In the face of the world's greatest changes unseen in a century, the game between the great powers has become increasingly fierce, with all fronts engaged in close combat, and there are also undercurrents in the currency field. Under the impact of the COVID-19 epidemic, the United States, the world's largest economy, was unexpectedly "injured" the most. Even the U.S. dollar index, which has remained strong in recent years, was not spared.
In recent months, large U.S. investment banks, former political figures, and economists have rarely collectively expressed concerns about the stability of the U.S. dollar system. Has the U.S. dollar system really been hit hard this time? Is the turning point of the international monetary system really coming?
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The COVID-19 epidemic sweeping the world has severely damaged the U.S. economy in an unexpected way, highlighting and further exacerbating the problems of the U.S. dollar system. Vulnerability.
First of all, the contradiction between the decline in the relative economic strength of the United States and the international status of the dollar has further deepened.
The day when the dollar hegemonic system was established was the peak moment of the United States’ relative economic strength. With the rapid economic recovery of Europe and Japan in the 1950s and 1960s and the rapid rise of emerging economies in the 1990s, the relative strength of the U.S. economy continued to decline. Now, the U.S. economy accounts for about 23.5% of the global economy and only 8.5% of merchandise trade, while the U.S. dollar accounts for more than 60% of global reserves.
Today’s U.S. dollar is in a double dilemma. On the one hand, the United States’ reduction in international balance of payments deficit means restricting the international supply of U.S. dollars, and global economic growth will be forced to wear a “dollar tights”;
On the other hand, if the United States allows the imbalance in the balance of payments, it will amplify the creditor's rights contradiction in the US dollar system and further distort the distribution of benefits from global economic growth. Various forecasts show that due to the impact of the epidemic, the U.S. economy may not return to pre-epidemic levels until 2023. Given that the potential growth rate of the U.S. economy will hover at a low level in the next 10 years, the above contradiction will further deepen.
Secondly, the contradiction between the economic policy dilemma of the United States and the international credibility of the US dollar continues to deepen.
The depth, breadth and high liquidity of the U.S. Treasury bond market and the superb monetary management skills of the Federal Reserve were once regarded as the cornerstone of the international credibility of the U.S. dollar. Now, these two myths may collapse simultaneously.
After the collapse of the Bretton Woods system, U.S. Treasury bonds replaced gold as the anchor of the U.S. dollar. In the following 40 years, U.S. Treasury debt remained at a moderate scale, accounting for less than 40% of gross domestic product (GDP) in most years. However, the international financial crisis that broke out in 2008 changed the development trajectory of U.S. national debt. After more than ten years of strong fiscal stimulus, the U.S. national debt has soared to 108% in 2019. The COVID-19 epidemic has undoubtedly added fuel to the fire.
Currently, the size of the U.S. national debt is close to 27 trillion U.S. dollars. Some international institutions predict that this value may reach 30 trillion U.S. dollars by the end of the year, which is close to 150% of the total U.S. economy. When Greek national debt rose to this level 10 years ago, it triggered a European debt crisis that affected many countries and dragged the entire euro zone into a dangerous moment of life and death.
At the same time, U.S. monetary policy is also in trouble. The U.S. dollar system needs the support of a strong U.S. dollar. In the past 10 years, the implementation of negative interest rates in Europe and Japan has effectively supported the strength of the U.S. dollar index. But now that the epidemic has hit hard, market expectations for the implementation of negative interest rates in the United States are rising. Although Federal Reserve Chairman Powell flatly denied that negative interest rates would be implemented, at the end of August the Federal Reserve significantly adjusted its policy framework and announced that it would maintain zero interest rates for a long time even if the inflation rate exceeded the target level and the labor market was hot. This was widely interpreted by the outside world as a response to the "inflation-based policy". To dilute the debt" default behavior.
Third, the contradiction between the "weaponization" of the U.S. dollar and the U.S. dollar's international public goods is increasingly deepening.
For a long time, the U.S. dollar, as a public item in the international monetary system, has played a relatively detached role in international political issues. However, in the past 20 years, in order to reduce the cost of sanctions and improve the efficiency of sanctions, the United States has begun to frequently use the special status of the US dollar in the international economic system to implement so-called "smart sanctions" with financial sanctions as the core.
Since then, the U.S. dollar has not only been a link to promote international economic ties, but can also be used as a trump card to cut off any country's connection with the U.S. dollar system at any time.
As of the end of 2019, 28 countries around the world were under direct US sanctions, involving nearly 2 billion people and a total economic volume of more than 15 trillion US dollars.
Has the U.S. dollar system reached a critical point of change?
Since the outbreak of the new coronavirus pneumonia, judging from the pricing, settlement proportion, global foreign exchange transaction proportion, foreign exchange reserve proportion and other data of foreign trade, foreign direct investment, commodities, derivative financial products, the U.S. dollar is still Yiqi Juechen, in some aspects the advantage has even been slightly consolidated. But if the measurement scale becomes the centrifugal force of the dollar system, the fragmentation of infrastructure and the rise of new reform forces, perhaps we will reach the opposite conclusion.
Recover some of the transferred rights. Today's dollar system originated from the Bretton Woods system, which is a cooperative international monetary system.
The reason why other countries participating in this system are willing to give up the potential functions of their currencies in international economic exchanges such as pricing, settlement, clearing, and reserves is not only because the United States’ economic strength is super strong, but also because it promises to fix prices. Convert dollars to gold at any time.
After the collapse of the Bretton Woods system, countries continued to focus on the US dollar. First, because of the unrivaled comprehensive strength of the United States at the time, and secondly, because countries continued to believe that a single-center exchange rate system could simplify exchange rate relations, Save transaction costs and improve economic efficiency.
