Arthur Hayes is a former CEO of BitMEX, a crypto derivatives exchange. In his recent article titled “Exit Liquidity,” he explores America’s position as the global reserve currency issuer and how it affects the world economy. He is very clear about his stand as the global economy stands “I Will not be exit liquidity!”
Arthur Hayes argues that the US dollar’s status as the global reserve currency provides the US with significant advantages, such as the ability to borrow at lower rates than other countries and the ability to print money without immediate consequences. However, Arthur Hayes also notes that this system creates imbalances and can lead to economic instability.
What is exit liquidity?
According to Arthur Hayes, if you are someone’s exit liquidity, you are one of those schmucks who buy or hold when intelligent or well-connected individuals are selling. In today’s context, exit liquidity refers to the helpless commoners who have been — and continue to be — on the losing side of the economic arrangement, that is, the reserve currency status of the U.S. dollar.
According to recent news accounts, the debate over whether the USD can be supplanted as the global reserve currency is intense. On the one hand, some vocal elites of the Pax Americana are skeptical that any country could step up to the plate and carry the global economy on its shoulders. On the other hand, there are indications that certain trade corridors are de-dollarizing and have been doing so for some time.
The rise of BRICS is gradually supplanting the normalcy of global trade since the end of the second world war. Arthur Hayes acknowledges this with the recent France realignment. Recent statements by French President Macron indicate that he believes his country must reduce the “extraterritoriality of the US dollar.”
The United States has maintained its position as the wealthiest nation in the world. Still, its wealth inequality is presently among the worst in the developed world, and the situation continues to deteriorate. The overwhelming majority of the population with few or no financial assets bears the brunt of the costs associated with being the reserve currency.
The intense debate over the fall of America as a hegemony
According to Arthur Hayes, the de-dollarization raises a few questions:
1. Is de-dollarisation actually underway, and to what extent?
2. Is the dollar’s role as the global reserve currency good for the majority of Americans at this particular time in history?
3. Does China actually want to be the issuer of the global reserve currency?
4. What currency or currencies will eventually replace the dollar, given that history has taught us that all empires come to an end eventually?
When the preponderance of international trade is priced in a particular currency, that currency is considered the global reserve currency. According to Arthur Hayes, following the end of the second world war, the United States and Asia (China and Japan) pursued distinct approaches to wealth.
A chart on the effect of globalization – led by America
On the one hand, the United States picked up the pieces and soon became the wealthiest nation in the world. Conversely, Asia repressed savers financially so that heavy industry could obtain inexpensive capital to develop manufacturing capabilities.
Due to these facts, if Asia is to take global economic dominance, it has two options: Option 1: Buy dollar-denominated assets. Option 2: Sell dollars in exchange for local currencies and give some of the earnings back to workers in the form of higher wages.
Option 1 maintains Asia’s currencies undervalued from a purchasing power standpoint, allowing Asia to continue producing and selling inexpensive goods. Option 2 is desirable for Asian workers, who would be able to consume more thanks to higher wages and/or lower prices on imported products.
However, option 2 is unfavorable to Asia’s large industrialists because they would sell fewer products if their product prices approached American levels due to rising labor costs and an appreciating exchange rate.
According to Arthur Hayes, the United States has had a deep-seated interest in saving the dollar and the banks that add more debt to consumers. He states:
American banks will always have a deposit base larger than the domestic lending opportunities because foreigners flood the banks with cash earned by selling stuff in dollars. Banks will always lend too aggressively and sacrifice tomorrow to boost earnings today. The Fed and Treasury will always bail out the banks because they must in order to prevent a financial crisis that makes the dollar more expensive and lowers its supply globally.
Arthur Hayes
Where does Asia stand
As has been observed, China and Japan share some cultural and economic similarities. They are collectivist, i.e., they place a higher value on the welfare of the community than on the welfare of the individual.
As a result, when Asia considers how far its current economic arrangement has gotten them and then considers the United States precarious position, they must ask, “Should we even strive to be the reserve currency issuer?” Does Asia desire an unfettered market?
According to Arthur Hayes, NO. By selling goods to wealthy Americans, Asia hopes to improve the living conditions of its people. It does not want regional funds to be used to purchase imports. Asia’s prosperity is entirely attributable to the ban on foreigners selling items to natives at a competitive price.
The difference between the United States and Asia is that foreigners hold a significant portion of US debt, whereas Asia is predominantly indebted to itself. This does not affect the probability that the debt will be repaid, but it does affect the rate of reckoning.
Arthur Hayes leads investors toward crypto amid economic shifts
Arthur Hayes confidently asserts that Asia does not wish to issue the global reserve currency. Asia refuses to recognize the essential pillars of a global reserve currency.
Asia’s reluctance to implement the policies necessary for it to become the issuer of the global reserve currency does not necessarily imply that it wishes to continue accumulating and trading dollars.
In the current discussion about the future of the global economic system, de-dollarization is gaining considerable traction. De-dollarization is not a novel phenomenon, however. According to Arthur, 2008 marked the pinnacle of dollar dominance. Ever since then, the dollar has been on a downward trajectory, and the world is catching up too late.
Arthur asserts that gold and cryptocurrencies will be the global currency of the future markets. Understanding the major economic movements of the past 15 years enables us to comprehend why and how China and Japan altered their behavior.
Investing in dollar-denominated assets has become such a no-brainer since 1971 that many investors have neglected how to conduct financial analysis. According to Arthur Hayes, gold and cryptocurrencies will be the focus moving forward. They are not linked to a specific nation. They cannot be arbitrarily devalued by a central bank frantic to prop up its financial system with fiat currency.
And ultimately, as nations begin to look out for their own best interests instead of serving as slaves to the Western financial system, the central banks of the global South will diversify how they save their international trade earnings. The initial option will be to increase gold allocations, which is currently taking place. As Bitcoin continues to demonstrate that it is the most difficult currency ever created, Hayes anticipates that an increasing number of nations will at least consider whether it is a suitable alternative to gold for savings.
