Dollar Will Remain Currency Of World Trade In Coming Year
Yesterday, I met Prof Helene Rey of London Business School . She tried to peep into the future scenario of international monetary and financial system.
So there had been a theory of hegemonic stability around , which says that there is a country at the Centre of the international monetary and financial system plays a critical role in stabilizing the world economy.this it provides liquidity whenever the monetary system is proven in panic. And also Centre country can be an importer of last resort when the world economy be importer of last resort when the world economy is in trouble as it can borrow from the rest of the world since it issues a type of liability which is always in high demand. So till 1930 it was UK and gradually thereafter the role is taken by USA. And rightly so US also act as the World Banker. But during past decade, people started noticing that the economic centre of world started moving towards Asia. Especially China has emerged as a geopolitical force with its constant GDP growth. People started thinking that the Days of dollar hegemony are numbered. More so the emergence of private and public digital currencies may also threaten this dominance and upset the present order.
At present if you see the net risky equity and FDI, and net safe ie bonds and bank loans positions of World Banker i e USA versus the rest of the world , as issuer of the main reserve currency the USA is long risky and short safe. It also provides very large and ever growing amounts of safe assets to the rest of the world. All the external liabilities of US are in dollar but it’s substantial chunk of external assets are in foreign currencies. US earns an excess return of 2 per cent on its net foreign asset position. And US has also used this position to weaponize as we have recently seen in Iran financial crisis.
The world is now heading towards multipolar monetary order due to shrinking size of US economy and stock of dollar’s liabilities in the rest of the world and thereby dollar’s dominance as universal currency is becoming unstable.
But if we look for an alternate currency to replace dollar the possibilities are not so glorious. Take for example Euro, though it is closest substitute as the Ero area is comparable to the USA in terms of economic size and in international trade, as well as institutional development. But if you look architecture of the Euro area with 19 finance ministries backing it is incomplete, there is absence of a Euro area wide safe asset, these two factors inhibits the internationalization of Euro. Even capital markets in the Euro are still underdeveloped and segmented as compare to deep and liquid markets of dollar. But if we look possibility of Rupee as an important player , it is a far remote dream looking at the size of Indian Economy.
Next most powerful economy is Chinese , it’s trade volume is huge. So Yuan can be the next potential currency . But it has a very big problem. China still impose state control over the money market , apart from that its financial system is still underdeveloped. Use of renminbi for trade invoicing and cross border financial transactions has increased in the recent time. This is mainly because of Chinese Government’s pro-active approach who has pushed RMB trade settlement programs, RMB Off Shore Clearing Banks and RMB Swipe lines.china has also introduced an RMB denominated oil future contracts. Renminbi is now part of International Monetary Funds’s special drawing rights. It is a symbolic milestone. But again, due to government control and lack of faith of trading community in Chinese Judicial system it will be very difficult for renminbi to replace dollar in the coming time.
While the transition to a multipolar currency world may get underway, much innovation is actually happening in the realms of private, digital and cyropto currency space. Possibility of of the launch of private monies or stable coins such as Facebook’s LIBRA, possible creation of creation of public digital currencies such as Swedish e-Krona. Cryptocurrency such as bitcoin is being used as virtual currency by using a decentralized blockchain. But the problem of crypto like bitcoin do not have any fundamental value: they are not legal tenders backed by the fiscal capacity of any government nor backed by any pool of assets.
There is another possibility, issuance of digital currency by central banks. With such currency fiscal backing will not be a problem but biggest challenge will be cyber security. Any country relying exclusively on a e-currency could be vulnerable to hackers. It also poses serious challenge to stability of commercial banking system if people were allowed to deposit directly at the Crntral Bank their e-currency, short-cutting commercial banks.
If addressed properly e-currency can disrupt the present unipolar dollar hegemony. But that too is not in the near future.
So there had been a theory of hegemonic stability around , which says that there is a country at the Centre of the international monetary and financial system plays a critical role in stabilizing the world economy.this it provides liquidity whenever the monetary system is proven in panic. And also Centre country can be an importer of last resort when the world economy be importer of last resort when the world economy is in trouble as it can borrow from the rest of the world since it issues a type of liability which is always in high demand. So till 1930 it was UK and gradually thereafter the role is taken by USA. And rightly so US also act as the World Banker. But during past decade, people started noticing that the economic centre of world started moving towards Asia. Especially China has emerged as a geopolitical force with its constant GDP growth. People started thinking that the Days of dollar hegemony are numbered. More so the emergence of private and public digital currencies may also threaten this dominance and upset the present order.
At present if you see the net risky equity and FDI, and net safe ie bonds and bank loans positions of World Banker i e USA versus the rest of the world , as issuer of the main reserve currency the USA is long risky and short safe. It also provides very large and ever growing amounts of safe assets to the rest of the world. All the external liabilities of US are in dollar but it’s substantial chunk of external assets are in foreign currencies. US earns an excess return of 2 per cent on its net foreign asset position. And US has also used this position to weaponize as we have recently seen in Iran financial crisis.
The world is now heading towards multipolar monetary order due to shrinking size of US economy and stock of dollar’s liabilities in the rest of the world and thereby dollar’s dominance as universal currency is becoming unstable.
But if we look for an alternate currency to replace dollar the possibilities are not so glorious. Take for example Euro, though it is closest substitute as the Ero area is comparable to the USA in terms of economic size and in international trade, as well as institutional development. But if you look architecture of the Euro area with 19 finance ministries backing it is incomplete, there is absence of a Euro area wide safe asset, these two factors inhibits the internationalization of Euro. Even capital markets in the Euro are still underdeveloped and segmented as compare to deep and liquid markets of dollar. But if we look possibility of Rupee as an important player , it is a far remote dream looking at the size of Indian Economy.
While the transition to a multipolar currency world may get underway, much innovation is actually happening in the realms of private, digital and cyropto currency space. Possibility of of the launch of private monies or stable coins such as Facebook’s LIBRA, possible creation of creation of public digital currencies such as Swedish e-Krona. Cryptocurrency such as bitcoin is being used as virtual currency by using a decentralized blockchain. But the problem of crypto like bitcoin do not have any fundamental value: they are not legal tenders backed by the fiscal capacity of any government nor backed by any pool of assets.
There is another possibility, issuance of digital currency by central banks. With such currency fiscal backing will not be a problem but biggest challenge will be cyber security. Any country relying exclusively on a e-currency could be vulnerable to hackers. It also poses serious challenge to stability of commercial banking system if people were allowed to deposit directly at the Crntral Bank their e-currency, short-cutting commercial banks.
If addressed properly e-currency can disrupt the present unipolar dollar hegemony. But that too is not in the near future.
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