Zoltan Pozsar, Bretton Woods III and Bitcoin

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Zoltan Pozsar, an analyst at the Swiss financial firm Credit Suisse, published a document in March anticipating frictions between commodity-producing countries and those with currencies backed by “full-faith and credit.” He predicted how a war between countries, such as Russia and Ukraine, would bring down the world monetary system as we know it today. Pozsar mentioned that bitcoin could play a pivotal role in the future, taking into account that bitcoin is currently the cryptocurrency with the largest market capitalization.

“After this war is over, “money” will never be the same again, and bitcoin (if it still exists then) will probably benefit from all this,” Pozsar stated.

In Pozsar’s words, “Wars tend to become momentous junctures for global currencies.” That’s why he argues that global reserve managers will lose interest in holding dollars for safety since they can’t take them out when they need them most. If this happens, banks will diversify into other currencies as an option to the dollar.

Just four short months after his Bretton Woods paper was published, Zoltan Pozsar has officially been announced as a speaker at Bitcoin 2023. This might leave some to speculate that he was playing an impartial judge at the time, not giving away his true bullishness on bitcoin.

Bretton Woods III Begins

Against this global economic backdrop, Pozsar warns, “We are witnessing the birth of Bretton Woods III, a new world (monetary) order centered on commodity-based currencies that will likely weaken the eurodollar system and also contribute to inflationary forces in the West.” 

Now, what is Bretton Woods? 

It is a term used to refer to the agreements signed in 1944 between different countries to establish a new post-war world economic model. These agreements set the trade and financial rules to be used by the most industrialized countries. There are similar agreements that establish these guidelines, an example of which was the Washington Summit in 2008, which took place during a context of political instability after a global financial crisis with bank collapses, which gave rise to the birth of Bitcoin.

Pozsar argues that, just as we moved from the Bretton Woods era (backed by gold) to Bretton Woods ll (backed by internal money), we are now entering the Bretton Woods lll era. This era will be a stage backed by external money (that is, in other words, gold bullion, other commodities, and most likely bitcoin).

“This crisis is unlike anything we have seen since President Nixon removed the U.S. dollar from gold in 1971, the end of the era of commodity-based money,” he noted.

How will Breton Woods III Unfold?

The paper asserts that a commodity crisis is brewing that affects money and the monetary system. More specifically it forecasts how the price level of these commodities will condition the entire market. An example of this is gold and oil, which have been increasing in value, causing investors to see these commodities as ideal assets to take refuge against inflation and other possible global economic destabilization. 

“Commodities are collateral, and collateral is money, and this crisis has to do with the growing attractiveness of external money over internal money. Bretton Woods II was built on inside money and its foundations collapsed a week ago when the G7 seized Russia’s foreign exchange reserves,” he explains. 

The idea is that since banked money is open to seizure and, as we’ve seen with Russia, becomes useless when there are international sanctions, then investing in commodities held in other countries would end up being the most effective way to safeguard value. This is where Bitcoin can shine. Intrinsic characteristics of the asset and monetary network, such as being private money and censorship-resistant, make it an ideal safe haven asset for any circumstance that may unfold in the future.

Comparing Todays Markets with Crises of the Past

If we compare the parallels between the current crises with those of 1997, 1998, 2008, and 2020, we can conclude that every crisis unfolds at the intersection of financing and collateral markets. Today the collateral is commodities, and according to Zoltan Pozsar, taking into account the history of economic crises at least, we might see a pattern that could concern us or at least that we should consider.

Until now, commodities were traded on tight spreads. Today, they no longer trade at par. Russian commodities have plummeted in price, and on the other hand, there are (non-Russian) commodities that are on the rise. According to Zoltan, this is a buyers’ strike and not a sellers’ strike.

Zoltan Pozsar also pointed out that from the 1997, 2008, and 2020 crises we learned that someone, somehow, must always provide a backstop. He believes that Western central banks cannot shut down the huge “commodity base” because their respective sovereigns are the ones driving the sanctions. They will have to deal with the inflationary impacts of the “commodity base” and try to cool them with rate hikes, but they will not be able to provide the external spreads. Likewise, they will be unable to provide the balance to close the “Russia-not Russia” spreads. Neither would commodity traders in that environment, which means that something has got to give. 

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