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Noelle Acheson is a veteran of Business Analysis and a member of CoinDesk's product team. The opinions expressed in this article are those of the author.
The following article was originally published in Institutional Crypto CoinDesk, a free newsletter for institutional investors interested in cryptographic badets. Register here.
Celebrating the 75th anniversary of the Bretton Woods conference is probably not a top priority for cryptocurrency enthusiasts this month. It's an understandable oversight – price fluctuations, confusing product launches and Justin Sun's localization may be more compelling.
But the birth of international economic cooperation and interoperability must be recognized as the beginning of a process of economic reconstruction that has contributed to the global imbalances that worry the markets today. It could also have paved the way for the solution.
Most of the US stock market may be overvalued and yields are expected to fall further – but much of the current tension is hiding beneath the surface of the currency market. Monetary easing, trade tensions and the threat of military action in the Middle East are a harmful badtail for currency holders and hedgers, as international conversions become risky and costly.
It is perhaps for this reason, in addition to the disturbing branding of the financial muscle by the US administration, that the number of questions about the role of the US dollar as a global reserve currency is intensifying.
In addition, it has been a leader for almost 100 years; The average lifespan of the world's reserve currency over the last five centuries is 95 years. The evolution of the balances suggests that the dollar's reign may soon be rising: its share of foreign exchange reserves exceeds 60%, while the weight of the US economy in world production has fallen to less than 25% and should continue to decline.
The encroachment of monetary competition may well gain momentum as politics begins to overtake the economy.
Some postulated that there was a "non-zero chance"This bitcoin would make a big reserve currency. I do not agree, I think that there is no chance that this will happen. I make however, believes that the global reserve system will change radically over the next two decades. Bitcoin could be part of what emerges.
Which give?
First, some information about the importance of Bretton Woods and why we should pay attention.
In 1944, an agreement was reached between delegates from 44 countries who established the US dollar as the world's reserve currency, which would be indexed to gold. Other member countries would tie their currencies to the US dollar, and the resulting relative stability between denominations would smooth world trade and stimulate recovery after the war.
The agreement also created the institutions of the International Monetary Fund (IMF) and the World Bank to coordinate global monetary movements and direct lending to developing countries.
The US dollar ceased to be "officially" the world's reserve currency when President Richard Nixon withdrew the country from the gold standard in 1971. He remained however the de facto global reserve currency, at strength to be the largest economy and trading nation of the world. Countries tended to hold more dollar reserves than all other foreign currencies combined, for ease of trading and relative stability.
Being the world's reserve currency is a mixed blessing. Although it is easy to borrow on international markets, it removes the power to influence the national economy.
If foreign creditors began to believe that President Trump could encourage a devaluation of the US dollar (as he has often suggested), they would begin to unload, as a devaluation would reduce the value of their bonds. Foreign badets in US debt currently amount to more than $ 6 trillion, nearly 30% of the total amount outstanding. A slight unloading would therefore be a shock to the market and weaken the credibility of the dollar for some time.
In addition to being unable to devalue at any time, the additional global demand in US dollars from its reserve currency status keeps the value of the dollar at a high level relative to other currencies, exacerbating the current account deficit. more important in the world. And, whatever your views on modern monetary theory (which poses that the level of indebtedness does not matter), the vulnerability of US markets to foreign investment strategies is worrying.
So much for America First.
A new reserve currency?
Given the growing doubts about the necessity and usefulness of a single issuer-based, fiduciary-based global reserve currency, you will understand why the bitcoin narrative comes up. Surely an alternative without a sovereign, based on an algorithm would be more stable and trustworthy?
Maybe, but it will not be bitcoin *.
First, a global currency must have a flexible supply. Limiting the amount of gold that banks could hold was one of the main reasons the gold standard did not work – economic growth outpaced the supply of gold-backed money, and the inevitable rush for gold. overcoming this limitation led to destabilization.
Second, bitcoin will not become a universal settlement token for commercial contracts. It's too volatile. Although this should ease along with increased liquidity, it is unlikely that companies and sovereigns will give up their preference for FIAT over which they exercise some control.
So, if it's not bitcoin, then what? What might a reliable and flexible international trade currency look like?
Drawing table
One such model is Facebook's Balance: a basket of currencies and public debt rebalanced periodically and used to fix a digital token that can be used for settlement.
But the thunder of debate over the object and the support of the coin has highlighted the strong mistrust of corporate motives to global ambitions, and the tight control of antitrust rules will prevent any large company from creating a universal solution.
Another, much more likely, model is a revamped special drawing right (SDR). This basket of currencies was created by the IMF in 1969 to serve as a private transaction token and a "store of value" for members. Its value is close to that of the underlying currencies: US dollar, Japanese yen, euro, pound sterling and Chinese renminbi.
Several economists have proposed expanding the scope of the SDR for international trade purposes by positioning it as a global reserve currency that is independent of any issuer and can be managed by a neutral organization. supranational, whose main objective is economic stability. .
The problem is that even a liquid DTS in its current configuration would be subject to national priorities and vulnerabilities. A sharp depreciation of the US dollar as central banks opt for the SDR, as a reserve could destabilize the basket. The euro is almost as important as the world's currency of payment but carries an existential risk, even distant. The Chinese renminbi is still largely controlled by its government and the future of the pound sterling is uncertain.
If only the DTS in its new liquid form could be attached to a non-sovereign trading symbol totally free of political manipulation. Do you see where I'm going with that?
Other currencies would also be part of the basket to reflect economic activity and allow for flexibility of supply. But a robust apolitical anchor could add a layer of trust, hard to find in an increasingly tense business environment.
Time to talk
I do not know how this mechanism would work. This would undoubtedly be complex and controversial, and anyone who studies the currencies is aware of the colossal complications of maintaining a pawn. But the growing belief that the current system is flawed and the increasingly apparent politicization of currencies will eventually drive the conversation away from the word "it's too hard to try" to "let it start talking about it".
At present, the main risk for the global economy is not trade tensions, overvalued badets or negative returns. It is complacent to badume that the status quo will be maintained. A profound change always costs a huge amount of political and economic capital, but it does happen anyway.
None of us can know with certainty what will be the next stage of financial evolution, but we will know it soon. As economist Tyler Cowen reminds us in a recent article: "Monetary institutions of all ages are virtually unimaginable until they are created."
Unfortunately, even getting the main participants around the table to discuss this task will be a huge task. The Bretton Woods anniversary celebrations have allowed newspapers and groups to question the current reserve system, the role of the IMF and how to cope with future economic storms. Ideas and discussions are a start. But we must not forget that in 1944, just after the bloodiest war in history, what brought the participants to the table in a spirit of collaboration was fear.
We can all hope with fervor that we should not be so afraid to bring everyone to the table. What is different this time around is that the need for a reform is becoming more and more obvious. The discussions involve a much larger group of participants. And Bitcoin adds a new tool to the list of potential solutions.
In itself, this will not solve the most pressing problems. But combined with other tools and helped by diplomacy, academic rigor and patience, it could well be an integral part of a new kind of reserve currency, which could help mitigate or even avoid future shocks.
(* Disclosure: I hold a modest amount of bitcoin without a short position.)
Bitcoin image via Shutterstock
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