What future for international monetary system & financial globalization post #COVID19?
@ArminHaas3 @JoeRini6 & I developed 4 scenarios. Out now in JOIE
Factors: Will @federalreserve swap lines hold in crisis? Will G-20 states cooperate or compete?
cambridge.org/core/journals/…
1/n
@ArminHaas3 @JoeRini6 & I developed 4 scenarios. Out now in JOIE
Factors: Will @federalreserve swap lines hold in crisis? Will G-20 states cooperate or compete?
cambridge.org/core/journals/…
1/n
Today’s IMS is “Offshore US-Dollar System”, composed of “monetary areas”. It is global & hierarchical. The USD monetary area is in apex. Monetary areas with unlimited USD swap lines are 1st layer periphery. More layers to follow below, here BRICS
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Core features of Offshore USD System: offshore creation of key currencies (esp USD @i_aldasoro), shadow money creation in main areas (@danielagabor @morganricks)
We have developed a visual conceptual framework to go beyond triple coincidence
@StefanAvdjiev @HyungSongShin
3/n
We have developed a visual conceptual framework to go beyond triple coincidence
@StefanAvdjiev @HyungSongShin
3/n
How did we get the Offshore USD System?
Post-WW2 Bretton Woods System (BWS) has USD pegged to gold & is reserve currency for other monetary jurisdictions
No offshore or shadow money at the start. State-centered system, but…
4/n
Post-WW2 Bretton Woods System (BWS) has USD pegged to gold & is reserve currency for other monetary jurisdictions
No offshore or shadow money at the start. State-centered system, but…
4/n
…1950s: offshore USD creation emerges via Eurodollar market
70s: BWS collapses, Offshore USD System takes over as private market-based alternative
G-10 central bankers manage transition at BIS. Don’t regulate Eurodollar market in 72/73 & give implicit LOLR support in 74
5/n
70s: BWS collapses, Offshore USD System takes over as private market-based alternative
G-10 central bankers manage transition at BIS. Don’t regulate Eurodollar market in 72/73 & give implicit LOLR support in 74
5/n
Shadow banking emerges in parallel. First creates USD shadow money onshore, from 80s offshore
System crashes in 2007-9, run on offshore and shadow money. Backstopped by Fed & US treasury
2010s big innovation: C6 swap network as ultimate defense for Offshore USD System
6/n
System crashes in 2007-9, run on offshore and shadow money. Backstopped by Fed & US treasury
2010s big innovation: C6 swap network as ultimate defense for Offshore USD System
6/n
But what future for the system? Does it expand along same evolutionary trajectory or deviates?
We see 2 bifurcations points: Whether Fed swap lines contain crises in Offshore USD System and defend US in apex. And whether the rest of the world plays along or competes.
7/n
We see 2 bifurcations points: Whether Fed swap lines contain crises in Offshore USD System and defend US in apex. And whether the rest of the world plays along or competes.
7/n
#COVID19 puts us at bifurcation point. World economy on hold. Global supply chains implode, payment chains default
Non-US institutions are USD deficit agents & turned to the Fed for emergency offshore USD liquidity
The world is on lockdown, cataclysm is nigh. What next?
8/n
Non-US institutions are USD deficit agents & turned to the Fed for emergency offshore USD liquidity
The world is on lockdown, cataclysm is nigh. What next?
8/n
Trajectory 1: Continued USD hegemony. The swap network holds. Offshore USD creation & shadow banking soar after lockdown. The USD monetary area is uncontested. Other monetary jurisdictions subordinate to USD system.
9/n
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This is the track we’re on right now. Fed expands swap network from C6 to C15. FIMA Repo Facility gives de facto swap line to monetary jurisdictions in 2nd layer periphery, esp. PBOC @bradsetser @PMehrling @daniel_mcdowell @adam_tooze @gilliantett
10/n
10/n
Trajectory 2: Competing monetary blocs. Swap network holds but de-globalization trend remains & gets affirmed. Regional hierarchical blocs emerge with apex & periphery. Sharply reduced supply & payment chains between blocs. Monetary regionalization, not globalization.
11/n
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Likely result of America First doctrine of @RealDonaldTrump. Uses 2nd term for more international disintegration. China uses head-start in end of lockdown. Scenario assumes Eurozone does not fall apart
#Eurogroup
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#Eurogroup
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Assumption: US swap network fails but cushioned by swift collective action (think G-20 & technocratic puzzling of central banks)
Eurozone transformed. ECB subordinated to BIS. EUR kept for clearing but national currencies re-established w/ fixed & adjustable rates
14/n
Eurozone transformed. ECB subordinated to BIS. EUR kept for clearing but national currencies re-established w/ fixed & adjustable rates
14/n
Trajectory 4: Int Monetary Anarchy. Swap network fails, no coordinated int response. (Think 1932, UK goes off gold standard w/o replacement)
That’s a true non-system. Private int payment infrastructure gone, no new mechanism. Each country muddles through w/ own approach
15/n
That’s a true non-system. Private int payment infrastructure gone, no new mechanism. Each country muddles through w/ own approach
15/n
Dystopia for some, utopia for others. Breakdown of global order, end of US hegemony. Phase of monetary experimentation #Cryptosystem can come true in some countries
@izakaminska
Destruction of wealth & economic capacity. Likely transition stage until new system is found
16/n
@izakaminska
Destruction of wealth & economic capacity. Likely transition stage until new system is found
16/n
Disclaimer: We don’t attach probability or value-judgement to any trajectory. No institutional blueprints. Just extrapolating trends.
Research funded by @EUHorizon2020, @DAAD, @DFG. No conflict of interest.
@IASS_Potsdam @GDPC_BU @GDPC_BU @HarvardWCFIA @CITYPERC
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Research funded by @EUHorizon2020, @DAAD, @DFG. No conflict of interest.
@IASS_Potsdam @GDPC_BU @GDPC_BU @HarvardWCFIA @CITYPERC
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