babylon is burning

World needs to end risky reliance on dollar: BoE’s Carney
Reuters, Aug 24 2019

Powell and Carney at the conference, Aug 23 2019. Photo: Jonathan Crosby/Reuters

JACKSON HOLE, Wyoming – Bank of England Governor Mark Carney took aim at the dollar’s “destabilizing” role in the world economy on Friday and said central banks might need to join together to create their own replacement reserve currency. The dollar’s dominance of the global financial system increased the risks of a liquidity trap of ultra-low interest rates and weak growth, Carney told central bankers from around the world gathered in Jackson Hole, Wyoming. Carney said:

While the world economy is being reordered, the dollar remains as important as when Bretton Woods collapsed. Emerging economies have increased their share of global activity to 60% from around 45% before the financial crisis a decade ago, but the dollar is still used for at least half of international trade invoices, five times more than Pindostan’s share of world goods imports, fueling demand for Pindo assets and exposing many countries to damaging spillovers from swings in the Pindo economy. Problems in the financial system are encouraging protectionist and populist policies. Very low equilibrium interest rates have in the past coincided with wars, financial crises and abrupt changes in the banking system. As a first step to reorder the world’s financial system, countries could triple the resources of the IMF to $3T as a better alternative to countries protecting themselves by racking up enormous piles of dollar-denominated debt. While such concerted efforts can improve the functioning of the current system, ultimately a multi-polar global economy requires a new IMFS (international monetary and financial system) to realize its full potential. The best solution would be a diversified multi-polar financial system, something that could be provided by technology. Facebook’s Libra is the most high-profile proposed digital currency to date, but it faces a host of fundamental issues that it had yet to address. 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. This could dampen the domineering influence of the dollar. Even a passing acquaintance with monetary history suggests that this center won’t hold. We need to recognize the short, medium and long-term challenges this system creates for the institutional frameworks and conduct of monetary policy across the world.

Carney: dollar is too dominant and could be replaced by digital currency
Phillip Inman, Groan, Aug 23 2019

Bank of England governor Mark Carney has challenged the dollar’s position as the world’s reserve currency, arguing that it could be replaced by a global digital alternative to end a savings glut that resulted in 10 years of low inflation and ultra-low interest rates. Likening the move to the end of sterling’s command of international money markets 100 years ago, Carney said the dollar had reached a level of dominance that meant it was a barrier to a sustainable recovery. He said a new digital currency backed by a large group of nations would unlock dollar funds that governments currently hoard as an insurance policy in uncertain times. Governments stockpile dollars to insure against swings in the Pindo economy, which in recent times have intensified, leading to a significant rise in the cost of borrowing. Carney said in a speech at the gathering of central bankers from around the world in Jackson Hole, Wyoming:

A new Synthetic Hegemonic Currency (SHC) could dampen the domineering influence of the dollar on global trade. If the share of trade invoiced in it were to rise, shocks in Pindostan would have less potent spillovers through exchange rates, and trade would become less synchronised across countries. The dollar’s influence on global financial conditions could similarly decline if a financial architecture developed around the new SHC and it displaced the dollar’s dominance in credit markets. By reducing the influence of Pindostan on the global financial cycle, this would help reduce the volatility of capital flows to emerging market economies.

The Chinese currency, the renminbi (or yuan), has been cited as an alternative to the dollar along with proposed digital currencies such as Facebook’s Libra. Carney said neither was in a position to take over from the dollar, but new technologies could allow for a global digital currency to challenge the Pindo currency. Digital currencies have attracted the attention of central banks in the past year as the prospect of mobile business and consumer transactions has become more popular. Earlier this year the BoE welcomed Facebook’s Libra initiative, which was seen as a challenge to Bitcoin and other crypto-currencies. Bank officials said the initiative, which was backed by several banks, could be a useful addition to trading goods and services. A succession of central banks have criticised Libra, saying it lacks the rules and regulations to be a reliable currency. The European commission opened an anti-trust investigation into Libra earlier this week, saying it feared the private digital currency could could unfairly disadvantage rivals and be open to abuse. In what appeared to be a warmer response to Libra, Carney said:

Retail transactions are taking place increasingly online rather than on the high street, and through electronic payments over cash. The most high-profile of these has been Libra, a new payments infrastructure based on an international stablecoin fully backed by reserve assets in a basket of currencies including the dollar, the euro and the pound sterling. It could be exchanged between users on messaging platforms and with participating retailers. There are a host of fundamental issues that Libra must address, ranging from privacy to operational resilience. In addition, depending on its design, it could have substantial implications for both monetary and financial stability.

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