Last week Canadian Governor of the Bank of England, Mark Carney unleashed a firestorm at the Economic Policy Symposium in Jackson Hole, Wyoming, USA by stating that while the U.S. dollar is facing pressure due to globalization and trade disputes – and the impact on national economies is stronger today than it was in the past, there needs to be a new global monetary system to replace the US dollar.
The U.S. economy is about 25 percent of the global economy in terms of total dollars but is significantly less if you adjust for price differences across countries. The American dollar is even smaller relative to world trade- but, the dollar is the dominant currency for trade invoicing and cross-border payments across the world. More than 50 percent of all international trade is denominated in dollars, while 30 percent is denominated in euro. The remainder is a blend of other currencies – the British pound, Japanese yen, and Chinese yuan.
MIT scientist and author, Dr. John Clippinger, did not mince words on the importance of Carney’s remarks:
“Mark Carney is the thought leader among Central Bankers who has an appreciation of the imminent climate and financial risks confronting the international monetary system. He also is unusual in his appreciation of the future and the place of next-generation virtual currencies – Synthetic Hegemonic Currencies.”
Clippinger is one to watch – he is working on how to design micro-monetary policies to enable value generation and retention within local economies to achieve resiliency, carbon reduction and equity in the digital asset space.
From Carney’s speech:
“Even a passing acquaintance with monetary history suggests that this centre won’t hold. We need to recognise the short, medium and long term challenges this system creates for the institutional frameworks and conduct of monetary policy across the world. Given the experience of the past five years, I will close by adding urgency to Ben Bernanke’s challenge. Let’s end the malign neglect of the IMFS and build a system worthy of the diverse, multipolar global economy that is emerging.”
Carney added that – due to the dollar’s dominance of the global financial system – risks of a liquidity trap of ultra-low interest rates and weak growth are growing.
There was a real sense of urgency in his speech – particularly when he stated that social turmoil and chaos could entail if policymakers ignore his warning of a global financial apocalypse.
Carney is not alone – chief economic adviser at Allianz Mohamed El Erian, IMF Managing Director Christine Lagarde, Putin and the Kremlin, and the Chinese central bank have all suggested that a new currency is coming to replace the dollar.
The Canadian said that the best solution in terms of stability would likely be a diversified multi-polar financial system, something that could be provided by technology. He stated that the dollar’s destabilizing reserve status role in the world economy has to end, and explained that one option was for central banks to join together to create their own replacement reserve currency, one tied to a “Synthetic Hegemonic Currency”.
In order to try and avoid a global financial meltdown, Carney suggested another solution could be to make the IMF’s SDR a reserve currency, specifically saying that as a first step to reorder the world’s financial system.
In terms of fiat currencies, Carney also mentions China’s yuan as the most likely fiat candidate to replace the dollar as the world’s reserve currency adding it has a long way to go before it is ready to assume the mantle.
“…for the Renminbi to become a truly global currency, much more is required. Moreover, history teaches that the transition to a new global reserve currency may not proceed smoothly.”
“The more straightforward alternative to the dollar, at least in theory, is the euro. It is the currency of the world’s second-largest economy and the largest contributor to global trade. Europe is a rich democracy with strong property rights. Unfortunately, Europeans have been unwilling to accept the costs associated with reserve currency status. They do not want to issue enough debt to satisfy their own domestic needs, much less those of the rest of the world. This choice is essential for understanding the dollar’s continuing predominance.”
On Digital Currencies
Carney unsurprisingly talked about Facebook’s Libracoin as he broke ranks with other central bankers to say he was keeping ‘an open mind’ about Facebook’s new currency Libra – the most high-profile proposed digital currency to date according to Carney. But, he added that it faced a host of fundamental issues that have yet to be addressed. Carney is currently under fire by the UK media for secretly meeting Mark Zuckerberg at Facebook in California, on April 16, two months before Libra was unveiled.
