to keep our currency nice and strong, but over here you’re going to be devalued. This is what happens today, that’s not going to be possible if we’re on one currency standard
The other thing that’s interesting is the wage disparity. If you think about the fact that companies can justify paying lower wages to different employees in different countries because it’s a different currency and they have to go through currency exchange, things like that, that’s not really going to be the case. Everybody’s going to be earning Bitcoin potentially in that kind of future. And that would just be a much brighter future for so many people.
The final thing that really blows my mind is this idea that all these developing countries, if you want to call them that, all of these emerging market countries today, again, to get dollars, they cannot print dollars, they cannot print their own currency to buy dollars, they have to trade with us to get dollars, that means they have to create things like perhaps harvest raw minerals out of the Earth’s crust, diamonds, gold, maybe they have to sell us things like tea, cocoa. Again, none of these things is productive for the nation. But imagine if in the near future, all they have to do is harness some of their stranded energy, maybe it’s geothermal, hydro, solar, fossil fuel, whatever… Every country has energy, not every country has gold, but every country has some sort of energy, right? Imagine if they could just transform their energy, permissionless, without asking permission from anybody else in the world, into the world reserve currency, and then they can use that to buy whatever they need. They can use that to buy oil, they can use that to buy grain, they can use that to buy fertilizer. Today, the system is weaponized and rigged so that these countries can’t really do that, the only way they can get what they need is by basically listening to what the powers that be say or coming into conflict. So, we may have an interdependent system but essentially it’s very fragile and unequal.
I think that the mining piece is really, really important, and it’s going to become more important as we think about this more and more. And it’s why I’m very excited to see all kinds of initiatives pop up around the world, especially in developing world countries, where people are able to harness stranded energy.
In short, this idea of a one world’s government is obviously a nightmare. It’s terrifying, right? We wouldn’t want that. But the idea of one global money for the world is actually pretty compelling, so long as the people are in control. So long as the people and not the government are in control, and that’s what we have with Bitcoin
At the end of the day, Bitcoin has an enormous promise to do this. This is Bitcoin’s promise. Look, there’s a lot of things that Bitcoin fixes, we know that, right? I could give you a long list right now. But maybe the most powerful thing that Bitcoin can fix is it can help destroy this enormously pernicious currency caste system. If that’s the one thing it does, it’s going to make this world so much better, and it’s going to give everybody around the world a way to save their wages and their time into something that governments cannot steal from them.
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