The Daily Peg
Barry Eichengreen offers a helping hand to those frustrated with dollar hegemony and seeking a workaround. Meanwhile, Russia suffers a yuan squeeze.
Editorial hello
Apologies for the delay, but there’s been a lot going on.
In terms of monetary system developments… Breugel has been thinking long and hard this week about what global imbalances signify for the world amid escalating geopolitical instability and how best to deal with them.
In a session on Tuesday, Breugel director Jeromin Zerrelmeyer, noted that if these imbalances persist, the world will have to live with growing exposure to the risk that the US could suffer a sudden stop on financing. This is all the harder to manage in the context of growing economic nationalism, i.e. a scenario where countries stop collaborating.
Adding further pressure is that the global financial architecture has shifted since the global financial crisis. It is now dominated by private-sector-driven capital flows intermediated by non-bank financial institutions, not sovereigns, which are more risk-sensitive, less regulated, and more opaque, amplifying the responsiveness of markets to changes in sentiment. [Just ask Liz Truss!']
Breugel’s Zsolt Darvas, meanwhile, questioned whether the imbalances arise from the deficit nation side at all. He highlighted that China has been promising to rebalance for two decades, but its consumption as a share of GDP is still the same as it was in 2005. Meanwhile, the real effective exchange rate of the renminbi has depreciated by 16% in four years under a background of strongly increasing surpluses, implying some degree of currency manipulation.
The panel also included former IMFer Tamim Bayoumi, who argued the persistence of deficits in countries like the US and UK over decades, and corresponding surpluses elsewhere, reflected the fact that these economies have highly developed, market-based financial systems that continuously create attractive assets, drawing in global capital inflows and that these inflows appreciate exchange rates and asset prices, increase domestic wealth, and reduce savings, thereby sustaining external deficits independently of fiscal policy considerations.
In other words, it might not be the fault of China or the deficit nations. Just blame the increasingly creative banking community and their offshore operations.
What’s this got to do with stablecoins? Well, if the real force behind the global imbalance and financial instability problem is the gunboat diplomacy of private-sector interests who patrol international liquidity highways… then challenging them with an armada of stablecoins isn’t a bad option. At the very least, it deprives them of interest.
Enjoy the rest of the day!