“As a consequence, it is an open question whether such a new Synthetic Hegemonic Currency (SHC) would be best provided by the public sector, perhaps through a network of central bank digital currencies,” the head of the BoE added.
Such a system could dampen the “domineering influence” of the U.S. dollar on global trade.
Saga Foundation’s Founder, Ido Sadeh Man, believes there is a burning question that must be answered:
“Who will be the issuer of such a currency?”
“Mark Carney’s comments about the rising need in a global currency to replace the dollar stem from the fact that trying to manage a global economy based on national structures is no longer sustainable. How can a currency that responds to an America-first policy remain the reserve currency that impacts the global economy? We at Saga echo Carney’s thoughts on the need for an alternative, based on a basket of currencies rather than a single national currency.
“The alternative, however, can only be external; one that maintains accountability and relies on the representation of the people that are using the currency. Such a solution must be accountable to the holders of the currency and reflect the core fundamentals Carney suggests.
“The question is, therefore, not ‘the what’ but ‘the who’: who will be the issuer of such a currency? We agree with Carney that Libra is not the solution as we will be losing even more accountability with an unelected corporate being in charge. What Carney is suggesting is for an alternative to be central-bank-issued, but this is just not going to happen. In the 50 years since the IMF issued the SDR, there have been many calls for the monetisation of this basket of currencies, but we don’t see the US accepting this from a political perspective. Why would the Federal Reserve agree to participate in an SDR currency which has a purpose to diminish the power of the dollar?”
“When we established Saga two years ago, it seemed absurd that a central bank would believe that the reserve currency of the world would not be issued by a nation-state. This assumption was reinforced by Jacob Frankel, a member of Saga’s Advisory Council and former Governor of the Bank of Israel, as well as Saga’s Chief Economist, ex-central banker at the Bank of Israel and member of the Bank’s Monetary Committee. Two years later, we have witnessed the ever-growing distrust and misalignment of the equilibrium between the central bank and their respective governments. With the next financial recession looking increasingly imminent, now is the time to take measures before it’s too late. We need to rectify the way our financial and governmental institutions are working, or else we’re in trouble when the next crisis arrives.”
The Saga Foundation’s advisory team includes the likes of Nobel Laureate in Economic Sciences Prof. Myron Scholes, Chairman of JPMorgan Chase International and Chairman of the Board of Trustees of the Group of Thirty (G30) Jacob A. Frenkel, PhD, Avi Licht, Former Deputy Attorney-General of Israel, Prof. Dan Galai is the co-developer of the Chicago Board Options Exchange’s Volatility Index (VIX), Prof. Emin Gün Sirer from Cornell University – globally recognised as a thought leader in the cryptography and cryptocurrency sectors, as well as well-known Israeli Blockchain players Matan Field, PhD and Eyal Hertzog from Bancor and others.
More from Carney’s speech in Jackson Hole:
“For decades, the mainstream view has been that countries can achieve price stability and minimise excessive output variability by adopting flexible inflation targeting and floating exchange rates. The gains from policy coordination were thought to be modest at best, and the prescription was for countries to keep their houses in order. This consensus is increasingly untenable for several reasons.”
“Globalisation has steadily increased the impact of international developments on all our economies. This, in turn, has made any deviations from the core assumptions of the canonical view even more critical. In particular, growing dominant currency pricing (DCP) is reducing the shock-absorbing properties of flexible exchange rates and altering the inflation-output volatility trade-off facing monetary policymakers. And most fundamentally, a destabilising asymmetry at the heart of the IMFS is growing. While the world economy is being reordered, the US dollar remains as important as when Bretton Woods collapsed.”
“…blithe acceptance of the status quo is misguided. Risks are building, and they are structural. As Rudi Dornbusch warned, “In economics, things take longer to happen than you think they will, and then they happen faster than you thought they could”. When change comes, it shouldn’t be to swap one currency hegemon for another. Any unipolar system is unsuited to a multi-polar world. We would do well to think through every opportunity, including those presented by new technologies, to create a more balanced and effective system.”