Monday, March 1, 2021

Can Digital Yuan Challenge US Dollar's Dominance in International Finance?

China's central bank is testing its digital currency in several major Chinese cities. The chairman of US Federal Reserve has recently confirmed that the US Central Bank is working on digital dollar. The State Bank of Pakistan announced in 2019 that it was developing a digital currency. It seems that the popularity of Bitcoin has triggered serious worries of loss of control of the official financial systems among the central bankers around the world. China's substantial lead in digital currency could put it far ahead of the US in the future of global payments and financial settlement. It could eventually displace the US dollar and provide China with the immense global financial power that the US currently enjoys. 

Digital Yuan


Central Bank Digital Currency (CBDC):

What Is a Central Bank Digital Currency (CBDC)?  Investopedia defines it as a digital currency that "uses a blockchain-based token to represent the digital form of a fiat currency of a particular nation (or region)". A CBDC is centralized; it is issued and regulated by the  country's Central Bank. Unlike decentralized cryptocurrencies like Bitcoin, a CBDC would be centralized and regulated by a country's monetary authority.  


Motivations for such currencies are many, but the key one is to maintain control of the national and global finance. Another worry is that the use of unregulated digital currencies like Bitcoin could enable serious domestic and international crimes. It could also make tax evasion easier and hurt governments' ability to support public expenditure on education, healthcare, physical infrastructure, public safety, national defense and other priorities. 

Digital Yuan:

The People’s Bank of China, the Chinese Central Bank, is testing its e-yuan digital currency in Shanghai, Chengdu and other major cities. It has filed more than 100 patent applications for its digital currency. Reports indicate that the experiments are going smoothly, and soon people will have the option of downloading a government-issued digital wallet. Unlike commercial payment processors such as WeChat Pay and Alipay, the official Chinese version will be equivalent to an account at the central bank with the same guarantee as hard cash, according to The Economist magazine. 

China is far ahead of of the rest of the world, including the United States in the development of a central bank-backed digital currency (CBDC). This could put it far ahead in the future of global payments and financial settlement. It could eventually displace the dollar and provide China with the immense global financial power that the US currently enjoys. 

China has set up a partnership with SWIFT, the Society for Worldwide Interbank Financial Telecommunications, that manages the global system for cross-border payments, through its digital currency research institute and clearing center.  SWIFT is a major vehicle for the United States to enforce its unilateral sanctions on countries like Iran, North Korea and Venezuela. China offers CIPS, cross-border interbank payment system, as an alternative to SWIFT. CIPS has only about 80 member banks worldwide compared to over 11,000 banks using SWIFT. 

Digital Dollar: 

US Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell have confirmed last week that they are working on digital dollar as a high-priority project. 

US Treasury Secretary Janel Yellen has been quoted by the media as saying: “I gather that people at the Federal Reserve Bank of Boston are working with researchers at MIT to study the properties of it. We do have a problem with financial inclusion. Too many Americans really don’t have access to easy payment systems and bank accounts. This is something that a digital dollar, a central bank digital currency, could help with. I think it could result in faster, safer and cheaper payments.”  

Digital Rupee: 

A top official of the State Bank of Pakistan, the nation's central bank, announced in April 2019 that the institution aims to issue a digital currency (Central Bank Digital Currency or CBDC) by 2025, according to media reports.   Speaking at the launch of regulations of Electronic Money Institutions (EMIs), central bank officials said that EMIs will be non-bank entities to be licensed by the central bank to issue e-money for the purpose of digital payments. Pakistan's finance minister Asad Umar and the central bankers said they are targeting Pakistan's economy to go fully digital by 2030.

More recently, the State Bank of Pakistan launched Raast, a digital payment system.  It is essentially a pipe that is intended to connect government and financial institutions with consumers and merchants with each other to process payments instantly at very low cost. Raast will be boosted by Pakistan government's decision to use it to pay salaries, pensions and pay welfare recipients under Benazir Income Support and Ehsaas Emergency Cash programs. 

Raast digital payment infrastructure represents a great leap forward for the use of financial technology (FinTech) and financial inclusion in the  country.  It will also promote e-commerce in Pakistan. Undocumented economy poses a serious threat to the country because it creates opportunities for criminal activities and tax evasion.  Raast is part of the government's effort to modernize payment systems and document the nation's cash-based informal economy. 

America's Global Financial Power: 

There's a common perception that the United State is abusing its extraordinary financial power to arbitrarily punish countries through its unilateral financial sanctions. This power stems mainly from the fact that the US dollar is the main international reserve and trade currency. It allows US to control multi-lateral financial institutions like SWIFT, World Bank, IMF and FATF. Many countries, including major US allies in Europe, are now looking to find alternatives to SWIFT. This has been specially true since former US President Donald Trump existed the JCPOA (Joint Comprehensive Plan of Action) agreed among the 5 permanent members of the UN Security Council (P5) plus Germany. Here's an excerpt of a recent New York op ed by Peter Beinart: 

"By deluding themselves about the extent of America’s might, they are depleting it. A key source of America’s power is the dollar, which serves as the reserve currency for much of the globe. It’s because so many foreign banks and businesses conduct their international transactions in dollars that America’s secondary sanctions scare them so much. But the more Washington wields the dollar to bully non-Americans into participating in our sieges, the greater their incentive to find an alternative to the dollar. The search for a substitute is already accelerating. And the fewer dollars non-Americans want, the harder Americans will find it to keep living beyond their means."

