What changes will digital currency bring to the global financial order?

Original title: "Ouyi OKEx Research Institute: Looking at the Future Impact of Digital Currency from the Changes of the International Monetary System"

Original source: Ouyi OKEx Research Institute

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Recently, as the domestic DC/EP began internal testing, people's attention to digital currency has increased, and all sectors of society have also launched heated discussions on this. One of the most popular views in the current market is that "digital currency can realize the mapping of numbers and power, and gain financial control in this era", which has also been sought after by a group of encrypted digital currency believers. However, is the reality really that simple? ?

Perhaps a simple case can refute the above point of view: In 2018, the Venezuelan government issued a digital currency called petro, and each Petrocoin has 1 barrel of Venezuelan crude oil as physical collateral. This has achieved the mapping of "numbers and power", but has the Venezuelan government gained the opportunity to seize financial control? No, there is even a phenomenon that residents of the country sell a large number of petro coins.

(Venezuelan petro symbol, image source: Interpretation of petro white paper)< /blockquote>

The sovereign currency of a country can play a dominant role in the international financial order, not just because of the change of the carrier of the currency can decide. Just as the reason why the U.S. dollar can become the world currency, behind it is the credit of the U.S. dollar, which is the strong comprehensive strength of the United States, which occupies an important or dominant position in the fields of international economy, politics, military, science and technology. As long as the credit of the US government remains and its comprehensive strength remains strong, the status of the US dollar as the world's leading currency will not be shaken.

So, what changes will digital currency bring to the global financial order? From the current point of view, currency digitization will become an important participant in the third anchor search of the global monetary system.

What is a "currency anchor"? Our common "anchor" is connected to the ship with an iron chain and thrown to the bottom of the water to make the ship stable on the water; and in the global currency system, we need such a "currency anchor". Guarantee the stability of currency value and realize the reduction of transaction costs in a country and the world's trade and financial transactions.

According to the current academic analysis based on the evolution of the international monetary system, the global monetary system experiences a small anchor-seeking cycle about every 40 years, and a major anchor-seeking cycle every 80 years. Every time the currency anchor collapses, it triggers severe global economic turmoil and serious political crisis, and there is an economic boom cycle of about 10-20 years after the anchor search. If we count from the collapse of the gold standard after the end of World War II, we have now reached the third currency exchange anchor period.

 

1. The establishment and collapse of the gold standard (1870-1929)

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Since the mid-19th century, major economies such as Britain, the United States, and Germany began to implement the gold standard system, and the international gold standard system was formally established. Under the gold standard, gold is the anchor of all national currencies, and the exchange rates between national currencies are determined according to the ratio of the gold content of the currencies. The existence of the gold anchor limits the fluctuation of the international exchange rate within a limited range and realizes the stability of the exchange rate and the automatic adjustment of the balance of payments. Thus, during the period 1870-1914, the world economy exhibited a high degree of exchange rate stability, low inflation and steady economic growth.

This period was also the "Golden Age" and "Industrial Age" of the American economy, and the modern United States began to rise. During this period, the U.S. economy experienced phenomenal growth: In the mid-1880s, the U.S. GNP was $11 billion, and by the end of World War I it had grown to $84 billion, an eightfold increase. On the industrial side, by the early 20th century, the combined manufacturing output of the United States exceeded that of the three countries of Great Britain, Germany, and France combined. So far, the United States has become the largest industrial country and the wealthiest country in the world.

 

(1869, Transcontinental Pacific Railroad Completed, it was rated by the British BBC as one of the seven industrial wonders of the world since the Industrial Revolution, and has made great contributions to the economic development of the United States. Source: World Digital Library, https://www.wdl.org/zh /sets/us-history/timeline/#35)

(In 1893, the Chicago World Expo was held to celebrate the 400th anniversary of Columbus's discovery of the New World. The total number of visitors reached 27.5 million, and the location was chosen on the shore of Lake Michigan. Source: World Digital Library, https://www.wdl.org/zh/sets/us-history/timeline/#40)

< p class="MsoNormal">However, with the outbreak of World War I, international trade was greatly impacted, and the gold standard began to collapse. After the end of World War I, the European economy was severely damaged. The old capitalist countries such as Britain and France changed from creditor countries before the war to debtor countries after the war, while the United States made a fortune from the war and became the largest creditor of European countries. Under such circumstances, the original gold coin standard system is difficult to restore, and countries have to adopt the gold exchange standard system to save the use of gold. Under the gold exchange standard system, bank notes in circulation in the country cannot be exchanged for gold, and only foreign currencies can be exchanged for gold.

