Today, everybody needs the US dollar. As the world’s reserve currency, the greenback holds outsize importance in the international economy, often serving as a unit of account when settling trades and playing a critical role in global stock markets.
However, in light of president Trump’s trade war with China, central bankers are starting to question whether the dollar should retain its prominent position. With foreign traders piling into US Treasuries as a safe haven, the dollar’s influence has grown ever stronger on the global stage, but it doesn’t have to be that way.
In remarks (pdf) last week at a central banker symposium in Jackson Hole, Wyoming, Mark Carney, governor of the Bank of England, suggested replacing the US dollar as the world’s reserve currency with a multi-currency, global alternative. “Even if the initial variants of the idea prove wanting, the concept is intriguing,” he said.
After briefly discussing Facebook’s Libra—a proposed private cryptocurrency, backed by multiple government currencies—Carney expressed optimism for something similar. Rather than a social media titan, though, he wondered whether a new global currency would “be best provided by the public sector, perhaps through a network of central bank digital currencies.”
A single global currency—what Carney called a “synthetic hegemonic currency” (SHC)—supported by the world’s central banks could reduce reliance on the US dollar, and he said, “dampen the domineering influence of the US dollar on global trade.” In theory, the SHC, like Libra, would be anchored by a basket of government currencies.
“Widespread use of the SHC in international trade and finance would imply that the currencies that compose its basket could gradually be seen as reliable reserve assets, encouraging [emerging market economies] to diversify their holdings of safe assets away from the dollar,” Carney explained. “This would lessen the downward pressure on equilibrium interest rates and help alleviate the global liquidity trap.” He alluded to the situation the US dollar faces now, where savings rates are high and interest rates are low, meaning monetary policy becomes less effective and consumer spending may stall. As a consequence, the economy risks slowing.
While Carney’s global currency idea sounds revolutionary, his proposal isn’t totally outlandish. His peers in the highest echelon of economics have considered something very similar. The SHC sounds a lot like the International Monetary Fund’s special drawing rights, a weighted basket of major currencies used as a reserve asset to promote global liquidity. Already the IMF has contemplated a digital SDR (paywall), an idea that won support from the Fung Global Institute, a Hong Kong think tank.
Still not everybody is convinced a global digital currency would be the panacea Carney described. “The desire to get out from total dominance of the U.S. currency is probably healthy,” Adam Posen, president of the Peterson Institute for International Economics, told Bloomberg. But, he added, “the idea that there’s a technological fix that will achieve it strikes me as mistaken.” Basket currencies, Posen said, haven’t worked before.
In proposing a SHC, Carney paid attention to fringe ideas inspired by the cryptocurrency community, but it should not be taken as an endorsement of blockchain-based currencies, which remain impractical for the general public. While bitcoin remains on the sidelines, a multi-currency unit—created by Facebook, the IMF, or some other organization—seems likely to become part of the financial landscape very soon, and with that, the dollar’s supremacy may eventually come to an end.
UP FOR ADOPTION
BITS AND PIECES
- Telegram will launch its Gram cryptocurrency by Oct. 31 or bust (The Verge)
- Australian who says he invented bitcoin ordered to hand over up to $5 billion (The Guardian)
- Libra Association’s crypto members remain unfazed by regulatory backlash (CoinDesk)
- Square Crypto hired another bitcoin developer, Matt Corallo (Twitter)
- Wednesday marked the five year anniversary of Hal Finney’s passing (New York Times)
- Alibaba, Tencent, five others to receive first Chinese government cryptocurrency (Forbes)
- Teaser rates come to crypto as Binance starts lending business (Bloomberg)
Please send news, tips, and synthetic hegemons to email@example.com. Today’s Private Key was written by Matthew De Silva and edited by Oliver Staley. You never master the instrument, you just strive to get better.