 
Summary:

Central Bank Digital Currencies (CDBDs) are gaining momentum with the talk of digital yuan and digital dollar. Motivations for such currencies are many, but the key one is to maintain control of the national and global trade and financial systems. If successful, these new currencies and associated payment systems could challenge the global financial power of the United States and fundamentally transform banking as we know it. 

15 comments:

Z Basha said...

We should peg PKR to Digital Yuan. So that trade and development moves in tandem with China. Team IK should also push for full convertibility of PKR with RMB.

Riaz Haq said...

#China Charges Ahead With a National #Digital Currency. Some economists said China’s digital currency would also make it easier for the renminbi to compete with the #US dollar as a global #currency because it can move internationally with fewer barriers. https://www.nytimes.com/2021/03/01/technology/china-national-digital-currency.html?smid=tw-share


The electronic Chinese yuan is now being tested in cities such as Shenzhen, Shanghai and Beijing. No other major power is as far along with a homegrown digital currency.

Annabelle Huang recently won a government lottery to try China’s latest economics experiment: a national digital currency.

After joining the lottery through the social media app WeChat, Ms. Huang, 28, a business strategist in Shenzhen, received a digital envelope with 200 electronic Chinese yuan, or eCNY, worth around $30. To spend it, she went to a convenience store near her office and picked out some nuts and yogurt. Then she pulled up a QR code for the digital currency from inside her bank app, which the store scanned for payment.

“The journey of how you pay, it’s very similar” to that of other Chinese payments apps, Ms. Huang said of the eCNY experience, though she added that it wasn’t quite as smooth.

China has charged ahead with a bold effort to remake the way that government-backed money works, rolling out its own digital currency with different qualities than cash or digital deposits. The country’s central bank, which began testing eCNY last year in four cities, recently expanded those trials to bigger cities such as Beijing and Shanghai, according to government presentations.

The effort is one of several by central banks around the world to try new forms of digital money that can move faster and give even the most disadvantaged people access to online financial tools. Many countries have taken action as cryptocurrencies such as Bitcoin, which has recently soared in value, have become more popular.

But while Bitcoin was designed to be decentralized so that no company or government could control it, digital currencies created by central banks give governments more of a financial grip. These currencies can enable direct handouts of money that expire if not used by a particular date and can make it easier for governments to track financial transactions to stamp out tax evasion and crack down on dissidents.

Over the last 12 months, more than 60 countries have experimented with national digital currencies, up from just over 40 a year earlier, according to the Bank for International Settlements. The countries include Sweden, which is conducting real-world trials of a digital krona, and the Bahamas, which has made a digital currency, the Sand Dollar, available to all citizens.

In contrast, the United States has moved slowly and done just basic research. At a New York Times event last week, Treasury Secretary Janet L. Yellen indicated that might change when she said an American digital currency was “absolutely worth looking at” because it “could result in faster, safer and cheaper payments.”

Riaz Haq said...

#China, #Pakistan reiterate commitment to #infrastructure development plan on the 70th anniversary of diplomatic ties & strong mutual friendship. So far, 46 of 70 planned #CPEC projects have been completed, with a combined investment of US$25.4 billion. https://www.scmp.com/news/china/diplomacy/article/3123925/china-pakistan-reiterate-commitment-infrastructure-development?utm_source=Twitter&utm_medium=share_widget&utm_campaign=3123925

China and Pakistan should continue to support their multibillion-dollar infrastructure development programme, Chinese Foreign Minister Wang Yi said on Tuesday, despite the scheme becoming a focus for regional tensions and concerns about its financial viability.
“We must persist in creating a mutually beneficial and win-win situation,” the foreign ministry quoted Wang as saying during a video chat with his Pakistani counterpart, Makhdoom Shah Mahmood Qureshi. The call was made to mark the 70th anniversary of the countries establishing diplomatic relations.
“The two sides should firmly promote the construction of the China-Pakistan Economic Corridor [CPEC], creating new growth points in areas including industry, agriculture, science and technology, people’s livelihoods and third-party cooperation, further enhancing Pakistan’s sustainable development capability,” Wang said.

Launched in 2013, the CPEC is an offshoot of the Belt and Road Initiative – Chinese President Xi Jinping’s pet project to boost trade and infrastructure links across Asia and beyond – and comprises a network of roads, railways, ports, power plants, oil and gas pipelines and optical fibre cables.

Though often valued at US$62 billion, only about US$25 billion worth of CPEC projects have so far been developed.
Wang said that 46 of 70 planned CPEC projects had been completed, with a combined investment of US$25.4 billion. The scheme had achieved “satisfactory results” and created job opportunities in Pakistan, he said

Qureshi said Pakistan fully supported China’s belt and road plan and described the CPEC as a prime example of its “high-quality development”, according to a report by Chinese Communist Party mouthpiece People’s Daily.