But the good times didn’t last long. The economies of all countries have brought devastating blows. In response to the depletion of gold reserves and the speculative impact of currencies, countries have stopped gold exchange and allowed the exchange rates of their currencies to float freely. At this point, the world's major economies abandoned the gold standard.

 

2. The first anchor search: post-war global economic recovery and the establishment of the Bretton Woods system (1929-1971)

After World War II, the United States became the most powerful country in the world, with GDP accounting for 50% of the world and gold reserves accounting for 63% of the world %; on the other side of the American ocean, Europe is devastated by war and heavily in debt. In order to rebuild the international financial order, 44 allied countries around the world held a meeting in Bretton Woods, New Hampshire, USA, and made arrangements for countries on issues such as currency exchange, balance of payments adjustment, and the composition of international reserve assets. "Breton "Forest System" was formally established.

(1944 Bretton Woods conference scene, picture Source: Getty Images)

 

Under the Bretton Woods system, the U.S. dollar was pegged to gold, countries were pegged to the U.S. dollar, and the U.S. dollar became Dominant world currency. So far, the U.S. dollar has become the "nominal anchor" in the global monetary system, and has promoted the recovery and prosperity of the global economy and trade for a long time after the war. In 1950, the global export value was 62 billion U.S. dollars, and by 1973 when Bretton Woods disintegrated, it had reached 580 billion U.S. dollars, with a compound annual growth rate of 15.5%. The U.S. stock market also ushered in post-war prosperity. The index rose from 17.5 in 1950 to 116.03 in 1973, with a compound annual growth rate of 8.6%.

Source: Wind

 

With the assistance of the US "Marshall Plan" (Europe) and "Dodge Plan" (Japan), Europe (represented by Germany) and East Asia Japan's economy recovered rapidly. In the 1960s and 1970s, Japan maintained a high-speed economic growth with an average annual compound rate of more than 10%, and became a global economic power and a major exporter.

Data source: Japanese Cabinet Office

Data source: Eurostat

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The establishment of the Bretton Woods system has played a positive role in global economic growth and asset price stability in a special historical period, but there are serious flaws: under the Bretton Woods system , as the world currency, the U.S. dollar needs to continuously issue U.S. dollars to meet the needs of the world economy and trade, which requires the U.S. to maintain a long-term trade deficit; however, the U.S. dollar, as the currency anchor of the global monetary system, must maintain a stable currency value, which requires reducing the U.S. dollar This requires the U.S. to maintain a trade surplus, otherwise the U.S. dollars held by foreign countries will exceed U.S. gold reserves, which will shake investors' confidence in the free convertibility of U.S. dollars to gold. This is the famous "Triffin Dilemma."

This is indeed the case. With the recovery of the post-war economy, international trade has rebounded rapidly. While the U.S. was exporting U.S. dollars, its current account deteriorated rapidly, and U.S. external debt began to exceed its gold reserves. This shook investors’ confidence in the smooth conversion of U.S. dollars to gold, and accelerated the run on U.S. gold by various countries. According to statistics, in 1950 after the end of World War II, the United States still had 20,279 tons of gold, accounting for nearly 2/3 of the global gold reserves; by 1970, the United States had only 9,839 tons of gold left, and its gold reserves dropped by 51%.

In addition, due to the free flow of international capital after the war, the fixed exchange rate system is often attacked by international speculators for currency speculation. In May 1971, a large-scale speculation against the U.S. dollar broke out. A large number of speculative capital sold U.S. dollars and snapped up gold and European currencies. Facing pressure from central banks and speculators to run on gold, then U.S. President Nixon was forced to announce the closure of the gold exchange window, the termination of the obligation to accept gold from foreign central banks, and the decoupling of the U.S. dollar from gold. In the next two years, the UK, Switzerland, Japan and other major OECD countries successively announced the implementation of floating exchange rates or joint floating, and the international financial system entered the era of floating exchange rates, which marked the end of the Bretton Woods system, and the global monetary system began to seek anchors new cycle.

