King Dollar Becomes Emperor: Currency Valuation with Political Modifier

When I was in college my senior thesis was on economic freedom. I used the Fraser Institute Economic Freedom Index and looked through all the factors that go into the score to tease out what was important. Some of my sources were books such as DeSoto's Other Path (which also informs some of my thinking around blockchain). One thing I quickly found was signals were difficult to tease out because most developed nations were also politically free. China was a huge confounding data point because it was politically unfree, but moving towards economic freedom. Also, the index is subjective. China for example, doesn't have "hard" property rights, property rights are fairly well assumed in Chinese culture and the CCP largely reflects this tradition. Not to go down a rabbit hole, but I can both accept that Chinese property rights are very loosely held because I understand the CCP's power advantage in society, while at the same time recognizing that the economy functions as if this advantage will not be abused. Long story short, I was trying to look at economic development like a state and find what are the key components for prosperity?

If we assume a currency is to some degree a reflection of the entire economy and its economic freedom, then we should discount currencies of less free nations if the government's power stretches into economics and property rights. Singapore is the go to example of a nation with less poltiical freedom, but very high economic freedom. I'm going to leave off countries like the Peru described in DeSoto's book, that lack property rights because of poorly functioning law. I believe every nation is unique. A lack of freedom and prosperity can be cultural issues rather than political. The Amish don't allow technology after a certain date, yet they are free to leave and have property rights. Are the Amish as free as other Americans? My sense, informed in part by living in China for a long time and finding that much of what in the West was called communism is actually Chinese or Confucianism, is that the universalist approach of the West confuses culture, religion and politics. Most people freely choose to restrict freedom in some way. They elevate community, they believe in God, sacred things are priceless. The hyper-American view of individuality is not universalist, but particular. I think this all matters when looking at something like economic freedom, but throw that all aside. I want to focus on hard power. On goverment abuse of its political power.

One thing I've said about China's capital controls is that it devalues the yuan. Even though they are holding the line on the exchange rate, the yuan is worth less if it cannot be freely exchanged for foreign currency. That is to say, there is some theoretical value of the yuan and there is the price the government controls, and that theoretical prices goes down when something like capital controls are instituted outside of a crisis. I'm not arguing the theoretical price should be the market price, the market is always "wrong" for your personal valuation. My point is only that if we take all the components of what makes a currency valuable, and think blockchain here if you want, the ease of spending it and exchanging it is a component.

What is the value of the euro, pound, Australian dollar and so on if they are locking down their economies? If they can shut your business? If they can arrest you and place you in a detention camp? If some African country started doing this, the currency might well devalue, no? Assuming it wasn't a highly competent state like China that was engaged in some targeted persecution, a society-wide lockdown would obviously be a signal to sell the currency.

More granularly, what happens to economies that are locked down? The government takes on more debt to stimulate the economy and the central bank monetizes it. If we grade all the economies based on their lockdown policies and their central bank policies, which currencies are better and which are worse? The U.S. is a mixed bag, but if you can travel into the U.S., most of the South and West, the rural and Red states, have almost total freedom with respect to the pandemic. There is almost no mask wearing for example. The pandemic is over in these states.

What is going on in Australia is off the charts criminal. The state is behaving like a totalitarian dictator and everyone seems to think it's OK because the government was elected. Lifesite: Australian army hauls 38 citizens to quarantine facility over some positive COVID tests

Link: Northwest Territory detention camps open for business

So the exit question is, how would you value the Australia dollar if the government never relinquishes their power? Or what if Australia has permanently turned the totalitarian ratchet forward, such that they will eventually ease their economic controls, but they will not revert back to the pre-pandemic level. Is the Australian dollar worth more or less? Does it deserve a "permanent" haircut on the exchange rate with the U.S. dollar for as long as these conditions persist? If lockdowns create permanent economic damage via inflation, shouldn't lockdown countries see their currencies devalued?