Just as technology has disrupted media, politics, and business, it is on the verge of disrupting America’s ability to leverage faith in its currency to pursue its broader national interests. The real challenge for the United States isn’t Facebook’s proposed Libra; it’s government-backed digital currencies like the one planned by China.
How Central-Bank Independence Dies
Since the world’s major central banks came to the global economy’s rescue in 2008, they have had more and more tasks foisted upon them, even as some politicians question their expanded role and others seek to undermine their policymaking autonomy. To escape this dilemma, monetary authorities must get back to doing what they do best.
CAMBRIDGE – With the global rise of populism and autocracy, central-bank independence is under threat, even in advanced economies. Since the 2008 financial crisis, the public has come to expect central banks to shoulder responsibilities far beyond their power and remit. At the same time, populist leaders have been pressing for more direct oversight and control over monetary policy. And while central banks have long been under assault from the right for expanding their balance sheets after the crisis, now they are under attack from the left for not expanding their balance sheets enough.
This is a remarkable shift. Not too long ago, central-bank independence was celebrated as one of the most effective policy innovations of the past four decades, owing to the dramatic fall in inflation worldwide. Recently, however, an increasing number of politicians believe that it is high time to subordinate central banks to the prerogatives of elected officials. On the right, US President Donald Trump and his advisers routinely bash the US Federal Reserve for keeping interest rates too high. On the left, British Labour leader Jeremy Corbyn has famously called for “people’s quantitative easing” to provide central-bank financing for government investment initiatives. “Modern Monetary Theory” is an idea in the same vein.
There are perfectly healthy and legitimate discussions to be had about circumscribing the role of central banks, particularly when it comes to the large-scale balance sheet operations (such as post-crisis quantitative easing) that arguably trespass into fiscal policy. However, if governments undercut central banks’ ability to set interest rates to stabilize inflation and growth, the results could be dangerous and far-reaching. If anti-inflation credibility is lost, governments may find it very difficult – if not impossible – to put the genie back in the bottle.
Worry About Debt? Not So Fast, Some Economists Say
U.S. deficits may not matter so much after all—and it might not hurt to expand them for the right reasons
Now, some prominent economists say U.S. deficits don’t matter so much after all, and it might not hurt to expand them in return for beneficial programs such as an infrastructure project.
“The levels of debt we have in the U.S. are not catastrophic,” said Olivier Blanchard, an economist at the Peterson Institute for International Economics. “We clearly can afford more debt if there is a good reason to do it. There’s no reason to panic.”
Mr. Blanchard, also a former IMF chief economist, delivered a lecture at last month’s meeting of the American Economic Association where he called on economists and policymakers to reconsider their views on debt.
The crux of Mr. Blanchard’s argument is that when the interest rate on government borrowing is below the growth rate of the economy, financing the debt should be sustainable.
Market interest rate signals can be misleading and dangerous. By blessing the U.S. with such low rates now, he says, financial markets just might be “giving us the rope with which to hang ourselves.”
Why Human Chess Survives
when Kasparov next had to defend his title against a human challenger, match organizers found it much more difficult to raise a suitably large purse than in pre-Deep Blue days. Sponsors would invariably ask “Wait, what I am paying for, isn’t the computer the real-world champion?” Fast-forward to today, and the top players cannot easily beat their cell phone.
Yet, rather than dying, chess has thrived. This is partly because the advent of computers and computer databases has made chess a truly universal sport. Once dominated by Russia, Vishy Anand of India held the title before Carlsen, and China’s Ding Liren seems on track to be the next challenger. Parents, despondent over their children’s addiction to video, are much happier to see them playing chess against a computer.
.. The advent of computers has required some adjustments in top tournaments. It helps that even the best computer programs do not play chess perfectly, because the number of possible games is greater than the number of atoms in the universe. Moreover, computers think so differently that it is not always helpful to know the computer’s favored move unless one can tediously follow reams of subsequent analysis. It is not unusual for a player to comment, “The advent of computers has required some adjustments in top tournaments. It helps that even the best computer programs do not play chess perfectly, because the number of possible games is greater than the number of atoms in the universe. Moreover, computers think so differently that it is not always helpful to know the computer’s favored move unless one can tediously follow reams of subsequent analysis. It is not unusual for a player to comment, “The computer says the best move is x, but I played the best human move.”
.. if someone is suspected of cheating, the organizers can check their moves against the choices of the top computer programs. If there is too high a correlation, the player is subject to ejection.