----------

The CPEC has strategic significance for China as it provides an alternative route for importing oil and gas from the Middle East. But Delhi is worried that Gwadar Port – a CPEC project on Pakistan’s Arabian Sea coast – will be used as a base for the Chinese navy.
Wang said China and Pakistan should expand their strategic partnership and uphold multilateralism.
“We should firmly hold that all countries have equal status regardless of their size while opposing hegemonism and power politics,” he said.
“We should deepen political mutual trust. Both sides should continue to firmly support each other on issues involving each other‘s core interests and major concerns.”

Riaz Haq said...

Global Trends 2024 "A More Contested World": Why #US #Spy Agencies Say the Future Is Bleak as Competition with #China Ratchets up in the Next 20 years. #Climatechange, #technology, #pandemics and #financial crises will pose big challenges for the world. https://www.nytimes.com/2021/04/15/opinion/global-trends-intelligence-report.html?smid=tw-share

The world envisioned in the 144-page report, ominously subtitled “A More Contested World,” is rent by a changing climate, aging populations, disease, financial crises and technologies that divide more than they unite, all straining societies and generating “shocks that could be catastrophic.” The gap between the challenges and the institutions meant to deal with them continues to grow, so that “politics within states are likely to grow more volatile and contentious, and no region, ideology, or governance system seems immune or to have the answers.” At the international level, it will be a world increasingly “shaped by China’s challenge to the United States and Western-led international system,” with a greater risk of conflict.

Here’s how agencies charged with watching the world see things:

“Large segments of the global population are becoming wary of institutions and governments that they see as unwilling or unable to address their needs. People are gravitating to familiar and like-minded groups for community and security, including ethnic, religious, and cultural identities as well as groupings around interests and causes, such as environmentalism.”

“At the same time that populations are increasingly empowered and demanding more, governments are coming under greater pressure from new challenges and more limited resources. This widening gap portends more political volatility, erosion of democracy, and expanding roles for alternative providers of governance.”

“Accelerating shifts in military power, demographics, economic growth, environmental conditions, and technology, as well as hardening divisions over governance models, are likely to further ratchet up competition between China and a Western coalition led by the United States.”

“At the state level, the relationships between societies and their governments in every region are likely to face persistent strains and tensions because of a growing mismatch between what publics need and expect and what governments can and will deliver.”

Experts in Washington who have read these reports said they do not recall a gloomier one. In past years, the future situations offered have tilted toward good ones; this year, the headings for how 2040 may look tell a different story: “Competitive Coexistence,” “Separate Silos,” “Tragedy and Mobilization” or “A World Adrift,” in which “the international system is directionless, chaotic, and volatile as international rules and institutions are largely ignored by major powers like China, regional players and non-state actors.”

There is one cheery scenario thrown in, “Renaissance of Democracies,” in which the United States and its allies are leading a world of resurgent democracies, and everybody is getting happier. Its apparent purpose is to show that people could, in principle, turn things around. But nothing in the report suggests it is likely.

The gloom, however, should not come as a surprise. Most of what Global Trends provides are reminders of the dangers we know and the warnings we’ve heard. We know that the world was ill prepared for the coronavirus and that the pandemic was grievously mishandled in most parts of the world, including the United States. We know the Arctic caps are melting at a perilous rate, raising sea levels and threatening dire consequences the world over. We know that for all the grand benefits of the internet, digital technology has also unleashed lies, conspiracies and distrust, fragmenting societies and poisoning political discourse. We know from the past four years what polarized and self-serving rule is like. We know that China is on the rise, and that it is essential to find a manageable balance between containment and cooperation.

Riaz Haq said...

China is now applying calculated doses of pain to shock Westerners into realizing the old, #American-led order is ending. #Chinese foreign policy chief lectured American diplomats in #Alaska. Then #China sanctioned #British, #Canadian & #EU politicians https://www.economist.com/china/2021/04/03/china-is-betting-that-the-west-is-in-irreversible-decline

Its gaze fixed on the prize of becoming rich and strong, China has spent the past 40 years as a risk-averse bully. Quick to inflict pain on smaller powers, it has been more cautious around any country capable of punching back. Recently, however, China’s risk calculations have seemed to change. First Yang Jiechi, the Communist Party’s foreign-policy chief, lectured American diplomats at a bilateral meeting in Alaska, pointing out the failings of American democracy. That earned him hero status back home. Then China imposed sanctions on British, Canadian and European Union politicians, diplomats, academics, lawyers and democracy campaigners. Those sweeping curbs were in retaliation for narrower Western sanctions targeting officials accused of repressing Muslims in the north-western region of Xinjiang.

China’s foreign ministry declares that horrors such as the Atlantic slave trade, colonialism and the Holocaust, as well as the deaths of so many Americans and Europeans from covid-19, should make Western governments ashamed to question China’s record on human rights. Most recently Chinese diplomats and propagandists have denounced as “lies and disinformation” reports that coerced labour is used to pick or process cotton in Xinjiang. They have praised fellow citizens for boycotting foreign brands that decline to use cotton from that region. Still others have sought to prove their zeal by hurling Maoist-era abuse. A Chinese consul-general tweeted that Canada’s prime minister was “a running dog of the us”.

