At a recent Fed-sponsored gathering in Jackson Hole WY, Mark Carney, the current head of the Bank of England perhaps gave the most stunning thing to ever be unveiled at a Jackson Hole meeting. He was urging the world to replace the U.S. Dollar with a “Facebook Libra-like” cryptocurrency as the world’s reserve currency, in a dramatic revamp of the global monetary-financial system and economic order. Notwithstanding a private company like Facebook control over a reserve currency, does the idea of a global reserve currency make sense, or just lunacy?
Mark Carney suggested that “The Dollar’s influence on global financial conditions could similarly decline if a financial architecture developed around a new digital currency and it displaced the Dollar’s dominance in credit markets. By reducing the influence of the U.S. on the global financial cycle, this would help reduce the volatility of capital flows to emerging market economies.” Carney’s chief argument says, stockpiling Dollars has become a barrier to global trade – really?
So what’s the big deal about a reserve currency – what is its value and how do they come about? A global reserve currency must maintain a reasonable predictable stable value. It must have size and be tradeable (at low bid/ask spreads and transaction fees). There is really no magic in a reserve currency. For example, if you sold your house for some large sum of money and wanted some liquid currency, which currency would you choose? The Zimbabwe Dollar – hyperinflating away? Having a reserve currency is a mixed bag – its about trust at the end of the day. Here are the main (there are more) reasons, pro, and con, for a country having its currency with reserve status (over time it may in fact net to zero):
- Pro – attracts money flow and capital and tend to keep interest rates lower than normal. Lower rates do help a country’s economy.
- Con – the attraction of money forces the country’s currency higher than normal, thereby hurting exports and the country’s economy.
There are other sub-reserve currencies; Euro, Swiss Franc, Yen, Pound Sterling, Australian Dollar and maybe Candian Dollar. But the size and the tradable issues can be problematic. The Chinese currency, the renminbi, perhaps – if you trust a near authoritarian pseudo communist country with your hard-earned cash. Carney said that no other currency at this time is ready to take over from the Dollar, but new technologies could allow for a global digital currency to challenge the US currency.
News Forecasters has already suggested that one-day central banks will be looking to go to their own government-controlled cryptocurrency, this may one day happen. This issue is not whether a currency is traditional or a cryptocurrency. The issue is whether the world is really ready for an internationally sponsored global currency. If you are just looking for a temporary store of value, we already have a global historical reserve currency – its called Gold. But it is not a functioning currency as defined in our current fiat-currency world (maybe a good thing – but another subject).
We have had a recent example of folding many country’s currencies into one – the Euro. The jury is still out on this project but it is already showing signs of cracks – another subject. Fundamentally, it is hard to set policy over such a wide area of such diverse economies. It will favor one area over another, setting up conflict among member states. As suggested before, positives and negatives – netting to at best zero.
Because economies around the world are too varied, getting any reasonable agreement on how it would be run, and agreement on its subsequent ongoing policy decisions – the chances of a global international reserve currency is nill. The Dollar stays the global reserve currency for the foreseeable future – at least another 20 years.
Mark Carney knows all this, so why even suggest this? Perhaps preparing the world for government-controlled cryptocurrencies or just grandstanding to bolster his own ailing currency. Another possibility for the conspiracy theorists – one global government – another subject to be addressed in the future.
A video presentation of this subject: