Is the global economy heading for a Bretton Woods for the digital currency age?
Sunday marks the 50th anniversary of what was described as a “money bomb” on the world financial system when President Richard Nixon announced that the dollar would no longer be pegged to gold, effectively tearing America out of an international monetary regime through the Bretton Woods -Agreement created.
The international monetary system was created in the 1940s amid political turmoil, the struggle against fascism, and global economic instability, say economists and historians. The main goal of the Bretton Woods Agreement was to create a monetary system that is less rigid than the gold standard while offering stability. As part of the effort, the conference laid the groundwork for the International Monetary Fund and the World Bank.
Now, five decades later, the monetary regime following the breakup of Bretton Woods on August 15, 1971, is not much different than it was before. The dollar still serves as the world’s reserve currency. But in an era of Bitcoin BTCUSD, -2.83% and crypto, and an apparent surge in stable coins pegged to fiat currencies and central bank digital currencies also known as CBDCs, a new global regime could be at hand.
“The arguments in favor of an international currency are just as strong today as they were then, but still difficult to implement,” wrote Ousmène Jacques Mandeng, director of the consulting boutique Economics Advisory Ltd, in a guest column published on Monday by the Financial Times (Paywall). Mandeng described the decoupling of gold from the dollar as “a money bomb”.
There are some similarities between the Nixon period and 2021. Inflation picked up in the 1960s, reaching nearly 6% in 1970, and world dollar reserves rose sharply. According to the Bureau of Labor Statistics, inflation has been around 5.4% for the past 12 months, up from 1.4% in 2020.
However, the share of the US dollar in global foreign exchange reserves in the fourth quarter of 2020 is at its lowest level in 25 years.
Meanwhile, the supply of stable coins, such as Tether USDTUSD, + 0.04% and circle-backed USDC digital currencies, which are usually backed by a fiat currency or other asset to hold values in place, is around 900 year-on-year % up to over $ 100 billion, the bloc reported in late May.
Cryptocurrencies like Bitcoin are not widely used as a means of payment, in part because their values are so volatile compared to the US dollar DXY, -0.55%, or other government-sponsored currencies. Since stablecoins are pegged to the dollar, many crypto enthusiasts see them as essential to encourage the use of digital currencies for everyday purchases. Meanwhile, proponents of what’s called a central bank digital currency have argued that a CBDC could function similarly to a stablecoin, but with reduced risk.
It seems that a move towards a digital regime is already underway.
Treasury Secretary Janet Yellen has already called a meeting of regulators, including Gary Gensler, chief of the Securities and Exchange Commission, to discuss stablecoins amid the rapid proliferation of digital assets and concerns over segments of the digital currency market.
Stablecoins critics say they pose significant risks to financial stability, especially after it became known that some of these dollar-pegged tokens are not 100% backed by actual US dollars, but rather a combination of riskier assets.
Kenneth Rogoff, professor of economics and public order at Harvard University, told MarketWatch in a telephone interview that he can understand why the supply of stablecoins in particular has exploded.
“Much of it is the discomfort not only the Chinese but also the Europeans have that the US controls the world’s rails [monetary] System because the dollar is so dominant, ”said Rogoff.
However, the former IMF chief economist from 2001 to 2003 said he believes there is still much to be done before a CBDC qualifies for use by central banks. Rogoff said that CBDCs need to have the same level of transparency, speed, and ease of use that the Federal Reserve currently enjoys with the existing system.
“The game changer would be if CBDCs were interoperable,” writes Barry Eichengreen, professor of economics at the University of California, Berkeley and former senior policy advisor at the International Monetary Fund, in a column for Project Syndicate published Tuesday.
For his part, Rogoff sees crypto in the broader sense not as a solution looking for a problem, but as “a problem”.
“Ransomware, tax evasion, crime. It’s the Wild West, ”he said of digital assets.
What’s on deck next week?
Following the S&P 500 Index SPX, + 0.16% and the Dow Jones Industrial Average DJIA, + 0.04%, it posted four tandem record closing prices on Friday for the first time since 2017 (the Nasdaq Composite Index COMP closed less than 0.5% versus its August 5 record closing price), investors will focus primarily on the July retail sales at 8:30 a.m. ET on Tuesday and the Federal Open Market Committee minutes due Wednesday at 2:00 p.m. for further guidance on the health of the economy and the monetary policy of the central bank to maintain political plans.
Wednesday also brings reports of home starts and building permits at 8:30 a.m., likely being followed to gain insight into the bubbling home market showing signs of cooling.
Investors can also check out a New York state manufacturing display for August, the Empire State Manufacturing Index on Monday at 8:30 a.m., a similar report for the Philadelphia Fed area on Thursday, and the usual weekly unemployment claims report at 8:30 a.m. clock
The markets will be retail-heavy next week, with giants like Walmart Inc.
WMT, + 0.32%,
Home Depot Inc.
HD, -0.81% should report on Tuesday. Target Corp., Construction company Lowes Cos.
and TJ Maxx parent TJX Cos.
should report on Wednesday. Semiconductor company Nvidia NVDA also reported on Wednesday.
Coach parent tapestry
Estee Lauder Cos. Tbsp, -0.06%,
ROST, -0.61% and Macy’s Inc. M, -1.97% report on Thursday.