Such performance-nationalism is watched by Western diplomats in Beijing with dismay. Envoys have been summoned for late-night scoldings by Chinese officials, to be informed that this is not the China of 120 years ago when foreign armies and gunboats forced the country’s last, tottering imperial dynasty to open the country wider to outsiders. Some diplomats talk of living through a turning-point in Chinese foreign policy. History buffs debate whether the moment more closely resembles the rise of an angry, revisionist Japan in the 1930s, or that of Germany when steely ambition led it to war in 1914. A veteran diplomat bleakly suggests that China’s rulers view the West as ill-disciplined, weak and venal, and are seeking to bring it to heel, like a dog.

In Washington and other capitals it is not hard to hear voices suggesting that China is making rash, clumsy mistakes. Surely China sees that it is souring public opinion across the West, they murmur. There is puzzlement about how China now views its recent draft accord with the European Union, the Comprehensive Investment Agreement, which it had appeared so eager to conclude. That pact’s ratification by the European Parliament is now on ice, and possibly entombed in permafrost, as a result of China’s sanctions on several Euro-legislators.

Riaz Haq said...

Globally, the value of all outstanding cryptocurrency has jumped to about $2.4 trillion — or more than the approximately $1.2 trillion of United States currency in circulation worldwide — from about $200 billion two years ago.

https://www.nytimes.com/2021/05/09/us/politics/cryptocurrency-regulation-sec-ripple-labs.html


As Scrutiny of Cryptocurrency Grows, the Industry Turns to K Street
Companies behind digital currencies are rushing to hire well-connected lobbyists, lawyers and consultants as the battle over how to regulate them intensifies.

When federal regulators late last year accused one of the world’s most popular cryptocurrency platforms of illegally selling $1.38 billion worth of digital money to investors, it was a pivotal moment in efforts to crack down on a fast-growing market — and in the still-nascent industry’s willingness to dive deeply into the Washington influence game.

The company, Ripple Labs, has enlisted lobbyists, lawyers and other well-connected advocates to make its case to the Securities and Exchange Commission and beyond in one of the first big legal battles over what limits and requirements the government should set for trading and using digital currency.

Ripple has hired two lobbying firms in the past three months. It has retained a consulting firm staffed with former aides to both Hillary Clinton and former President Donald J. Trump to help it develop strategy in Washington. And to defend itself against the S.E.C., it hired Mary Jo White, a former chairwoman of the commission during the Obama administration.

Ripple is just one of a long list of cryptocurrency companies scrambling for influence in Washington as the Biden administration begins setting policy that could shape the course of a potentially revolutionary industry that is rapidly moving into the mainstream and drawing intensifying attention from financial regulators, law enforcement officials and lawmakers.

“There is a tectonic shift underway,” Perianne Boring, the president of the Chamber of Digital Commerce, a cryptocurrency lobbying group, told other industry lobbyists, executives and two House lawmakers who serve as industry champions, during a virtual gathering last month. “If we don’t start planning and taking action soon, we have everything to risk.”

So far, cryptocurrency has been a highly volatile investment, but it is already starting to alter the way individuals, companies and even some central banks do business. Firms like Ripple, which is based in San Francisco, run cryptocurrency platforms that allow customers to make nearly instant global payments through a system that operates largely outside government monetary networks.

-------------------

The House this month passed a bill backed by industry lobbyists to create a working group of federal regulators, industry executives, investor protection groups and others to examine possible frameworks for a regulatory system.

“We need to get the big prize done,” Representative Darren Soto, Democrat of Florida and a member of the Congressional Blockchain Caucus, a group of lawmakers working with the industry to help promote cryptocurrencies, told the industry conference last month. “Which is the statutes and jurisdiction and definitions to create that certainty, to really let blockchain and cryptocurrency flow and improve in the United States.”

Riaz Haq said...

#China emerges as the the biggest global #trading nation, eclipsing the #UnitedStates. How will it affect the #US #currency and #American dominance of the international #financial system? #economy #trade #finance #investment https://www.worldstopexports.com/chinas-top-import-partners/

https://twitter.com/haqsmusings/status/1416932505194680322?s=20

-----------------

China Eclipses U.S. as Biggest Trading Nation
Bloomberg News
February 10, 2013

https://www.bloomberg.com/news/articles/2013-02-09/china-passes-u-s-to-become-the-world-s-biggest-trading-nation

China surpassed the U.S. to become the world’s biggest trading nation last year as measured by the sum of exports and imports of goods, official figures from both countries show.

U.S. exports and imports of goods last year totaled $3.82 trillion, the U.S. Commerce Department said last week. China’s customs administration reported last month that the country’s trade in goods in 2012 amounted to $3.87 trillion.

China’s growing influence in global commerce threatens to disrupt regional trading blocs as it becomes the most important commercial partner for some countries. Germany may export twice as much to China by the end of the decade as it does to France, estimated Goldman Sachs Group Inc.’s Jim O’Neill.

“For so many countries around the world, China is becoming rapidly the most important bilateral trade partner,” O’Neill, chairman of Goldman Sachs’s asset management division and the economist who bound Brazil to Russia, India and China to form the BRIC investing strategy, said in a telephone interview. “At this kind of pace by the end of the decade many European countries will be doing more individual trade with China than with bilateral partners in Europe.”

U.S. Leadership
When taking into account services, U.S. total trade amounted to $4.93 trillion in 2012, according to the U.S. Bureau of Economic Analysis. The U.S. recorded a surplus in services of $195.3 billion last year and a goods deficit of more than $700 billion, according to BEA figures released Feb. 8. China’s 2012 trade surplus, measured in goods, totaled $231.1 billion.

The U.S. economy is also double the size of China’s, according to the World Bank. In 2011, the U.S. gross domestic product reached $15 trillion while China’s totaled $7.3 trillion. China’s National Bureau of Statistics reported Jan. 18 that the country’s nominal gross domestic product in 2012 totaled 51.93 trillion yuan ($8.3 trillion).

“It is remarkable that an economy that is only a fraction of the size of the U.S. economy has a larger trading volume,” Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics in Washington, said in an e-mail. The increase isn’t all the result of an undervalued yuan fueling an export boom, as Chinese imports have grown more rapidly than exports since 2007, he said.

Riaz Haq said...

Renowned British #economist #Keynes warned the world in `1924 against using #economic #sanctions. Both the deterrent and the compellent effects of #US sanctions have fallen dramatically amid rampant overuse. #Afghanistan #Iran #Russia #Syria #Pakistan https://www.theguardian.com/commentisfree/2022/jan/20/keynes-warned-the-world-against-using-economic-sanctions-his-alternative-is-worth-considering

Promoting economic stimulus at home while enforcing deprivation abroad is a self-defeating way to seek world stability

Nicholas Mulder is assistant professor of history at Cornell University and the author of The Economic Weapon: The Rise of Sanctions as a Tool of Modern War (New Haven: Yale University Press, 2022)

he United States has come to rely on economic sanctions more than ever before. Following its retreat from Kabul in August, Washington has maintained economic pressure on the Taliban. The treasury’s freezing of $9.5bn in Afghan state assets has left that impoverished country facing starvation this winter. Two weeks ago, US officials warned Iran, already under heavy economic pressure, that it will face “snapback” sanctions unless Tehran restrains its nuclear ambitions.

Most prominent of all is the sanctions threat that the Biden administration issued against Russia last month. In the face of a large Russian military buildup on the borders of Ukraine, Joe Biden announced on 8 December that Vladimir Putin will face “severe consequences, economic consequences like none he’s ever seen or ever have been seen” if he escalates into open conflict.

In all three cases, advocates of economic pressure argue that sanctions will deter aggressive action and compel better behavior. But the reality is that both the deterrent and the compellent effect of US sanctions have fallen dramatically amid rampant overuse.

Sanctions were created as an antidote to war. Today, they have become an alternative way of fighting wars
Iran has been under US sanctions on and off since 1979. It has such longstanding experience resisting external pressure that further coercion is unlikely to work. Putin’s Russia has adapted to western sanctions imposed since 2014 by building up large financial reserves, promoting agricultural self-sufficiency, and designing alternative payments systems.

Western supporters of sanctions now face a gridlock that is in part of their own making. Instead of cooling tensions, their implacable and impulsive resort to the economic weapon has aggravated the very conflicts that it is meant to resolve.

Sanctions were created as an antidote to war. Today, they have become an alternative way of fighting wars, perpetuating conflicts but not defusing them. To understand how the policy of economic pressure has reached this impasse, it helps to go back to its historical origins.

A century ago, in the aftermath of the first world war, sanctions were created as a mechanism to prevent future conflict. During the war, the allies imposed a devastating blockade on their enemies, Germany and Austria-Hungary. This kind of economic war against civilians was not a new phenomenon. It dated back to antiquity and played an important part throughout the 19th century, from the Napoleonic wars to the American civil war.

Riaz Haq said...

Michael Pettis
@michaelxpettis
1/5
More evidence of the exorbitant burden the US dollar creates for the US economy? This interesting paper by
@BenignoGianluca
,
@LucaFornaro3
, and
@mw_econ
argues that unfettered capital inflows into the US reduce American productivity growth.

https://twitter.com/michaelxpettis/status/1491616604760817664?s=20&t=Iru-JqgFCGBVpVVSIec9qg

----------


Michael Pettis
@michaelxpettis
2/5
The reason, they say, is because, paradoxically, cheap access to foreign capital "leads to a contraction in economic activity in tradable sectors, which are the engine of growth in our economies."

https://twitter.com/michaelxpettis/status/1491616607927472129?s=20&t=Iru-JqgFCGBVpVVSIec9qg

--------------


Since the late 1990s, the United States has received large capital flows from developing countries - a phenomenon known as the global saving glut - and experienced a productivity growth slowdown. Motivated by these facts, we provide a model connecting international financial integration and global productivity growth. The key feature is that the tradable sector is the engine of growth of the economy. Capital flows from developing countries to the United States boost demand for U.S. non-tradable goods, inducing a reallocation of U.S. economic activity from the tradable sector to the non-tradable one. In turn, lower profits in the tradable sector lead firms to cut back investment in innovation. Since innovation in the United States determines the evolution of the world technological frontier, the result is a drop in global productivity growth. This effect, which we dub the global financial resource curse, can help explain why the global saving glut has been accompanied by subdued investment and growth, in spite of low global interest rates.
JEL Codes: E44, F21, F41, F43, F62, O24, O31.
Keywords: global saving glut, global productivity growth, international financial integration, capital flows, U.S. productivity growth slowdown, low global interest rates, Bretton Woods II, export-led growth.
∗Gianluca Benigno: LSE, New York Fed and CEPR; gi

https://crei.cat/wp-content/uploads/2021/12/GFRC.pdf

Riaz Haq said...

Could #SWIFT be used to sanction #Russia? Swift as a weapon could erode the #dollar-dominated global financial system, including by fostering alternatives to Swift being developed by Russia and the world’s second largest economy, #China. #Trade https://www.wsj.com/articles/swift-banking-system-sanctions-biden-11645745909?st=id5oym5gvi93hv6&reflink=desktopwebshare_twitter via @WSJ


Russia’s assault on Ukraine triggered a surge of calls for Western allies to completely sever Russia from the global financial system by disconnecting it from the so-called Swift global payment system. Fear in places like the U.S. and Germany of potential collateral damage have put the idea on hold for now.

What is Swift?
The Society for Worldwide Interbank Financial Telecommunication, or Swift, is the financial-messaging infrastructure that links the world’s banks. The Belgium-based system is run by its member banks and handles millions of daily payment instructions across more than 200 countries and territories and 11,000 financial institutions. Iran and North Korea are cut off from it.

Why is Swift important for countries, including Russia?
Cross-border financing is critical to every part of the economy, including trade, foreign investment, remittances and the central bank’s management of the economy. Disconnecting a country, in this case Russia, from Swift would hit all of that.

Who is advocating for such a move?
U.K. Prime Minister Boris Johnson has lobbied other Group of Seven members to flip the switch. Other proponents include countries along the European Union’s border with Russia and some members of Congress, including California Democratic Rep. Adam Schiff, chairman of the House Intelligence Committee. The move, they argue, would help cripple Russia’s economy in a way that more targeted sanctions can’t.

Why are other countries resisting it?
Critics say there could be economic blowback, not just in Europe, which has deep trade ties and relies heavily on Russia’s natural gas exports, but also the rest of the world. Some former U.S. officials say the move could severely hurt Russia’s economy, but also harm Western business interests such as the major oil companies. President Biden, while ruling it out for now, said the option isn’t off the table completely.

At an estimated $1.7 trillion last year, Russia’s gross domestic product makes it the 12th largest economy in the world. Even if the global economy wasn’t hobbled by a three-year pandemic, rising inflation, supply chain disruptions and escalating East-West political tensions, losing 2% of global GDP and one of the world’s top oil exporters would inflict severe damage to it.

Additionally, using Swift as a weapon could erode the dollar-dominated global financial system, including by fostering alternatives to Swift being developed by Russia and the world’s second largest economy, China. That could undermine Western power, especially the diplomatic leverage that sanctions offer.

What have Western nations done instead?
Besides halting a new natural gas pipeline and hurting Russia’s ability to raise debt, Western sanctions so far have blacklisted many of Russia’s biggest banks, affecting the majority of the country’s banking sectors assets. Those sanctions ban transactions with the targeted institutions, cutting off their access to U.S. dollars and financing.

Why would cutting Swift off be different?
President Biden said that with Thursday’s sanctions, allied efforts essentially amount to the same things as cutting Russia off from Swift. But there are differences.

Swift is a bludgeon in the economic warcraft arsenal compared with targeted sanctions that provide precision and diplomatic flexibility for policy makers.

Riaz Haq said...

China’s Cross-Border International Payments System could give Russia a lifeline and accelerate de-dollarization
By DAVID P GOLDMAN


https://asiatimes.com/2022/02/chinas-swift-alternative-may-undercut-us-sanctions/


Washington’s new sanctions against Russia were no match for President Biden’s rhetoric, leaving out the most obvious measure that the United States might take to hurt Moscow, namely exclusion from the SWIFT international payments system.


Banks conduct virtually all hard-currency transactions via SWIFT, or the Society for Worldwide Interbank Financial Telecommunication. But a new Chinese alternative might allow Russia to conduct most of its trade in yuan rather than dollars.

China’s Cross-Border International Payments System (CIPS), founded in 2015, is still under development and includes only 80 foreign banks. But there is no reason in principle that CIPS can’t substitute for SWIFT. And if Russia successfully shifts its trade payments out of the dollar system, the blow to American prestige and power would be enormous.

De-dollarization of trade is under debate in Western Europe. Germany’s Manager Magazine wrote on February 14, “Exclusion from the international payment system SWIFT is considered the sharpest sword that the West could wield as an economic sanction against Russia.

“However, it is a double-edged sword: the economic consequences would not only be serious in Russia, but also in Western Europe. In addition, the decoupling of Russia and China from the US dollar would be accelerated. Both countries are already working on competing payment systems.”

Russia also has developed an interbank messaging system, which now covers about 20% of domestic financial payments.

China’s yuan has advantages and disadvantages as a dollar substitute. It has gained about 8% against the US dollar since the Covid recession began in early 2020.

China’s consumer inflation rate stands around 1% year-on-year vs. 7.5% in the US, and the yuan to some extent has acted as a hedge against dollar inflation, as I wrote on February 17.

Riaz Haq said...

Europe relies on Swift to pay Russian producers for 40% of its natural-gas supply. Fear that Russia's natural gas exports could be frozen sent Europe's natural gas prices shooting up as high as $40 per million BTUs vs. about $5 per million in the natural-gas-rich U.S.

https://www.investors.com/news/russia-ukraine-invasion-poses-big-economic-risks-fed-policy-oil-prices-cybersecurity/


If sustained, such prices would plunge European economies into recession, as consumers struggled to pay bills and manufacturers were forced to shutter their factories.

Germany has already halted certification of the Nord Stream 2 natural gas pipeline from Russia as the Ukraine invasion loomed. It also said it'll take steps to wean itself off Russian gas over time. But pressure is building on Germany to accede to harsher sanctions.

There would still be potential workarounds, if Russia is cut off from Swift. BCA Research said it expects Germany to find an alternate way of transmitting payment instructions to keep energy flowing.

Russia might use China's much smaller CIPS messaging system for conducting regional commerce, driving the countries closer together. Still, it's not clear how effective any of these alternatives will be, so risk will rise of price increases or supply disruptions for a number of key commodities.

Russia's Other Riches
Russia's economy is "basically a big gas station," but otherwise of little global importance, Jason Furman, top economic advisor to President Obama, said recently.

For S&P 500 companies, Russia only amounts to 0.1% of total sales, according to a Bank of America report.

Yet Russia controls big enough slices of key commodity markets beyond oil and gas to roil global supply chains that are still trying to recover from Covid disruptions.

Russia accounted for 6% of global aluminum and 5% of nickel supply in 2021, according to the Cru Group's commodity market research.

On Thursday, aluminum prices rose more than 3% to hit an all-time high $3,450 per ton, while nickel reached a decade-plus high around $25,000 per ton.

Inventories of base metals are already extremely low, JPMorgan said in a note to clients. That leaves "very little additional cushion for further supply disruptions — either from Russia directly or via higher-for-longer gas and power prices," the firm's analysts added.

Russia also controls 35% of palladium and 10% of platinum supply. Those precious metals are used in catalytic converters to reduce auto emissions.

The U.S. neon supply, key in the advanced lithography chipmaking process, comes almost entirely from Russia and Ukraine, says the Techcet research and consulting firm.

With nearly 25% of the global wheat supply between Russia and Ukraine, the invasion also could exacerbate food inflation.

For the U.S. and its allies to target these crucial commodities with sanctions would be shooting themselves in the foot.

Ukraine Invasion Timing
The West will sanction less-essential Russian exports, like diamonds. Still, Russia's major income streams will remain intact, as Putin surely counted on. The surge in oil prices and global inflation pressures mean Putin has invaded Ukraine at the most opportune time.

"Putin was ready for this crisis," said Lori Esposito Murray, president of The Conference Board's public policy arm, in a podcast this week. "He's been planning this for a while."

Murray highlighted the $630 billion in currency reserves that Russia has built up to buttress its economic foundations for war.

That's not to say Russians won't pay a steep price from the Ukraine invasion and sanctions. Biden noted Thursday that the ruble had fallen to an all-time low, while Russian borrowing rates soared. Amid currency depreciation, a recession in Russia looks like a given.

Riaz Haq said...

Russia Sanctions Could Help Undermine Dollar’s Global Status

By George Pearkes of Atlantic Council

https://www.atlanticcouncil.org/blogs/econographics/ukraine-and-dollar-weaponization/

Aggressive use of dollar weaponization has been signaled repeatedly by US policymakers to meet US goals in the current dispute over Ukraine. Though this would severely impact Russia today, negative feedback to dollar sovereignty will be measured in decades rather than years — and will inevitably arrive.
------

