Yesterday, I had the pleasure of joining a virtual panel sponsored by the Official Monetary and Financial Institutions Forum (OMFIF), is think tank covering central banking, economic policy and public investment.
I joined Robert Dohner, former Deputy Assistant Secretary of the US Department of the Treasury (2005-18), Scott Kennedy, Senior Adviser and Trustee Chair in Chinese Business and Economics at the Center for Strategic and International Studies, and the moderator, Mark Sobel, former Treasury Deputy Assistant Secretary for international monetary and financial policy between 2000 and early 2015. The proceedings are available here.
The future of global multilateralism is increasingly under threat, exacerbated by Covid-19 lockdown policies. Many questions have been raised over the international economic system, built by the US and its allies, and the role of today’s global powers in reshaping it for the next century. This panel discusses some of the major themes facing the global economy, in particular the international role of the Federal Reserve, US-China relations and the future of the dollar in maintaining global stability.
Mark Sobel’s views on the RMB vs. US dollar can be seen in this International Economy forum, while Robert Dohner discusses the Fed as the world’s indispensable central bank. Scott Kennedy tackles decoupling (or not) here.
The dollar is the main reserve currency in part because the U.S. has had the dominant economy and dollar assets are perceived to provide greater security that assets denominated in other currencies. Liquidity, rule of law and the like.
There is, however, a requirement of reserve currency status that gets less attention is that sufficient assets in that currency must be available to be held in reserve – this is most easily accomplished if the reserve currency country runs a large current account deficit, as the U.S. does. It is unlikely that the euro will overtake the dollar as a reserve currency under the current policy mix in the EU. Same can be said of the yuan.
It is possible to create a payment system like SWIFT that is not dominated by the U.S. One can imagine a number of siloed payment systems created to reduce U.S. political leverage. China is busy trying to create something like that. European governments, angry at the Trump administration’s behavior regarding Iran, want a way to reduce U.S. financial leverage, too.
Reserve currency status and payments have long gone hand-in-hand, but they are separate issues. Related, but separate. If China wants the U.S. to have less leverage and Europe wants the U.S. to have less leverage, odds are, the U.S. will have less leverage. Europe also wants to limit Chinese leverage, which certainly complicates matters.
Having a batch siloed payment systems would create problems at the best of times, and might badly gum up the works in times of trouble.
The problem is, it forces higher and higher debt to keep the dollar “stable” as the reserve currency which causes financial speculation gone awry. Eventually when the US is no longer the reserve currency, the economy will implode as everybody defaults sending real interest rates spiking higher. Destroying just about every debt based business in the process.
This is the problem with capitalism in a nutshell. It was a science driven revolution because the rise of science drove merchants to peddle these new techs in a way that created the spectacle of “growth”, but this was only done due to the low hanging fruit in the warehouse. With that fruit evaporated by WWI, the only thing left was consumption markets. By 2000 that was finished in terms of growth. Now the only thing that can power capitalism is debt. The ability to take tech into growth is no longer financially possible and growth without huge debt sums. This is what keeps Libertarians up at night, where the reality is, modern monetary policy exists not because of crony capitalism, but because capitalism has no other way of surviving. If the Markets senses overpopulation and excessive growth, compared to potential, it will demand contraction, famine and death. People will protect themselves from the culling. Its just nature.
Well gosh! That is a dystopian view of things.
macroduck,
Well, the EU economy is larger than the US one, and I think will still be so even with the UK gone. I am not sure about just the eurozone one, which is the key to currncy issues, but it is certainly about the same size. A lot of this is inertia. The UK pound remained the world’s most important currency long after the US and Germany had surpassed it in GDP, still the case even after WW I, and it continues to play a role even now, if way reduced.
The EU has created a facilityi to get around SWIFT for making payments to Iran, but so far it has not taken off. There has been little use of it by China (or Russia, who deals with Iran I think mostly by barter deals). Only small firms use it as the US threatens any firm using it with not being able to operate in the US.
