We are at a crossroads in many areas of economic and political life. We’re experiencing a pandemic that may disrupt the global economies more than the great depression, we’re probably approaching the finale of a 50 year credit cycle, and capitalism and globalisation are being called into question as are the roles that people want their governments to play.
I believe that the role that money itself plays in society and economic life will be put under the spotlight in the coming months and years, with many currencies losing significant value through high or even hyper inflation.
Here are my top three currencies that I think could run into the most difficulties in the medium term:
The Chinese communist party plans to introduce a national security law that essentially crushes the relative autonomy that Hong Kong currently enjoys under the agreed principal of ‘one country two systems’ and perhaps ending its attractiveness as a global business hub.
The HK$ has been pegged to the US$ at 7.8 HK$ to 1 US$ since 1983. Whilst the peg has come under speculative attack on numerous occasions, including during the 1997 Asian crisis, the Hong Kong monetary authority put overnight interest rates up to 300% to defend the peg.
If there is a mass exodus and capital flight from the Hong Kong banking system then we could see the peg tested again and a devaluation of the Hong Kong dollar which could lead to banking failures and then capital controls.
The introduction of the Euro in 1999 happened without the explicit permission of the voting population of all the Euro area countries and this might turn out to be one of the biggest economic and political errors of the last 50 years. Without full political and economic integration into a single federal European state (and that means a sharing of all debt!) the Euro cannot survive.
Things are coming to a head right now as the proposed fund to combat the economic backdraft caused by the Corona virus breaks the commission’s own rules banning the EU from issuing its own debt (which also appears to breach the constitutions of several member countries).
Which Eurozone country would walk away from the currency union first is hard to predict. Would it be Italy whose economy has stagnated since the introduction of the Euro, or Finland whose main political parties are becoming anti the single currency, or perhaps even Germany whose courts have deemed QE illegal and effectively banned the Bundesbank from buying other Euro area government bonds.
It's going to be a testing time for the European Union with some economists now believing that the only way to stop the EU breaking up is to disband the Euro.
The Argentinean peso was pegged to the US$ at 1 to 1 from 1991 to 2002 in an attempt to eliminate hyperinflation and stimulate the economy. When the peg broke the black market quickly jumped to 5 pesos to the US$. Today, the official rate is 70 peso to one US$. Argentines and citizens of most other South American countries, especially Venezuela, have a sorry history of managing their currencies. If there was ever a case for the people of a country to decide for themselves to start using a crypto currency or a non government currency, Argentina is a prime candidate.
The problem, as I see it, is that the governments of the world have a monopoly on the issuance of money. Not having competition means that they don’t have to worry about mismanaging their sovereign currencies. Just by having alternatives will force governments to up their game and manage their government currencies better. This will result in a fairer and more suitable economic system.