Given the power of dollar sovereignty, it feels inevitable that it would be turned into a weapon in a world that is deeply financialized. Global debt – or, equally accurate, global interest bearing assets – topped $300 trillion in 2021 according to the Institute for International Finance. In that context, the ability to restrict access to financial markets is vastly more powerful than it has been historically.There are restraints on the use of weaponized dollar sovereignty against Russia. A maximalist weaponization of the dollar would have a large enough impact on the Russian or other adversary’s economy that standards of living would plummet. While not as overt as a bombing campaign, the effects of a fully weaponized dollar would be severe enough that a bombing campaign would be an apt comparison for the impact on the civilian population. It’s not clear to what degree American policymakers are willing to impose pain on Russia’s civilian population, but it seems unlikely the most aggressive possible use of dollar weaponization and the cost to ordinary Russians it would impose would not create negative feedbacks to the United States.Another obvious restraint is domestic American interest groups. US companies may be users of Russian natural gas, aluminum, or other exports either in the United States or at overseas production facilities. These interests could dissuade US policymakers from using the dollar as a weapon.The weaponized dollar is already a fact of life in global affairs. The governments of Cuba, Iran, North Korea, and Venezuela can all attest to that fact, as can their civilian populations. In all four countries, dollar sovereignty has been weaponized in a contemporary context. Deeper historical examples abound in Latin America and other parts of the world. At a smaller scale, the wide range of sanctions activity tracked by the Atlantic Council’s Sanctions Dashboard are forms of dollar weaponization as well.It’s only a matter of time before the United States attempts a more aggressive and maximalist use of financial warfare. Whether Russia will be the target after an invasion of Ukraine remains to be seen. However, at least 40 Senators have signaled they favor that course, and the precedent for similar actions from the United States is well established. On January 19th, President Biden said “If they invade, they’re going to pay. Their banks will not be able to deal in dollars”, a reference either to just one of the wide range of dollar weaponization strategies that exist under current law and are being discussed in Congress. While there is no current contender to replace the dollar as the dominant currency in global trade and finance, the weaponization of dollar sovereignty could catalyze a push for a new currency hegemony, or perhaps even a multi-currency global reserve system. Game theorists would call aggressive dollar weaponization for narrow national objectives a “non-credible” threat: a threat to do something a rational actor wouldn’t do, because ultimately it hurts the actor. By using the power of dollar sovereignty, dollar sovereignty risks endangering the reserve status which allows it to be weaponized.Over the foreseeable future of the next decade or so, dollar weaponization will not endanger the US dollar’s unique position as the global reserve currency. The various network effects outlined previously make a near-term shift away from the dollar extraordinarily unlikely. Unfortunately for US policymakers, the long-term is less certain.

Riaz Haq said...

FT columnist Gillian Tett recently wrote there was “concern that some emerging market funds will dump non-Russian assets to cover losses on frozen Russian holdings,” amid talk that some overleveraged hedge funds had been wrongfooted and “memories of the 1998 collapse of Long-Term Capital Management are being revived.”

https://www.wsws.org/en/articles/2022/03/07/sanc-m07.html

Economic historian Adam Tooze has commented that Russian reserve accumulation, derived from its oil and gas sales, is a source of funding in Western markets and “part of complex chains of transactions that may now be put in jeopardy by the sanctions.”

Longer-term concerns about the future direction of the international monetary system and the world economy are also being raised. An editorial in the Economist headlined “A new age of economic conflict” said the implications of the sanctions on Russia were “huge” and marked a “new era of high-risk economic warfare that could further splinter the world economy.”

One issue that has been raised is that the sanctions, which demonstrate the enormous financial power of US imperialism because the dollar functions as the world’s major currency, will lead to a bipolar financial world—one based on the dollar and the other on the Chinese renminbi.

There is no realistic prospect that the renminbi can assume anything like the dollar’s global role given the fact that the Chinese financial system is controlled by the state while US markets, by contrast, are open and liquid. Furthermore, at present the renminbi is used to finance only 2 percent of world trade. While there are predictions it could rise to 7 percent in the next few years, it is dwarfed by the position of the dollar which finances 59 percent.

However, as the Economist noted, the sanctions will have long-term effects, the implications of which were “daunting.”

“The more they are used, the more countries will seek to avoid relying on Western finance. That would make the threat of exclusion less powerful. It would also lead to a dangerous fragmentation of the world economy. In the 1930s, a fear of trade embargoes was associated with a rush to autarky and economic spheres of influence.”

While the editorial did not make the point, this fracturing was one of the economic driving forces behind the eruption of World War II.

China will no doubt be carefully examining the implications of the Russian sanctions because in a war, or even a conflict over Taiwan or some other issue, the US and Western powers could freeze its $3.3 trillion of foreign reserves. Other countries, such as India, “may worry they are more vulnerable to Western pressure,” the Economist said.

An article by Wall Street Journal writer Jon Sindreu said the sanctions on Russia, which showed that reserves accumulated by central banks can simply be taken away, raised the question of “what is money?”

He noted that, in the wake of the Asian financial crisis of 1997–98, scared developing countries sought to protect themselves by accumulating foreign currency holdings, raising them from less than $2 trillion to a record of $14.9 trillion in 2021.

“Recent events highlight the error in this thinking: Barring gold, these assets are someone else’s liability—someone who can just decide they are worth nothing,” Sindreu said.

In the 19th century and into the first part of the 20th, the world financial system operated on the gold standard. This system collapsed with the eruption of World War I and attempts to restore it in the 1920s failed, leading to the breakdown of international trading and financial relations in the 1930s and a return to barter in some cases.

Riaz Haq said...

Powell Says War May Speed China Moves to Insulate Against Dollar
Fed chief says China has been working on currency matters
Powell says Ukraine war may serve as accelerant to China moves
Powell: Fed Needs to Be 'Nimble' Amid Ukraine Crisis

Federal Reserve Chair Jerome Powell said the Ukraine war could have the effect of accelerating China’s moves to develop alternatives to the current dollar-dominated international payments infrastructure.

Powell was questioned Thursday in a Senate Banking Committee hearing on how China might view the U.S.-led efforts to isolate Russia’s economy, especially by damaging its ability to use the dollar.

https://www.bloomberg.com/news/articles/2022-03-03/powell-says-war-may-speed-china-moves-to-insulate-against-dollar