My point about the likelihood of the euro gaining a larger role as a reserve currency had to do with its current account balance, not its economic size. The Eurozone has run a current account surplus consistently since 2012. That means the Eurozone, on net, absorbs foreign assets. That makes it hard for the Eurozone to provide a net increase in assets to foreign reserve accounts. The size of the economy is a consideration, as is financial stability (oops), but as a practical matter, the Eurozone’s current account surplus limits its role as a producer of reserve assets.
Excellent point I completely agree with, macroduck. However, the way this works is that if a currency becomes the major international reserve and used-for-trade currency, then this pushes up its value, kind of like the resource curse phenomenon, so one ends up running chronic current account deficits. That the US has run such deficits basically for closing on half a century while the EU nations have not is the absolute sign of this. If the euro were to replace the USD, then the roles would reverse, and the EU would run chronic current account deficits while the US would become much more balanced. Of course, shifting from one to the other is kind of like the old chicken-egg problem, which goes first?
And, no, neither the yuan/rmb or the Japanese yen looks to be a serious alternative to the USD, at least at this time, for many reasons.
The linkages of causality are clear in that model, but I’m not convinced the model is appropriate in the absence of floating currency regimes all around. In any other FX regime, countries may not have the ability to change global reserve balances at will. You buy my assets, I respond by buying yours to maintain my FX target, and the net is unchanged while gross levels rise.
From a flow of funds perspective, national saving rates play a large role in determining current account and FX behavior. Reserve accumulation is a policy aimed at raising the national saving rate. The U.S. has no active policy to manipulate the saving rate, but does have a fiscal policy which tends to drive down saving, all else equal. The Eurozone demands fiscal policy which tends to drive up saving. That policy is growing more flexible now, but may not remain so, given the founding law of the EMU. That makes a very much increased global reserve role for the euro difficult.
Reserve policy has played a large role in driving FX performance since the Asian financial crisis, because a number of countries with non-floating currencies engaged in an historically large accumulation of reserves. That made reserve policy action an important factor in driving saving rates. Japan had done something similar in earlier decades. That period of accumulation is now mostly over, which is to say, policy is no longer as important in driving national saving. Other factors, including household spending and saving behavior, fiscal policy and corporate borrowing and saving, now play a larger role in driving current accounts and FX rates.
As long as the U.S. is a net seller of assets to the rest of the world, while Europe is a net buyer, the natural role for the euro as a reserve currency is limited. The is one circumstance which might change that, I suppose. If global reserve holdings fell to a level which fit better with available EMU sovereign debt (I’m assuming reserve authorities will continue to prefer sovereign-backed assets), the euro could play a larger role. I doubt large sales of reserve assets are likely outside a balance of payments crisis, but I could be wrong.
I have a lot of a affection to China, and a deep affection to certain things and certain people there. People I no longer have contact with but still think about. Arguably the best times of my life. It’s an intense feeling when you are alone (yes, even as an adult male) and you go to a country that is the polar opposite in some ways to your own culture. And 7 years is a long time, if I live to be 100, that’s 7% of my life. If I live to age 75 that’s 9% of my life. I never came back to see my parents or anyone back in America during all that time, it’s highly unusual. The thing that bothers me most about China (in a big picture way, excluding my personal things) is that they are regressing again politically. Bullying India. Bullying Australia. Doing the exact same things they claim vexes them the most about foreigners. Xi Jinping isn’t 1/200th of the leader Deng Xiaoping was. And the only two leaders off the top of my head I can think of that I respect is Deng and Zhao Ziyang. I remember a lot of my Chinese friends used to rave about Bo Xilai, but his reputation came crashing down as well. Which did mildly sadden me, or maybe disappoint me is a better way to say it.
Chinese government ministers think that by destroying the system they have in Hong Kong they can just turn it into another Shanghai or Shenzhen. And that is exactly what they will do. That is Beijing officials’ whole point of ravaging Hong Kong, isn’t it?? Turn it into just another large Chinese city where bureaucrats abscond with other people’s efforts. A place where smart, hungry, aspirational Chinese from rural areas will have to play 2nd fiddle to lazy city raised “little emperors” because you don’t have the treasured “residency card” for that city. It’s sad to watch when you know it’s an inexorable event, and people’s souls and vigor for life get sucked up in the process.
