Currency


“The only true currency in this bankrupt world are the moments you share with someone when you’re uncool.”

Business & Finance

Currency & Power


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We have a global economy, but we don’t have a global currency. Technology is now reaching the point where a common digital currency, enabled by near-universal mobile phone adoption, certainly makes this possible. And however far fetched a global currency may sound, recall that before the first world war, 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).

The major benefit of a global currency is that there would no longer be currency risk in international trade. In addition, no country can no longer use currency exchange as a means to make their goods cheaper on the global market and hence there would be somewhat of a level playing field. The most obvious downfall to the introduction of a global currency would be the loss of independent monetary policy to regulate national economies.

Benjamin Cohen, professor of International Political Economy at the University of California says that power is influence, and it is also the ability to do what you want without having to worry about what others want, according to Cohen. The United States dollar has been a dominant currency because the U.S. economy has dominated since World War II.  What makes the dollar attractive, according to Cohen, is the U.S. financial market. The U.S. dollar offers liquidity advantages that no other does.

Few currencies are able to meet all the demanding economic and political qualifications for internationalization. That is not pessimism but realism. Given the substantial stakes involved, the competition that is at the core of the process of internationalization is bound to be unforgiving.

Currency internationalization alters monetary geography by accentuating the hierarchical relationship among currencies, expanding the domains of a few popular moneys well beyond the jurisdictions of the countries that issue them. The outcome is produced by a sort of a Darwinian process of natural selection, driven above all by the force of competition—much like Gresham’s Law, except in reverse. Instead of “bad” money driving out “good,” as Gresham’s Law traditionally holds, the good money drives out bad. There is nothing irrational about the process. On the contrary, internationalization may be regarded as a quite natural demand response to prevailing market structures and incentives.

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Let’s recall that while under the Bretton Woods system, the U.S. dollar’s primacy was rooted in law, this has not been the case for the past 30 years: dollar usage has continued as a matter of choice. The U.S. dollar dominates the global economy, used in settling trade and investment deals but also held in reserve in vast quantities by central banks in case of a payments crisis. This demand for dollars keeps the U.S. borrowing costs lower than they otherwise would be, reinforcing the country’s economic clout and helping to pay for the world’s strongest armed forces. Its widespread acceptance is partly the consequence of the dominant position of the U.S. economy, but has also been sustained by the following factors:

  • The depth and liquidity of the United States’ financial and forex markets, which remained resilient even during the financial crisis.
  • The U.S. economy’s track record of macroeconomic stability, which bolsters confidence in the dollar’s long term purchasing power.
  • The willingness of the U.S. fiscal and monetary authorities to allow the dollar to be used in international transactions, and to generate sufficient high quality liabilities to meet international demand for assets denominated in dollars.
  • Network effects—the more a currency is used and held, the more useful it becomes, which in turn increases demand for it even more.

The U.S. dollar’s status as the leading global currency gives the U.S. immense political as well as financial clout, but that power risks being eroded — with unpredictable strategic consequences — as the Chinese renminbi and possibly other currencies assume greater prominence.

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Cohen describes what he calls a currency pyramid, which includes the U.S. dollar at the very peak.  It has universal scope and domain.  Potentially the renminbi, China’s currency (a.k.a. the yuan), which is still just a minnow, according to Cohen, but its international use is growing quite rapidly.  It reflects that China has achieved a degree of autonomy that’s almost unprecedented.

Some people would like one world currency, which would come with a great deal of power. While it is interesting to speculate about the future of the international monetary system, and the U.S. dollar’s role in it, the reality is that the current system has proved its resilience while the alternatives have not; and though change is likely over time, it will not happen overnight, or by decree.

According to Cohen, as long as we have a political system that relies on state sovereignty, we’re going to live with an imperfect monetary system and the best we can hope for is international institutions that can help smooth some of the rough edges.

For today’s international monetary system, the perfect – an unattainable single central bank and currency – should not be made the enemy of the good. Working within our existing means, it is surely possible to improve our policy tools and boost global growth and prosperity.

Business & Finance

£110 million in ONE trade!


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A sensible prediction on a seemingly obvious outcome on how the markets would react following the British referendum on European Union membership by 36-year-old hedge fund manager James Hanbury has resulted in a vast win of £110 million ($148 million), the Daily Mail reports.

The paper says that despite commissioning a private poll before the referendum which showed a Remain vote winning, Hanbury, who manages £1.1 billion for Odey Asset Management, decided to gamble on a Leave vote anyway — reasoning that there was a lot to gain and little to lose.