(August 15, 1971, Nixon at It was announced in front of the TV that the gold window would be closed and the gold acceptance obligation would be terminated. This event was called the "Nixon Shock". Image source: WSJ)

 

3. The Second Search for Anchors: The Great Stagflation Era and the Establishment of the Jamaica System (1972-2008)

In the 1970s After the disintegration of the Bretton Woods system in the 1990s, in order to maintain the status of the US dollar as the world currency, the US government reached an agreement with Saudi Arabia and other major oil-producing countries to use US dollars for pricing and settlement in the oil market. In return, the United States will provide military protection and sell to Saudi military weapons.

Although the US dollar has maintained its status as the world currency through oil transactions, due to the loss of the gold anchor, the world's major currencies are Falling into violent fluctuations, it has had a serious impact on the global economy and asset prices --- due to the continuous depreciation of the currency, the global commodity prices have risen, and the oil crisis has been superimposed. Throughout the 1970s, the Western capitalist camp led by the United States was Caught in the quagmire of "stagflation".

The so-called "stagflation (stagflation)", that is, stagnant inflation, refers to economic stagnation, unemployment and inflation at the same time Sustained economic boom. In traditional Keynesian economics, according to the "Phillips" curve, inflation and economic recession cannot coexist, but "Keynesianism" fails in the face of reality.

 

Data source: Wind

In 1971, after the Knicks announced the decoupling of the U.S. dollar from gold, they also announced "new economic policies" such as wage and price controls and intervention in labor negotiations. However, in 1972-1973, prices still rose by 3.2% under control conditions, and the unemployment rate remained above 5%. On the contrary, the strong price control caused the price to get out of control, and even caused a serious shortage of materials. The dissatisfied American people even launched a national boycott of meat for this reason. In 1974, on the eve of President Nixon's resignation due to the "Watergate Incident", the real GDP growth rate of the US economy was -0.5%, prices rose by 12%, and the unemployment rate was as high as 9%. Gerald Ford and Jimmy Carter, who subsequently took over the presidency of the United States, were unable to deal with the high inflation and unemployment in the country, and stepped down after only one term of office. Or indirectly affected the US presidential elections in 1976 and 1980.

(During the "oil crisis" in the United States in the 1970s, Cars lined up in front of the gas station. Photo source: https://www.douban.com/photos/photo/2020634175/)

As The famous American economist Friedman said that "inflation is a monetary phenomenon at any time and anywhere." In order to solve the problem of high inflation, Friedman advocated the implementation of a "single rule", that is, to formulate according to the expected economic growth rate. Monetary policy, which keeps the growth rate of money in line with the expected growth rate of the economy. This rule was then further developed by economists such as Mundell and evolved into a "targeted inflation system".

(Known as "the greatest Federal Reserve Chairman"---Paul Volcker)

Fed Chairman Paul Volcker, who took office in August 1979, is exactly the "single rule ", but he took a more pragmatic approach: pegging interest rates and monetary aggregates at the same time, and implementing a tough policy to curb high inflation. Starting in 1980, he tightened the money supply in just five months, consecutively The Fed Funds rate rises from 9.5% to 20% during the rate hike. Ultimately deflationary monetary policy paid off, and in July 1983 U.S. inflation fell back to 2.5%.

 

However, solving the inflation problem only achieves the internal stability of the dollar value; Stability of the external value of the currency---the stability of the exchange rate. To solve this problem, the trade deficit problem that has plagued the United States for many years must be solved.

In an open economy, external currency devaluation and internal inflation are two sides of the same coin. While Volcker was solving the domestic inflation problem, the high interest rate monetary policy led to the appreciation of the dollar, and the strong dollar made the current account of the United States deteriorate rapidly, and the trade deficit became increasingly serious.