But America is regressing as well. We have a man who has federal goons (with US military generals chaperoning him) beat people for congregating near a Catholic Church near the White House so he can hold up a Bible he never reads like a 6 year old boy doing “show and tell”. If Americans keep voting in an illiterate manner we will be 2030 Hong Kong in the blink of an eye— the only difference being—under Caucasian leadership.
Moses,
I applaud your serious and informed commentary on the Chinese situation. I believe that I have on several occasions in the past praised you for your deep and intimate knowledge of China.
My only minor correction to your post is that “the Presidents; church,” St.. John’s across from the White House, is Episcopalian, not Catholic.
I don’t hold up a billboard in every comment, but if you read this blog regular, you known the state I am in. The “Rt” number is very high here, right now, compared to most states. I emailed two of my state’s better journalists. Telling them about “Rt” or “R-Naught”, whatever you prefer. And I very subtly (nearly sheepishly) asked if they might not post a story on “Rt” or at a bare minimum quote “Rt” in their social media—because they never mention it—even giving them the free website by the Instagram guys. One of them seemed deeply confused if they couldn’t get it from the state’s health department site, which has made multiple errors and had delays in daily data blamed on “technical issues” which they never explained what those “technical issues” were which happened to coincide time wise on dates when the cases and death numbers had risen dramatically. So apparently it’s much harder for the state health department to add up say 12 deaths vs 3??? Anyways, after telling them it might be useful, educational, and beneficial as an educational “nudge” for people to wear masks BOTH journalists seemingly dismissed my suggestion, as if the number “Rt” had no bigger relation to COVID-19 than the temperature of their backyard swimming pool.
Here is my main question—this annoys the hell out of me—am I being zany or bizarre for letting this annoy the F*** out of me??? I can get the “Rt” number on my own, yeah–but why not regularly update the citizens on a number that is a very good leading indicator on transmission of the virus—and maybe even deaths?? Why would you become a journalist and then transcribe death/cases/hospitalizations from a dysfunctional state health department like some Down syndrome secretary—and not want to report the “Rt”/R-Naught number?!?!?! Why would you become a journalist?? Donuts and Starbucks and pretentious laughs with other idiot reporters who can only copy-paste state agency data??? Why do the job if you only care to copy/paste state agency numbers and say “I’m a journalist??” Why?? Why not just be a G*ddamned beekeeper?? I’d really like to know.
Moses,
I’m guessing you are looking at https://rt.live/ ?
Seems an easy resource for reporters. Seems lo lend itself to the easy creation of a narrative.
Sadly, most reporters are not encouraged to introduce new ideas. “The Atlantic”, “Washington Monthly” and sometimes the big newspapers, along with internet journalism, are the likely sources of new narrative. The rest need an already current narrative to exploit. Dean Baker fights against existing narratives all the time with what seems to be little effect.
Oh, and by the way…YEESH!
I’m moving from NY (former Covid hell now turned green (Rt below 1) to Tennessee, where the Rt is red (above 1) and rising. Not my smartest decision.
I’m sure there’s some very solid reasons behind your move. But in a general way I agree, Tennessee is not as good. There are some very very beautiful natural scenic areas there, what do they call it, “blue grass” or something?? Obviously not the same but think “Upper State” New York here, so it might not be too bad. I feel confident you’ll navigate it. I’ve spent most of my life in the south, and was a semi truck driver for a short stint which has many southerners in it. But I still feel I am very much to my core Midwestern. The thing I think about southerners, again speaking in a general way, a large contingent of them are dumb as a rock—but they also can be extremely kind, and even loyal, when they want to be, So hopefully you’ll get more of the latter flavor than the former.
I wasn’t sure which of Menzie and Jim’s threads to put this under. I almost put it under the most recent thread as I thought it would reach more eyeballs that way, but then thought maybe this is suitable under a China-based theme since China used to be our biggest export market for soybeans, and donald trump decided it’s a horrible idea to give U.S. farmers higher demand for their products.
https://www.youtube.com/watch?v=_3q1G9OF3o4
I can strongly testify the video has no vulgarity. Whether the price point predictions are accurate I leave to Menzie and people a little sharper than me. I’ve found these to be bent towards the positive end, but who knows.