Current and former central bankers in Jackson Hole, Wyoming, weren’t sure if Mark Carney’s idea for a virtual reserve currency is the answer, but they agree that the dollar’s dominance is a problem.
The Bank of England governor used the Kansas City Federal Reserve’s annual symposium to set out a radical goal — invent a libra-like currency, based on several widely-used ones — that would eventually replace the dollar’s role in international transactions.
Carney’s provocative pitch highlighted the simultaneous struggle 8 000km away of Group of Seven leaders in France, who are trying to preserve some semblance of the international order amid President Donald Trump’s regular Twitter outbursts. Monetary policy makers at the foot of the Teton mountains spent Friday and Saturday debating how they can strengthen the world economy, with increasing doubts about how much more they can do.
Adam Posen, a former Bank of England policy maker, argued that there are still fundamental political and economic reasons why people rely on the dollar, mainly because it wins a “least-ugly” contest against, say, the euro or China’s yuan. While it’s possible to have multiple reserve currencies, countries have tried using synthetic basket currencies before and that hasn’t really worked, he said.
“The desire to get out from total dominance of the US currency is probably healthy,” said Posen, who’s now president of the Peterson Institute for International Economics in Washington. Even so, “the idea that there’s a technological fix that will achieve it strikes me as mistaken”.
Having the dollar as the dominant reserve currency works reasonably well as long as the US and the rest of the world are more or less in sync. But now that the US is doing better than most, pushing the dollar higher, smaller countries are suffering even more than they should. Trump’s tariffs on imports from China and elsewhere are adding to dollar strength as well, making matters even worse.
Furthermore, emerging-market countries increasingly pay for imports and exports in dollars, which means they can no longer rely on moves in their own currencies to absorb shocks.
Stanford University economists Arvind Krishnamurthy and Hanno Lustig presented a paper at Jackson Hole saying the dollar had become like gold. They said increased demand for treasuries, as well as tighter US monetary policy, causes the dollar to appreciate.
“Mark shone a light on something that’s important,” Krishnamurthy said in an interview. “From my work in studying the role of the dollar in the international monetary system, it does strike me that he’s right,” yet “I don’t think the central banking community has really taken it into account”.
Carney suggested there may be a solution in new technology that hasn’t been tested. Facebook’s libra is planned to be a worldwide digital currency that could lie outside the direct control of central banks, but so far most policy makers have been sceptical. Carney, who leaves the BoE next year, said the new currency he has in mind would be controlled by public authorities.
“It was a remarkable speech,” said Olli Rehn, who sits on the European Central Bank’s governing council. “It’s an idea worth pondering in a wider context of the digitisation of our monetary and banking system.”
Carney warned that the global economy risks falling into a liquidity trap in which no amount of monetary easing revives prices. With Trump escalating the US trade war with China, rising protectionism and central banks already deploying ultra-low interest rates to prop up growth, he said something needs to be done.
“Blithe acceptance of the status quo is misguided,” and dramatic steps will ultimately be needed, Carney said on Friday. His idea attempts to address an issue that’s resurfaced almost five decades after President Richard Nixon’s then-treasury chief John Connally uttered the famous words, “The dollar is our currency, but your problem.”
Stanley Fischer, the former Fed vice chairman and grandee of the central banking world, responded to Carney’s presentation by saying Trump was the bigger threat.
“We are in a system in which things are getting worse day by day,” he said. “It’s not service to anybody, at least privately, to not focus on what the problems are, and they are the behaviour of the United States.”
Fischer’s frustration was probably shared by many, not least among them Fed chairman Jerome Powell. Trump on Friday asked in a tweet whether Powell was a bigger enemy than Chinese President Xi Jinping. Dallas Fed president Robert Kaplan and Philadelphia Fed president Patrick Harker lined up to say trade policy is standing in the way of faster growth, not the level of interest rates, as Trump has contended for over a year.
Carney’s sweeping proposal could prove to be just one of many as central bankers rethink the basics of their field.
“It’s always worth looking into different issues and exploring,” said Kristin Forbes, an economist at the Massachusetts Institute of Technology and former BoE policy maker. “But it feels like we’re far from any sort of viable solution just now, we’re just starting the conversation.” — Reported by Brian Swint and Matthew Boesler, with assistance from Rich Miller, (c) 2019 Bloomberg LP