But don’t forget that governments can take back some of the transferred rights at any time. Once these countries introduce other standards into the evaluation framework of the US dollar system, they may choose to partially or fully restore the international functions of their currencies, provided of course that they have such strength. In fact, such attempts have been ongoing in recent decades.
The fragmentation of the global payments system. Since the Belgium-based Society for Worldwide Interbank Financial Telecommunication (SWIFT) was officially included in the United States' sanctions arsenal, the U.S. dollar payment system has begun to become irreversibly fragmented.
Many countries and regions are busy upgrading and integrating intra-regional payment systems. These payment systems all use local currencies as payment methods, and all aim to facilitate cross-border payments. Once the local currency is recognized abroad, it will immediately change. It is a powerful booster for the internationalization of the local currency.
The fantasy of a technology geek. As early as the 1980s, when computer network applications were just beginning, some people proposed to establish an anonymous, distributed electronic cash system. After the international financial crisis broke out in 2008, central banks in developed countries embarked on the path of super quantitative easing, once again triggering global doubts about credit currencies.
Limited-issue decentralized cryptocurrencies represented by Bitcoin were once sought after by global investors. Due to the lack of asset backing, this type of cryptocurrency quickly became a speculative product. Some politicians in the United States disdainfully call it the "arrogant idea of ????technical geeks' monetary autonomy."
But soon, a super upgraded version of cryptocurrency emerged. In 2019, Facebook, which has 2 billion users worldwide, announced the issuance of “Libra Coin”. At first, Facebook planned to peg to a basket of currencies, but under tremendous pressure from major developed countries, in April 2020, Facebook announced the implementation of a peg to a single currency such as the U.S. dollar or the euro.
Global central bank digital currency (CBDC) experiments. Facebook’s “Libra” plan has greatly stimulated the nerves of central banks around the world. Once this type of currency gains popularity, the effectiveness of monetary policies of central banks around the world will be greatly affected. On January 21, six central banks in the Eurozone, Japan, the United Kingdom, Sweden, Switzerland, and Canada formed an alliance to jointly assess the feasibility of central bank issuance of digital currencies.
The U.S. government was slow to respond to this. Treasury Secretary Mnuchin and Federal Reserve Chairman Powell have both stated on different occasions that issuing digital currencies is not a priority for the U.S. government. But in February this year, the Fed changed its attitude and said it was accelerating relevant research. As JPMorgan Chase said in a report released in May, "No country will suffer greater losses from the potentially damaging impact of digital currencies than the United States, because this is related to the core status of the U.S. dollar."
Every corner of the US dollar system is being eroded at a visible speed, and secret wars in the currency field have already begun. What might the global monetary landscape look like in the next 10 years? I believe no one can confidently give accurate predictions. All descriptions of the future are based on past experience.
However, in the next 5 to 10 years, the world political and economic landscape may undergo accelerated or even over-speed adjustments. When the world enters the so-called "era of great power competition" that some major powers are weaving from the global governance cooperation period of the past 30 years, the rules of all aspects of international politics and economy may face rupture, adjustment and reshaping, and the same goes for currency relations.
First of all, it is difficult to maintain the dominance of the US dollar in the international monetary system. It may be replaced by several major currencies (the US dollar, the euro, the renminbi, and perhaps the Japanese yen), and even several decentralized currencies. The simultaneous rise of electronic currencies.
With the accelerated adjustment of global supply chains, value chains, and industrial chains based on the principles of "onshore" and "nearshore", and the gradual implementation of regional industrial alliance policies promoted by major economies, the global economy will Increasingly fragmenting into a collection of multiple central clusters. The adjustment of the international monetary system is bound to be consistent with the development trend of the real economy. The current unipolar and hierarchical currency structure will be replaced by a polycentric and networked currency structure.
Secondly, the currency competition landscape is accompanied by the arrival of the era of global currency innovation. Due to the lack of a central currency such as the precious metal standard and the US dollar credit standard, under the future coexistence of multiple central currencies, the determination of exchange rate relationships between major currencies will become the main contradiction in the future international monetary system.
In the context of intensified currency competition, some economies have tried to select new anchors for their currencies, such as oil, gold, carbon, or others, in order to increase the international appeal and credibility of their currencies. Certain rare but valuable resources; experiments with central bank digital currency will also accelerate, and the security, traceability and efficiency of cross-border currency payments will become a new battlefield for currency competition among countries; with the application of new technologies, future currencies will exist There may be huge changes in the form of transactions, transactions and storage.
What cannot be ignored in particular is that the electronic currencies issued by giant companies such as "Libra" are themselves backed by huge assets. Regardless of which legal currency they are nominally anchored to, as competitors to the central bank's legal currency, once they enter the monetary competitive arena, they will surely become a strong opponent that the central bank has to face in the long term. This will be the first powerful challenge faced by the central bank since the international monetary system entered the era of central bank management.
Finally, the outcome of the development of the multi-polar currency structure may not be the victory of a certain legal currency. After all, it is difficult to imagine that a country will appear again in the future with a currency like the United Kingdom in the 1870s or the early post-World War II era. The relative economic strength of the United States is at its peak. After the long-term experiment of the US dollar credit standard, the shortcomings of a country's legal currency as the central currency of the international monetary system have been clearly seen. In the future, after a period of chaotic currency competition, the international monetary system may develop towards a new and more advanced form.
In recent years, the reform of the Special Drawing Rights discussed by the International Monetary Fund may provide experience for a new reform blueprint. Perhaps, we should also revisit the famous battle over the design of the Bretton Woods system between British economist Keynes and US Treasury Assistant Secretary White more than 70 years ago.
When creating a new international currency, how to balance the obligations and responsibilities between countries with balance of payments deficits and surplus countries may still be a key issue related to the fairness and sustainability of the international monetary system.