In order to maintain the dominant position of the US dollar in international currencies, the US dollar cannot be easily devalued. So how to improve the balance of payments of the United States while maintaining the stability of the dollar in the foreign exchange market? ---Forcing other countries, especially countries with major trade surpluses with the United States, to appreciate their currencies.

As we mentioned earlier, Japan and Germany recovered rapidly after World War II and became major exporters, and became major surpluses with the United States in the 1980s country. For this reason, the finance ministers of the United States, Japan, Britain, France, and Germany signed the famous "Plaza Agreement" at the Plaza Hotel in New York in 1985, requiring the appreciation of the yen and the mark against the dollar. After signing the "Plaza Accord", Japan's exports fell sharply, coupled with the domestic loose monetary policy, triggered the stock market and real estate bubble crisis, entered the "lost thirty years", and still cannot extricate themselves, this is a later story.

(1985 Plaza Accord During the period, the finance ministers of the United States, Britain, France, Japan, and Germany took a group photo)

Although the United States and Japan and Germany reached the "Plaza Agreement", the Under the J-curve effect, the U.S. current account experienced a short-term deterioration. For this reason, in 1987, the G7 Group signed the "Louvre Agreement", requiring the G7 Group to strengthen "intervention coordination" in the foreign exchange market to ensure the stability of the US dollar.

   Data source: Wind

 

The signing of the "Plaza Agreement" and the "Floating Palace Agreement" improved the balance of payments of the United States and maintained the stability of the exchange rate of the US dollar. The US dollar achieved internally stable inflation and externally stable exchange rates , and remained largely stable throughout the 1990s. So far, the Jamaican system has been formally formed, and the global monetary system has found a new anchor.

Under this system, the currencies of major countries in the world are decoupled from gold and use floating exchange rates, and the US dollar is still used as The leading currency in the international monetary system forms a currency basket with the euro, the yen and other currencies, and has become the currency anchor of many developing countries and emerging market countries; in order to maintain the stability of currency values, major European and American economies implement currency "inflation targeting" . During this period, the global economy maintained a low level of inflation, the information technology industry also began to rise, and the economy showed a relatively high growth rate—even in the 1990s, the economic growth rate of old developed countries like the United States could reach 5%. %, the world has entered the "new economy" era.

Data source: Wind

 

3. The third anchor search: the reconstruction of the international monetary system in the post-crisis era

Although After the second anchor search, the global economy has ushered in a golden age again, but the real problem has not been resolved. Even if the United States can use force to force the currencies of Japan and Germany to appreciate, it still cannot completely solve the balance of trade balance of the United States. question. Because there is a fundamental flaw in the international monetary system dominated by the US dollar: the US dollar, as both a sovereign currency and a world currency, will plunge the global economy into an extremely unbalanced state:

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The U.S. uses cheap U.S. dollars to buy goods from developing countries, and developing countries use these U.S. dollars to buy U.S. treasury bonds, thus forming a return of U.S. dollars; Developing countries face the risk of shrinking foreign exchange assets by turning on the money printing machine. Correspondingly, the developed countries represented by the United States are also facing serious challenges: due to the high quality and low price of goods in developing countries, the local manufacturing industry in the United States has been hit, and a large number of American workers have lost their jobs. The famous "rust zone" has appeared. The financial services industry represented by Wall Street has made a lot of money in the process of globalization.

is the current global currency Serious flaws in the system have caused imbalances in the global economy and unequal distribution, triggering the current "anti-globalization" and the rise of populism---Trump's rise to power and the rise of European right-wing forces are not accidental. Mixed with deep economic reasons.

(The U.S. trade deficit in the 1980s was nothing compared to what it is now) Data source: Wind

 

The US subprime mortgage crisis broke out in 2008, and then spread to the global financial crisis. In response to the crisis, the Federal Reserve began to cut interest rates, and then injected a large amount of liquidity into the market through the quantitative easing policy. The original international monetary system was also impacted. The United States passed the crisis to the world through the US dollar. Questions from market countries and calls for rebuilding the international monetary system are also growing, and the global monetary system has begun its third anchor search.

So in the third anchor search of the global monetary system, can digital currency make some contributions?

