Is it time for a new world currency?

With so many financial markets in flux our central banking overlords are lost in a world of confusion right now. Also the slowing world economy has them in a tizzy as even the most credulous must realise that their Forward Guidance is an oxymoron and the less polite will drop the oxy bit. All this is symbolised in a way by the Italian ten-year yield falling below 1% this morning in a scenario that in the past would have led to a bond vigilante all-nighter.

There is also an individual element to the next bit as the author of the new currency plan is looking to enhance his own claims for the job as head of the IMF. Here is the editor of the Financial Times Lionel Barber.

A heavyweight last minute pitch for the IMF job from the Canadian-British-Irish candidate – well worth reading.

The most revealing bit I think is the journey from being according to the FT a “rock star” central banker to someone whose name apparently cannot be mentioned. Governor Carney will no doubt be furious that his long-planned coronation as head of the IMF seems to have been usurped even in terms of UK support by his former boss George Osborne.

The Problem

Learning nothing from his debacles with an equilibrium unemployment rate ( remember when he signposted 7%) and the lower bound for interest-rates ( stating 0.5% then cutting to 0.25% and promising 0.1% at one point) we have a new toy.

In an increasingly integrated world, global r* exerts a greater influence on domestic r*. As the global
equilibrium rate falls, it becomes more difficult for domestic monetary policy makers everywhere to provide
the stimulus necessary to achieve their objectives.

For newer readers r* is the idea of a normal or equilibrium interest-rate and until around last November was what the US Federal Reserve was searching for. However as their Ivory Tower fantasy got even vaguely close to reality they ended up singing along with U2.

But I still haven’t found
What I’m looking for
But I still haven’t found
What I’m looking for

Under pressure from President Trump they gave up and decided that south was the new north and started to cut interest-rates.

Returning to the speech the ordinary person would not know the difference between an interest-rate of 1% caused by world or domestic r^. Why is he doing this? Having slashed interest-rates and it not working he and his cohorts want to shift the blame onto someone or something else. Also if you think this through logically he seems upset that he cannot reduce the value of the UK Pound £.

So if this was a game of chess he has had everything he wanted but now the results are embarrassing he wants to knock the board over like a child in a fit of pique

In the medium term, policymakers need to reshuffle the deck…….In the longer term, we need to change the game.

What to do

Those familiar with the track record of Governor Carney will not be surprised by this bit.

In these circumstances, the Committee can extend the horizon over which it returns inflation to target…… policymakers would do better to trade off inflation and output volatility,

A bit of inflation will fix it. Meanwhile back in the real world people are worse off. Whilst he is at it there is also time to make his dream job even more important. It is hard to know where to start with the moral hazard in this bit.

The deficiencies in the current IMFS mean that the IMF should play a central role in informing both domestic
and cross border policies. In particular, discussions at the Fund can identify those circumstances when
spillovers from the core are particularly acute.

Is this the same IMF that helped foster an economic depression in Greece and is currently in quite a quagmire with its programme in Argentina where there are 70% interest-rates in spite of it being the largest ever intervention or a fantasy one? Still there is some more time to make his dream job even better.

Pooling resources at the IMF, and thereby distributing the costs across all 189 member countries, is much
more efficient than individual countries self-insuring…….A better alternative would be to hold $3 trillion in pooled
resources, achieving the same level of insurance for a much lower cost. This would imply a tripling in the
IMF’s resources over the next decade, enough to maintain their current share of global external liabilities.

With responsibility and power comes accountability or at least it should. Still with that amount of pooled funding the IMF would be able to shuffle its Argentina problem into a dark corner.

The Plan

Here is the nub of it. As ever such things require an acronym and International Monetary Financial System is the new one. Perhaps International Rescue was too much even for them.

The main advantage of a multipolar IMFS is diversification. Multiple reserve currencies would increase the supply of safe assets, alleviating the downward pressures on the global equilibrium interest rate that an
asymmetric system can exert. And with many countries issuing global safe assets in competition with each
other, the safety premium they receive should fall.

Actually the main disadvantage of a multipolar IMFS is its diversification so we have nor started well. For example how would the move in recent times of the Euro from 7.5 Chinese Yuan to 7.9 then relate to “safe assets”? Also how would the flash rally of the Japanese Yen back in January? Whilst in theory a type of actual Special Drawing Right ( the present IMF currency unit) works there is no evidence it would work in practice and in fact would be a complete debacle if everyone wanted US Dollars.

Even if you issue assets in a new “SDR-IMFS” there is the problem that you would be paying for it in your own currency be it Pounds, Euros or Yen so there is a risk which can only be alleviated by fixed exchange rates. With the issues around the Euro I doubt even the most elevated Ivory Tower really believes a type of global Euro would work but of course with them you never really know.

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.

Comment

I thought that today I would provide my comment using the words of Governor Carney to explain what he really plans. He is where he is actively misleading listeners/readers.

A more diversified IMFS would also reduce spillovers from the core and by so doing lower the synchronisation of trade and financial cycles. That would in turn reduce the fragilities in the system, and increase the sustainability of capital flows, pushing up the equilibrium interest rate.

The truth is tucked away here.

While the likelihood of a multipolar IMFS might seem distant at present, technological developments provide
the potential for such a world to emerge. Such a platform would be based on the virtual rather than the
physical.

Ah a virtual currency! Here is the IMF on that from February.

One option to break through the zero lower bound would be to phase out cash. But that is not straightforward. Cash continues to play a significant role in payments in many countries. To get around this problem, in a recent IMF staff study and previous research, we examine a proposal for central banks to make cash as costly as bank deposits with negative interest rates, thereby making deeply negative interest rates feasible while preserving the role of cash.

