Picture a consulting firm with 150 staff worldwide, a global retail chain with a million in-store employees, or a manufacturer that sources high-turnover inventory from more than 50 suppliers in 10 different countries – each an archetype of the global, corporate economy.

What’s the one thing they all need consistent access to? Cash.

That basic need lies at the heart of a global, and potentially transformative, scramble for liquidity as the economic outlook turns dire during the COVID-19 pandemic. Firms want an unbroken, liquid source of funds to make payroll and settle invoices – without which the entire economy goes into toxic shock – and specifically, they want dollars.

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The pandemic has unleashed a global race for greenbacks, which when combined with a debt crisis for the world’s banks could catalyze a sea change in our global payments system with what some are starting to call “crypto dollarization.”

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Crypto or not, dollars are the only game in town now. It’s the currency in which debt and assets are denominated worldwide and, because it’s used for cross-border payments, it’s the easiest to get, the most liquid.

The U.S. Federal Reserve is currently facilitating this by opening currency swap lines with other countries’ central banks and providing them with short-term “repo” lending. As I alluded to in last week’s inaugural edition of this newsletter, the Fed will eventually be unable and/or unwilling to be the world’s indefinite lender of last resort, with huge geopolitical ramifications when it withdraws support. But for now, the dollar is king.

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Dollarization is combining with a looming debt crisis. This week, Goldman Sachs forecast a staggering 34 percent contraction in first quarter U.S. GDP and the International Monetary Fund said 2020 will be the worst year for the world economy since the Great Depression. The defaults and bankruptcies this will generate are almost unfathomable.

Of course, the world’s governments will try to backstop banks and companies, which is one reason the IMF is forecasting that, globally, net public debt will rise to 85 percent in 2020 from 70 percent last year. Since this entails robbing Peter (taxpayers) to pay Paul (corporate shareholders and bankers), the political tensions unleashed by bailout negotiations will sow acrimony and fear and could undermine confidence in the system.

The banking system is nothing without confidence. It’s built on a fractional reserve model by which banks lend out deposits, which creates new money without the equivalent held in reserve. (Cast your mind to the “It’s a Wonderful Life” speech by the Jimmy Stewart character George Bailey to his savings and loan customers for a reminder of how a loss of confidence can seriously challenge this model.)

When the edifice of confidence looks shaky, a business leader with cash liquidity needs faces a dilemma. Many will hold their noses and continue to bet on the existing system. But anyone who’s lived through, say, Greece’s debt crisis, or Argentina’s currency meltdowns, or any other emerging-market panic might look at the world’s debt numbers with trepidation. Given the post-COVID outlook for banks’ loan customers, some will doubt the security of their deposits, regardless of whether they are denominated in dollars.

What’s a business to do then? They can’t withdraw and hoard cash to protect themselves; banknotes are hardly a viable payments option in the modern world. But perhaps dollar-backed stablecoins pose an option. These carry the bearer instrument qualities of cash, where the right to value is transferred peer-to-peer without an intermediary, based purely on the change in possession. But they also have the capacity to move money globally and securely, all, in theory, without the security risks of the banking system. Since the token issuer commits to hold the full equivalent in reserves for all tokens issued, the fractional reserve system’s perennial question about deposit assurance ceases to be an issue.

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