An ideal currency anchor, its fundamental role is to reduce the transaction costs of a country and the world's trade and financial exchanges Potential ability, while the choice of a standard currency anchor generally depends on two important factors:

(1) Currency anchor its own stability. The stability here is not only to stabilize the exchange rate externally, but also to meet the expectations of internally stable inflation;

(2) It can be used as a major denomination, reserve and settlement currency. For gold, it is easy to meet this requirement due to its own attributes; for credit currency, two conditions must be met: one is that domestic trade occupies an important share in global trade, and the other is efficient and safe cross-border payment settlement Infrastructure that provides global movement of national currencies.

 

In fact, if we carefully Combing the international monetary system since modern times, we can find the importance of the above two factors in determining the currency anchor: during the gold standard period, due to the existence of the "Hume Mechanism", a country's prices and international income can be automatically balanced; in Breton Under the forest system, the value of the U.S. dollar can remain stable due to the link between the U.S. dollar and gold, and the United States has imported a large amount of U.S. dollars to Europe and East Asia through the "Marshall Plan" and "Dodge Plan", successfully making the U.S. dollar the world's main pricing and settlement system. and the reserve currency; under the Jamaica system, by virtue of the "Plaza Agreement" and "Louvre Agreement", the problem of the stability of the foreign exchange rate of the US dollar was solved, and the implementation of the "targeted inflation system" achieved the stability of domestic prices in the United States. , the establishment of the SWIFT and CHIPS systems maintained the status of the US dollar as the world currency.

From the above analysis, it can be seen that in the third anchor search process of digital currency, there may be two

(1) To achieve the stability of currency value

It is difficult for the independence of monetary policy not to be disturbed by external factors. Even Paul Volcker, a strong chairman of the Federal Reserve, who took a tough stance against high inflation during his tenure, was also affected by the There were many criticisms: President Carter publicly criticized Volcker's policy as "ossified", President Reagan hinted that Volcker would not be re-elected, some congressmen forced him to resign, news publications mocked and condemned him, and even a group of farmers drove tractors to the gate of the Federal Reserve. Former protests...; even today, we can see President Trump "threatening" the Fed on Twitter as US stocks plummeted. The digital currency provides a new possibility for future monetary policy: its "code is law", "code is law" thinking, can be applied to monetary policy, a country's central bank can create legal digital currency, for To prevent political interference and the abuse of monetary policy, the "inflation targeting system" is written into the digital currency issuance mechanism, which not only avoids the devaluation of credit currency, but also maintains the need for normal economic growth.

 

(2) Construction of cross-border payment and settlement infrastructure

The reason why the U.S. dollar can be called the main settlement currency of global trade is not only that the U.S. dollar is widely used for denomination in international trade, but also the convenient settlement system of the U.S. dollar: CHIPS and SWIFT, among which SWIFT It is a global message exchange network rather than a payment system, which mainly establishes connections for various payment systems around the world; CHIPS is a payment system dedicated to cross-border payment settlement of US dollars. However, the current international cross-border payment system is too complicated and inefficient. For example, a current wire transfer usually takes 2-5 working days to arrive, and the handling fee is usually charged at one thousandth of the remittance amount. Plus a telecommunications fee of 150 yuan; and the blockchain technology underlying the digital currency has obvious advantages in cross-border payments: it can not only increase the speed of cross-border transfers, but also reduce remittance fees. For example, the blockchain cross-border remittance service launched by an Internet company currently takes only 3 seconds for the entire remittance, and the handling fee is lower. Although blockchain technology is currently unable to achieve large-scale clearing and settlement, we can expect to use blockchain technology to reconstruct the cross-border payment system in the future.

 

 

Affected by the new crown epidemic in 2020, countries around the world Both have launched a new round of monetary easing policies, and the flood of global liquidity has brought many challenges to the global monetary system. From the perspective of historical development, the global monetary system experiences a small cycle of anchor search about every 40 years, and a major cycle of anchor search every 80 years. Each anchor search takes about 20 years. The next ten years will be a decade of rapid development of financial technology represented by digital currency. We should seize the historical opportunity and use the advantages of digital currency to promote the completion of the third anchor search of the international monetary system.

This article is from a contribution and does not represent the opinion of Rhythm BlockBeats

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