By up he means down.

What never happens in these sort of reports is addressing the problem of why increasing the dose again will work after so many failures?

Me on The Investing Channel

17 thoughts on “Is it time for a new world currency?

  1. Hello Shaun

    re; ” thereby making deeply negative interest rates feasible while preserving the role of cash.”

    hurrump ! spilt my coffee then !

    maybe the gold bugs are right ……. uh oh ….

    Forbin

    • Hi Forbin

      Gold is having a good day up US $17 at $1531 but that is still three hundred or so below the 2011 peak when people like Max Keiser were predicting it would go to the moon. Interestingly Silver has been on a bit of a tear recently and was the currency back in the times of mercantilism. It is easy to forget that the treasure ships chased by the likes of Drake etc. would be carrying Silver. It does have uses as well.

      But on the other side it has a long way to go to get back to the peak of the 1970s. Ironically after that episode of upwards price rigging it seems to have been rigged the other way.

    • ah but this will be the E-dollar ………

      not to be confused with Zollars

      ( although probably the same success , eheheheh )

      Forbin

  2. Great blog and podcast as usual, Shaun. As Andrew Saxton, a former Conservative leadership candidate, observed, Postmedia is basically a penny stock now, so I don’t think Toronto’s Financial Post sent any journos to Jackson Hole. In any case it only published the Reuters story on Carney’s speech there. I had already left a comment on Carney’s speech on its website before I read your blog. Of course, my comment can’t compare with your analysis, but there is some overlap between them:
    ‘Carney’s speech really read like something someone who was still interested in being IMF head would say. Now all of a sudden “a new Synthetic Hegemonic Currency (SHC) … provided by the public sector, perhaps through a network of central bank digital currencies” is just the ticket for the world financial system.” How come it took him so long to come to this conclusion and how long will this infatuation last? When he started as Governor of the Bank of England he immediately introduced state-contingent forward guidance based on the unemployment rate, obviously clueless about how quickly the unemployment rate was likely to fall. This was supposed to go on for years and he dropped it after six months.
    ‘Carney’s chart 2 showing global economic uncertainty has been used in previous speeches. The global economic uncertainty peak identified with Ukraine/ISIS early in 2015 is so weird. The regime change in Ukraine was in February. The downing of the Malaysian Airlines flight over Donetsk oblast was in July 2014. What’s this about?!’
    This is a very slightly modified version of the original comment, which the Financial Post deleted. I won’t go all tinfoil hat speculating why except to note that there has been a level of idolatry in this country regarding Carney that almost defies belief. I have resubmitted the modified comment and it is awaiting moderation. I don’t worry about it. Everything will be fine.

    • “there has been a level of idolatry in this country regarding Carney that almost defies belief.”

      from MSM certainly , and if we can see that vital questions that need to be asked are in so much censored by omission , then certain questions about democracy will follow….

      ok Shaun avoids the politics but if you can’t get anyone to disagree or at least question Carney on his track record as BoE governor ( an unelected position) , what gives?

      Forbin

    • ‘cat’ says-(from reading the furry ‘carpet’ hairballs)- JP Morgan Chase cryptocurrency ecoin will need new ‘advisory directors of impeccable monetary acumen’ to facilitate the ‘seamless, discrete, liquidity’ of a brave new ‘Frontier in banking’.
      1. Near 40 trillion Assets Under Managent (AUM- think ohhhmmm- secure)
      2. Chase just cancelled and annulled credit card balances for all Canadian customers (ahhhhh- that’s so nice!!).
      3. Now being tested in tested in Tokyo-NY trading?!?
      4. Forex,derivatives, bonds – zap that ‘front-running’ trading with a “cloudy day”.
      5. ‘remember’ jpm ecoin- “cause your countries run by idiots” and “we’re here to help”.

      Cue-song-The Orb- “Little Fluffy Clouds”.

  3. Shaun.

    Yes I do think there is a need for a new world currency and I think a good name would be the “Peter Pan world pound” I just need to think of how many would be needed to satisfy world demand but will only issue a small percentage of what is needed and will base it similar to a bitcoin type of currency. There will be no asset base but I don’t see that a major problem.

    So long as it makes me very rich I am up to any ideas as to how to get it off the ground as I am not well clued up with bitcoin mining but considering most bankers aren’t well clued up either I don’t see that being a problem.

  4. Another world currency I think I would like to think of issuing is the “Pyramid Pounds”.

    It would be a three sided coin just like a pyramid and am working on the details but it would be based upon a pyramid scheme where as I issue to first pyramid coins and watch the money roll in.

    Although a pyramid currency sounds a bit dodgy so are bankers and financial institutions so I don’t see that as a barrier.

  5. Its fakebooks Libra isn’t it, deal done after carn’the’s meeting with zuckers.
    wot cud go rong? oops krypto kills superman.

  6. ” Cash continues to play a significant role in payments in many countries. To get around this problem,…”
    I never thought I’d live to hear that cash was a problem that had to be “got around”.
    Surely I must have misunderstood.

  7. I’m not a goldbug by any means, but I’m starting to see the logic for holding gold in preference to holding cash/deposits should negative rates be implemented.

    Of course their logic may falter once they’ve gotten rid of cash or introduced negative rates when people decide to use alternative currencies….cryptocurrencies for instance. What if a country does not introduce such a system, will they ban exchange into that currency? Cash just becomes a hot potato to be gotten rid of like a Zimbabwean note. Where does it end? They need to game each reaction to their action as though they were ordinary people trying to hold on to the value of their money.

  8. Pingback: Is it Time for a New World Currency? - Free World Economic Report

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