Prague Finance Institute with Lyn Alden, Author of Broken Money

Lyn Alden: "For the first time in modern history, life expectancy in the US is not increasing." (YouTube link)

The conversation unfolded with Andre Chelhot, CFA, Chief Economist at PFI, at the helm. He guided the discussion alongside his esteemed guest, Lyn Alden. Alden, a renowned investor, best-selling author, and global speaker, brought her unique insights to the table, particularly focusing on the fascinating intersection of money and technology.  

Key points include:

1. Evolution of the Global Monetary System:

• Bretton Woods and Nixon Shock: Post-World War II, the U.S. dollar became the world’s primary ledger, pegged to gold under the Bretton Woods system. However, the lack of constraints on dollar creation led to an imbalance, with U.S. gold reserves depleting by the 1960s. In 1971, Nixon ended gold convertibility, resulting in a fiat-based system with no scarce backing.
• Post-1971 System: The dollar retained dominance due to its liquidity, global acceptability, and the U.S.-Saudi petrodollar agreement (pricing oil in dollars, storing reserves in treasuries). The U.S. supplied dollars via trade deficits, creating imbalances that overvalued U.S. import power and reduced manufacturing competitiveness.
• Geopolitical Fragmentation: The current system shows signs of cracking, with potential shifts toward a multipolar world where currencies like the Chinese yuan and euro gain prominence, possibly alongside neutral assets like gold or Bitcoin.

2. Potential Mar-a-Lago Accord and Capital Flows:

• Plaza Accord Comparison: The 1985 Plaza Accord weakened the dollar to boost U.S. competitiveness without altering the monetary order. A potential Mar-a-Lago Accord could similarly weaken the dollar cyclically to address trade imbalances but wouldn’t fundamentally change the dollar-centric system.
• Impact on Capital Flows: In a fragmented system, debtor regions (e.g., emerging markets) may face higher capital costs, while creditor regions (e.g., China) could offer lower rates. China could redenominate dollar-based debts into yuan during shortages, easing transitions but facing network effect frictions.

3. China and Semiconductors in Yuan:

• China, a rising exporter of complex goods (e.g., cars), could price semiconductors in yuan, leveraging its position as the largest trading partner for most countries. However, limited capital market depth and restricted capital flows hinder the yuan’s global adoption compared to the dollar.

4. Bitcoin as a Monetary Anchor:

• Potential and Challenges: Bitcoin could serve as a decentralized, scarce ledger with fast settlement, unlike gold, which is slow to transfer and audit. Its network effect as the leading cryptocurrency supports its growth, but volatility, small market size, and career risks for central bankers limit adoption.
• Criticisms Addressed:
• Fractional Reserve Banking: Bitcoin wouldn’t support long-term fractional reserve banking, favoring shorter-term, productive debt over inflationary, permanent debt.
• Banning Risk: Banning Bitcoin is difficult due to its decentralized nature and global gray markets. Political incentives (e.g., donor support) and polarization reduce ban likelihood in places like the U.S.
• Volatility: Bitcoin’s volatility reflects its growth phase as an emerging store of value. As its market cap grows (e.g., to $5–10 trillion), liquidity and stability should increase.

5. Governments and Money Control:

• Governments rely on money control to influence societies, but Bitcoin’s decentralized nature challenges this. Historical examples (e.g., dollar adoption in failing emerging markets) suggest that destabilized currencies could lead to Bitcoin’s rise, though major economies have significant resources to defend their currencies.

6. Reserve Currency Prospects:

• Conditions for Reserve Status: Deep financial markets and rule of law are critical. The U.S. dollar benefits from both, though its rule of law is fraying (e.g., freezing Russian reserves). The euro faces fragmented capital markets, and China’s yuan is limited by capital controls and weaker rule of law.
• Outlook: A multipolar system is emerging slowly, with the yuan and euro gaining ground, but smaller currencies (e.g., ruble, Brazilian real) lack global scalability. Neutral assets like gold and Bitcoin could reduce reliance on any single currency.

7. Triffin Dilemma and Trade Deficits:

• The U.S.’s trade deficits, necessary to supply global dollar demand, create imbalances unsustainable as its GDP share shrinks (25% nominally, 15% PPP). A multipolar system with regional currencies (e.g., euro for Europe, yuan for Asia) and neutral assets could mitigate these imbalances.

8. Government Debt Repayment:

• Governments, especially those with major currencies, rarely default nominally but inflate debt away, eroding purchasing power. Recent negative-yielding bonds ($18 trillion in 2019) and low yields relative to money supply growth exemplify this. Financial repression (e.g., mandating banks to hold treasuries) is likely, though unpopular.

9. Asset Inflation and Social Unrest:

• Negative yields and inflation have driven asset price surges, exacerbating inequality. High borrowing costs for individuals and small businesses contrast with low government rates, fueling financial repression.
• Social Unrest Risks: Persistent inequality, high rates, and potential triggers (e.g., Social Security trust fund depletion by the mid-2030s, energy shortages, AI disruptions) could lead to unrest, populism, and polarization, especially in the West. Public frustration may grow as systemic issues become apparent, with disagreements over causes potentially leading to extreme outcomes.

Conclusion: 

Lyn Alden highlights a transitioning global monetary system, with the dollar’s dominance weakening but no immediate replacement. Bitcoin and neutral assets like gold offer alternatives, but entrenched network effects and government control pose challenges. Inflation, financial repression, and rising inequality could drive social unrest, particularly in the late 2020s to 2030s, as structural imbalances force tough policy choices.