Global Currency. Consequences and it's proposed solution.

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2 years ago

The world today is home to over one hundred and ninety countries, using one hundred and eighty currencies to trade, to invest and collect taxes. The global economy is complex at the best of times, and the foreign exchange or forex market only looks to add an additional layer of confusion to this complexity. Currency is supposed to be the legal tender that makes trade easier for everyone.

So this begs the question: Could the world adopt a single universal currency.

It sounds like such an obvious solution that would wipe out the frustrations at all levels of global industry, from someone desperately trying to exchange the yens to euros at the airport, all the way up to international companies managing their foreign operations. 

This is not just about convenience, though. Removing the burdens of transactions has a very real impact on the economy. Humanity has evolved the financial system, from bartering to gold coins, to fiat currency all the way up to the modern day when we make the majority of that transactions completely digitally. With every step up his evolutionary process of learning and spending money has become easy, massively boosting quality of life. 

A single worldwide currency, surely sounds like the logical next step in creating a truly frictionless globalized marketplace. But of course, there are questions that must be answered. What are the drawbacks of a single currency? How would it be rolled out and do the advantages really make it worthwhile? Now universal currencies are  not, necessarily a totally new thing , for hundreds of years, gold was almost universally accepted as a standard medium of exchange

In the modern world. The European Union has adopted the Euro to varying degrees of success. Perhaps the best way to address the viability of a worldwide currency is to really explore these other currencies 

Mediums of exchange have been around for a very long time, we have found examples: everything from seashells, the wooden sticks being used to facilitate the exchange of basic societies. Having a universally accepted medium of exchange makes trade far easier than the alternative which was bartering. Bartering meant item to item exchange and people ran into a lot of problems.

Illustration of a goat farmer

Say there was a goat farmer, looking to do his monthly shopping trip. He would need to find people selling the items he wants and those people would also need to trade those items for goats. Even then, it's hard to try one goat for one loaf of bread, because that's not a fair trade. Also the farmer doesn't need thirty loaves of bread. So what will they do? Dividing that bread into thirty just doesn't work. 

The other major problem that's often overlooked is if a goat farmer works particularly hard, and he's very successful. It's hard to store wealth in goats. They die and are hard to maintain the difficulty involved in trading and the lack of incentive to grow. That meant that the economy was really just limited to small communal and self-sufficient villages. These small communal villages did very little to increase the quality of life of the citizens living within them. People more or less had to do everything themselves. There was no time to specialize and become an engineer scientist, because every waking hour will need to be used to obtain bare essentials. Financial innovation has been every bit as important as technical innovation throughout history because it's really really difficult to have one without the other. 

Friction of transactions

All the problems with the trading bartering system are called frictions by economists. By definition, friction is any difficulty and could in carrying out a transaction. If someone gets frustrated that a credit card terminal is down at their local, fast food joint account to buy that burger, because they forgot their cash. That is transactional friction. Of course, the goat farmer of yours was probably facing slightly more significant friction. 

Frictions exist in all parts of exchange. Gold alleviated a lot of these problems, then there were gold-backed cash, and then fiat currency, and today cryptocurrencies. People were reluctant to trade internationally because it was too much of a problem. This in turn stops the country from trading and just becomes self-sufficient just like the self-sufficient villages. Just like in the villages, not specializing reduces the potential for the entire global economy.

Think Europe, a highly concentrated area with high developed economies with strong independent industries. Before the Euro, if these countries were to have businesses across the border, they will find that very difficult to do so. The risk of dealing with foreign currency is very significant for a business. The usual solution is to involve complex financial derivatives to hedge the risks, this however is a major problem for small and medium enterprises. That’s why they would just rather source their operations in their own country altogether. The introduction of the Euro gets rid of the invisible wall, making cross-border transactions and employment highly possible. Companies offering positions can draw from a larger talent pool that would have otherwise been unable to them. Better talents mean better productivity, leading to higher production and higher quality of lives.

Of course, it’s not always sunshine and rainbows. There are certain drawbacks that we will have to discuss.

Power that comes with managing the global currency

The major ongoing problem is that the power that comes with managing the global currency. Domestic currency is controlled by a central bank and the federal government. These two entities control the creation of money and the setting of the cash rate. A few countries in the world don’t control their own currency at all and just use foreign currencies to trade because it’s easier than managing their own currency. These countries give up a lot of control to do that. It is hypothetical for their country to be completely drained dry of currency with no way to replace it. Their banks also could not operate in a fractional reserve system that all other banks do which will severely restrict access to credit. Holding the power to manage global currency will mean holding the lives of all other countries. Similar to how gold works, countries will also start to horde these assets as a store of value. By simply hoarding and stockpiling these assets, the countries will easily achieve wealth. They will be incentivized to heavily restrict import as every import is money being sent overseas. The restriction of trade will then be the literal opposite for what it proposed to be. 

Possible solution - cryptocurrency

It is therefore a need to create a decentralized independent entity to manage the global monetary system. This is where Bitcoin has come to play, Bitcoin is a digital currency operating on a decentralized system which records transactions in a distributed ledger called a blockchain. The ledger is protected against fraud via a trustless system where miners run complex computer rigs to confirm groups of transactions called blocks. These blocks of transactions are then added to the blockchain record upon success. There is no central entity that prints and controls money, but the money is just being mint by the miners. This makes Bitcoin a decentralized system with no one having the power.

Closing thoughts 

Bitcoin offers an alternative to fiat currency. The fixed supply of 21 million Bitcoin means that it cannot be hyperinflated. On the other hand, fiat currencies have an infinite supply which means that citizens need to have faith that their government and central banks will preserve their purchasing power. 

Bitcoin is not controlled by any central bank or government. Capital controls cannot be imposed, and Bitcoin can be freely transacted across borders.

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