Crypto? The world’s appetite for the dollar remains strong

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Evan Guido | Special for the Herald-Tribune

About two years ago I made the mistake of arguing with someone who believed cryptocurrency was the future. Pro Tip: Never argue with the crypto crowd. They have more time and energy than you to devote to their cause.

This particular crypto trader argued that the demise of the dollar, if not imminent, was a possibility. Then what ? I think the trader was taking the position from an apocalyptic perspective, some gold investors have the same view. But economists have questioned whether the US dollar will remain the world’s reserve currency of choice. Alan Greenspan, then head of the Federal Reserve, even questioned the status of the dollar in a 2004 speech.

There have been periodic concerns about the world’s appetite for the dollar. But no other currency could replace it. The euro was weighed down by Greece’s financial collapse and Brexit. Japan’s relatively slow growth and aging population, it is losing one person every minute, is holding the yen back. Globally, there is distrust of China’s so-called surveillance capitalism, which is preventing the rise of the renminbi.

During this time, the US dollar remained the primary reserve currency. There are two lessons here. First, our institutional strength as a country provides a strong backbone for the dollar. This comes in the form of rule of law, strong intellectual property rights and separation of powers in government.

Second, don’t underestimate the network effect. It’s real and it’s spectacular. In short, the network effect occurs when a good or service increases in value as more and more people use it. If you’re going to auction clothes, for example, you’ll probably use eBay because everyone uses it.

And the dollar benefits from a strong network effect. It is by far the main currency bought and sold in global foreign exchange transactions. When foreign debt is issued in a currency other than the domestic currency, the bonds are likely denominated in US dollars. And there’s a lot of US paper money floating around overseas.

So why do we care about the status of the US dollar? One of the reasons is that it helps our economy. The government can borrow at favorable rates compared to other countries, supporting domestic growth and development. Other advantages are that the currency used is very liquid and reliable in holding its value, helping companies that do business around the world.

Incidentally, a related misconception is that most US government debt is owed to foreign entities such as China and Japan, raising concerns if they decide to sell their bonds en masse. The reality is that most US debt is held domestically.

We were in a highly competitive global economy, so the dollar will have its challenges both in the short and long term. But a history of stability, liquidity, and strong government support (not appreciated by cryptocurrencies) counts for something.

Evan R. Guido is the founder of Aksala Wealth Advisors LLC, a member of the Forbes Next-Gen Advisors 2018 list and a finance professional at Avantax Investment ServicesSM. Evan leads a team of retirement transition strategists for clients who see themselves as the millionaire next door. He can be reached at 941-500-5122 or [email protected]. Learn more about his insights attheraldtribune.com/business. Securities offered by Avantax Investment ServicesSM, Member FINRA, SIPC.Investment advisory services offered by Avantax Advisory ServicesSM, insurance services offered by an insurance agency affiliated with Avantax.6260 Lake Osprey Drive, Lakewood Ranch, FL 34240.

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