Saturday, November 14, 2015

Project Syndicate Article: Is it Time for Global Money?

The idea of a global currency administered by a global central bank has always sort of floated out there in the background. We have talked about the SDR used at the IMF and its potential to someday function somewhat like a global currency. Jim Rickards has talked about the SDR as a kind of global money and also projected a more prominent role in the future for it. 

So this new article on Project Syndicate naturally caught my attention. It once again raises the idea of a global currency and a global central bank. The article even talks about all the reasons it might make sense to have a global currency. But the main point of this article is to explain all the reasons why we will NOT see a global currency any time soon (or a global central bank). 

All of this of course relates directly to what we cover here on the blog. Therefore, I have pasted in a few quotes from this article by Larry Hatheway and Alexander Friedman just below. It's an interesting article and I encourage readers to read the full article. It also supports what we have written here on the blog about how any change like this is likely to come in a very gradual process over many years if it comes at all unless a new major global financial crisis were to speed up the process.

"Today’s world is more economically and financially integrated than at any time since the latter half of the nineteenth century. But policymaking – particularly central banking – remains anachronistically national and parochial. Isn’t it time to re-think the global monetary (non)system? In particular, wouldn’t a single global central bank and a world currency make more sense than our confusing, inefficient, and outdated assemblage of national monetary policies and currencies?"

Technology is now reaching the point where a common digital currency, enabled by near-universal mobile phone adoption, certainly makes this possible. And however farfetched a global currency may sound, recall that before World War I, ditching the gold standard seemed equally implausible.
The current system is both risky and inefficient. Different monies are not only a nuisance for tourists who arrive home with pockets full of unspendable foreign coins. Global firms waste time and resources on largely futile efforts to hedge currency risk (benefiting only the banks that act as middlemen)."
. . . . . 

"In short, the current state of affairs is the by-product of the superseded era of the nation-state. Globalization has shrunk the dimensions of the world economy, and the time for a world central bank has arrived."

"Dream on. A single world currency is in fact neither likely nor desirable."

My added comments:

I got a surreal feeling reading this article. Everything mentioned in the first part of this article are ideas that have been mentioned here on this blog. And the authors of this article are certainly highly knowledgeable insiders who would know about ideas like this being discussed inside the system. Alexander Friedman was CFO of the Bill Gates Foundation for example.

But as you read on through the article you see how the authors change direction and explain why "a single world currency is in fact neither likely nor desirable."  This article sort of mirrors my own investigation of this topic here on the blog. When the blog began in January 2014, it seemed as though the world might be on the verge of major changes in the monetary system including a currency "reset" of some kind. All kinds of theories were out there including the idea of a new global currency. The word  reset was used frequently by those inside the system as well as those speculating on the outside. Most assumed that this meant we were about to see some major changes.

But as time passed my own investigation led me to conclude that this kind of major change is probably not likely to happen any time soon (unless a new major global financial crisis ushered in the changes). Instead, what I saw was strong evidence that change is likely to unfold gradually and probably more at a regional level than a global level. What led me to this conclusion? The follow bullet point list:

- some good information from informed readers convinced me that the thinking inside the system is that things are fairly stable for now and major rapid change is not needed. The strength of the US dollar (vs other currencies) allowed the dollar to remain entrenched as the primary global reserve currency

- the ongoing inability of the IMF to get its 2010 governance reforms passed and the continued lack of similar changes at the World Bank has created a more divisive atmosphere making global cooperation for any kind of global currency more difficult

- the response to bullet point #2 above by the BRICS nations has been to become more and more frustrated at the lack of changes at the IMF and World Bank and move forward with their own Plan B (BRICS Bank and AIIB). This is a move away from more global cooperation and not towards it in terms of having one global currency

- The continuing geo-political skirmishes between the US, Russia, and China don't create an atmosphere conducive to one global currency. For now it does not appear these nations trust each other enough to allow something like that because the BRICS will assume the US would control any such process and the US would not be willing to give up that kind of control to either China or Russia (or the BRICS as a group)

So. does all this mean that this will never happen? It could mean that, but there is really no way to predict the future on this. So long as the major powers don't fully trust each other and suspect that that each would want to control any sort of global currency or global central bank, it is highly improbable that we would see that unfold. The one wild card I always mention is another major global financial crisis. If we do ever get one as bad as Jim Rickards and others predict, it is hard to say what might happen. If the entire global financial system collapsed and panic were to set in, who knows what solution might be offered in that atmosphere and who knows if people would accept it? Would they still trust the existing financial institutions or blame them?

What we do know is that the idea of one global currency has been out there for a long time. It has been seriously discussed many times by credible people inside the system as we have written here on this blog. This article on Project Syndicate explains why the odds are still against it becoming a reality. All we can do here is watch events and attempt to cover what actually does happen. So far it seems like we have managed to cover the right issues in terms of what to watch for that could lead to major change.

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