The vote to leave, a so-called Brexit, raised the prospect of sustained anxiety in the global economy as investors struggle to surmise what is happening. He guessed that Britain might shock the world by voting to Leave — and that the value of sterling would plunge as a result.

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Brexit hit the financial world hard, with the pound dropping to a 31 year low and billions disappearing from the FTSE after the result. His latest coup will go down in hedge fund history and is comparable to a similar move by legendary investor George Soros ahead of Black Wednesday (16 September 1992).

Soros is widely known as the man who “broke” the Bank of England in 1992, when he bet against the pound and made a reported £1.5 billion. He short-sold more than £7.6 billion in the currency — meaning he would make money if its value fell. So when the UK crashed out of the European Exchange Rate Mechanism and the pound collapsed, Soros pocketed a windfall.

Business & Finance, Science & Technology

Entering era of national digital currencies


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Imagine a world where all money is digital. Instead of carrying coins and notes in your purse, you’re keeping digital currency units in electronic wallets on phones, watches or other electronic devices. Paying at the farmer’s market, giving the kids pocket-money for lunch, settling the tab at a restaurant — all of this could happen digitally the way cash is handed over today: in real-time, irreversibly, with no additional fees, using legal tender fully backed by the faith and credit of the national treasury.

Around the world, central banks from England to China have publicly floated the notion of issuing their own national digital currencies. Conceptually, they like the idea of harnessing the upside of the digital revolution—mobile payments, in particular—while preserving the existing legal and regulatory set up. Practically, they expect significant cost savings, a reduction of operational and fraud risks in the current payments systems, and a strengthened ability to execute monetary policy.

From a consumer’s perspective, the prospect of a digital British Pound Sterling or Renminbi is still mind-boggling. Which means, of course, societies would not go completely digital overnight. Instead, central banks could start issuing digital currency units alongside notes and coins as base money and adjust the mix over time, according to uptake. Once critical usage levels are reached and network effects kick in, universal adoption could happen very quickly.

The key requirement for central banks to feel comfortable with issuing their own digital currency, and for consumers to embrace it, is ironclad integrity and security of the underlying technology. There are efforts to separate the blockchain technology from the libertarian concept of a private currency, e.g. Bitcoin, that central banks are unlikely to embrace. Such efforts to trace the exchange of digital money via a public ledger could be combined with the counterintuitive concept of creating cryptographically protected digital currency units offline and injecting them into current payments systems, much like central banks distribute notes and coins to retail financial intermediaries today.

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Blockchain would accelerate the settlement of transactions, and thereby improve the capital efficiency of making a transaction. It’s also more transparent, because any user has immediate access to all transactions on a blockchain. And it’s more efficient because it eliminates the need for intermediaries. It has the potential to redefine transactions and can change everything.

In most emerging markets and developing countries, financial inclusion is a major concern. The current formal financial system doesn’t cover the majority of working-age adult population. Smallholder farmers, self-employed households, and micro-entrepreneurs have to rely on the age-old informal financial mechanisms such as rotating savings clubs, moneylenders, and pawnbrokers. These mechanisms can be unreliable and very expensive.

For policymakers from the global south, the digitization of retail payment systems and financial services has become an important economic development priority. It offers the prospect of reaching far more people at far lower costs with the broader range of financial services they need to build resilience and capture opportunities. Wall Street is also obsessed with blockchain. JPMorgan last month announced it was launching a trial project with a blockchain startup.

The idea of a central bank-issued digital currency might well be the type of “soft infrastructure” investment that brings direct and immediate efficiency gains. But perhaps more importantly, it would also accelerate and help scale a wave of service innovations that help advance financial inclusion, stimulate economic growth, and ultimately spur social progress.

HT: Tilman Erbeck / WEF

Nature & Environment

Cash as fuel!


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Every year Hungary recycles approximately $1 billion worth of worn out forints, and converts the used currency into bricks. These bricks are sent to several charities, so they can burn them as heating fuel. The program allows the organization to cover up to a third of their annual heating costs.

Banknotes undergo a quality check at the logistics centre of the National Bank of Hungary in Budapest. Once they are taken out of circulation, the bank notes are recycled for fuel, and a few charities each year get 20-30 tonnes of paper bricks each. Banknotes are shredded and compressed into heating fuel in the shape of bricks.

As per Reuters, Hungary is the only country to recycle its worn cash for fuel each year.