.. just as tied World Cup matches end with a shootout, chess championship can come down to an “Armageddon” where the games are speeded up so much that it is virtually impossible to avoid big mistakes. In the end, Carlsen convincingly prevailed in the tie-breaker, in very human fashion. But we should all celebrate.
SOUTH BEND – Facebook CEO Mark Zuckerberg was at least half right when he recently told the United States Congress that there is no US monopoly on regulation of next-generation payments technology. You may not like Facebook’s proposed Libra (pseudo) cryptocurrency, Zuckerberg implied, but a state-run Chinese digital currency with global ambitions is perhaps just a few months away, and you will probably like that even less.
Perhaps Zuckerberg went too far when he suggested that the imminent rise of a Chinese digital currency could undermine overall dollar dominance of global trade and finance – at least the large part that is legal, taxed, and regulated. In fact, US regulators have vast power not only over domestic entities but also over any financial firms that need access to dollar markets, as Europe recently learned to its dismay when the US forced European banks to comply with severe restrictions on doing business with Iran.
America’s deep and liquid markets, its strong institutions, and the rule of law will trump Chinese efforts to achieve currency dominance for a long time to come. China’s burdensome capital controls, its limits on foreign holdings of bonds and equities, and the general opaqueness of its financial system leave the renminbi many decades away from supplanting the dollar in the legal global economy.
Control over the underground economy, however, is another matter entirely. The global underground economy, consisting mainly of tax evasion and criminal activities, but also terrorism, is much smaller than the legal economy (perhaps one-fifth the size), but it is still highly consequential. The issue here is not so much whose currency is dominant, but how to minimize adverse effects. And a widely used, state-backed Chinese digital currency could certainly have an impact, especially in areas where China’s interests do not coincide with those of the West.
A US-regulated digital currency could in principle be required to be traceable by US authorities, so that if North Korea were to use it to hire Russian nuclear scientists, or Iran were to use it to finance terrorist activity, they would run a high risk of being caught, and potentially even blocked. If, however, the digital currency were run out of China, the US would have far fewer levers to pull. Western regulators could ultimately ban the use of China’s digital currency, but that wouldn’t stop it from being used in large parts of Africa, Latin America, and Asia, which in turn could engender some underground demand even in the US and Europe.
One might well ask why existing cryptocurrencies such as Bitcoin cannot already perform this function. To an extremely limited extent, they do. But regulators worldwide have huge incentives to rein in cryptocurrencies by sharply proscribing their use in banks and retail establishments. Such restrictions make existing cryptocurrencies highly illiquid and ultimately greatly limit their fundamental underlying value. Not so for a Chinese-backed digital renminbi that could readily be spent in one of the world’s two largest economies. True, when China announces its new digital currency, it will almost surely be “permissioned”: a central clearing house will in principle allow the Chinese government to see anything and everything. But the US will not.
Facebook’s Libra is also designed as a “permissioned” currency, in its case under the auspices of Swiss regulators. Cooperation with Switzerland, where the currency is officially registered, will surely be much better than with China, despite Switzerland’s long tradition of extending privacy to financial transactions, especially with regard to tax evasion.
The fact that Libra will be pegged to the US dollar will give US authorities additional insight, because (at present) all dollar clearing must go through US-regulated entities. Still, given that Libra’s functionality can largely be duplicated with existing financial instruments, it is hard to see much fundamental demand for Libra except among those aiming to evade detection. Unless tech-sponsored currencies offer genuinely superior technology – and this is not at all obvious – they should be regulated in the same way as everyone else.
If nothing else, Libra has inspired many advanced-economy central banks to accelerate their programs to provide broader-based retail digital currencies, and, one hopes, to strengthen their efforts to boost financial inclusion. But this battle is not simply over the profits from printing currency; ultimately, it is over the state’s ability to regulate and tax the economy in general, and over the US government’s ability to use the dollar’s global role to advance its international policy aims.
The US currently has financial sanctions in place against 12 countries. Turkey was briefly sanctioned last month after its invasion of Kurdish territory in Syria, though the measures were quickly lifted. For Russia, sanctions have been in place for five years.
Just as technology has disrupted media, politics, and business, it is on the verge of disrupting America’s ability to leverage faith in its currency to pursue its broader national interests. Libra is probably not the answer to the coming disruption posed by government-sanctioned digital currencies from China and elsewhere. But if not, Western governments need to start thinking about their response now, before it is too late.