The Breakdown - Could These Currencies Be Dollar Killers? Feat. Niall Ferguson & More [Money Reimagined - Part 2]

Episode Date: May 9, 2020

Libra, the Euro, China's DCEP.  Do any of these currencies have a chance at displacing the dollar in the global order? Or is it possible - as Niall Ferguson suggestions on this episode - that we're poised to shift back to a multipollar, multi-currency world? The second in our four-part documentary micro-series on the battle for the future of money.  Also featuring Michael Casey, Matthew Graham, Katherine Wu, Peter Zeihan, Luke Gromen and more.  Music by DJ J-Scrilla "Faith In My Money (Money Printer Go Brrr)" from the new “Sound Money” album.    

Welcome back to the breakdown, Money Reimagined, a special podcast micro series in the run-up to Consensus Distributed, a free-to-attend event from May 11 through the 15th hosted by CoinDesk. Money Reimagined is about the battle for the future of money in the post-COVID-19 world, and it's a hell of a story. This episode is sponsored by Aris X, the Stellar Development Foundation, and grayscale digital large-cap fund. Here's your host, NLW. Welcome back to the breakdown. So on the first episode of this special money reimagined series, we looked at the strange, almost schizophrenic narratives around the U.S. dollar. On the one hand, money printer go burr.

Massive stimulus and increasingly exotic forms of QE would suggest for future inflation, right? On the other, however, in practice, the dollar has gotten nothing but stronger and become even more in demand during the crisis. The goal of that episode was to maybe piece through and figure out how these two things, how these two narratives might not be mutually exclusive. On this episode, however, we are turning our attention. And instead, we'll be looking at the contenders in this battle for the future of money. These are the insurgents that would replace the dollar in the global order, and in particular in this episode, the insurgents who would replace it in an inside-the-system formal way. So before we fully dive in, let's get some historical context from Neil Ferguson.

He's a historian and senior fellow at Stanford's Hoover Institution and the author of works like The Ascent of Money. It wasn't always a foregone conclusion that the world would be organized around a single dominant standard like the US dollar. In fact, as Ferguson argues here, this was a byproduct of globalization. Some of the greatest theorists about money, Hayek, for example, Friedman, thought it better for the to be multiple competing currencies rather than a single global standard. And there were plenty of periods in history when that was the case. There were multiple currencies in, for example, 17th century Europe. And there were, in fact, many different forms of payment across the United States and the 19th century. Standardization of money

became relatively late to the world. It began with the British gold standard, which by around 1900, was a global standard pegging currencies to a specific quantity of gold. I think one of the lessons of history is that with globalization comes a tendency for a particular currency to become the number one dominant currency for transactions, for trade, for international reserves. In the 19th century, it was the British pound, in the 20th century. It became the US dollar. And a great question to ask is globalization enters this phase of crisis. Will there be some other transition from the dollar to another currency? Or could we see? a reversion to a multipolar, multi-currency world of the sort that we've seen in previous

eras. Okay, so a unipolar monetary order was a byproduct of globalization. Globalization is being unwound right now and unwound in an accelerated fashion thanks to COVID-19. So when it comes to the US dollar system, does this mean an unraveling too? And if so, who might be stepping up? That's really the whole point of today's episode. Let's look first to the Euro.

If the genesis of the global dollar standard that we're on now was the end of World War 2 in the Bretton Woods Conference, the Euro came about as Europe tried to re-forge both a shared identity and a shared economic destiny after the fall of the Soviet Union. Agreed upon in principle in the Maastricht Treaty in 1992, the Euro would come into being in real form about a decade later. It quickly became the second most widely used reserve currency after the U.S. dollar. But as Europe and the euro came into the COVID-19 crisis, both were on kind of shaky ground. Brexit had taken the most valuable economy out of the European Union, and flagging economies within the union created pretty significant fragility.

In this clip, we revisit comments from the geopolitical strategist and author of Disunited Nations, Peter Zeyan. The degree to which the United States is the sole, sole store of value in the global system was already pretty extreme in the last two years and it's only gone up during the crisis. Because there's nothing that the Europeans can do in terms of stimulus spending without actually raising debt. Even if they decide to do something like QE like the United States has done, they didn't have to have the debate, which last time took years, over who gets how much of whatever the stimulus spending happens to be. And no one wants to throw money any more money than they have to in the black hole that has become Greece. Italy, despite the death rate and how tragic that is, has had 30 years to clean up their banking sector. They've actually gone the wrong direction. And no one in Europe wants to be responsible for paying for that.

So aside from some German debt, because there's actually a shortage of high quality debt in Europe, the Europeans are having a hard time raising the capital that is necessary to deal with this crisis, whereas the U.S. can just flip a switch. and that's what we've done. If the euro continues to exist, it will exist over a shriveled, demographically spent economy that is no longer capable of exports. That's not a functional block, and that's their best case scenario. More likely, this whole thing just breaks up, and the United States basically absorbs a huge amount of capital from Europe. CoinDesk's chief content officer Michael Casey takes this argument around the euro farther,

saying in some ways it's inherently a question of political validity. So the euro is actually a really interesting way to think about some of the other questions that those of us who are interested in cryptocurrencies and new currency designs go about perceiving things. Because in and of itself, right, was a really interesting experiment. It's an entirely different way of thinking about issuance of a sovereign currency because it's a federation of otherwise sovereign nation states who, yes, are bound with some level of political unity within the EU, but are otherwise independent, but have this one common currency. And that disconnect between sort of the local political power and the reduced political power

at the EU level and the common currency is actually at the heart of the euro crisis that we saw maybe 10 years ago, the capacity of the EU to act in unison and the common interest that the EU was supposed to represent kind of fell apart, right? Everybody was each to their own. Italy was onto its own. Spain was under, all of a sudden borders got shut down. It was all, each nation to him or herself as the pandemic took hold. So the EU's kind of validity as an entity to manage this, I think, has been challenged somewhat. COVID is a force for decentralizing power. It's pushing interest down to the local level. And so I think from a currency perspective, the value of these currencies are political questions.

Therefore, the EU's own sort of political validity is being challenged right now. I'm not sure that's going to be a very positive environment for the euro. Of course, the contenders in the battle for the future of money, aren't just other sovereign currencies that exist today, like the beleaguered euro. Coming up after the break, we turn our attention to something more digital and potentially even more disruptive. Support for this podcast and this message come from Eris X. With ArisX, you can trade spot and regulated futures on cryptocurrencies through a licensed,

U.S.-based exchange. ErisX believes in fair access for all. Sign up today to take advantage of zero fees and learn more at ErisX.com slash consensus. This episode is also sponsored by the Stellar Development Foundation. The Stellar Network connects your business to the global financial infrastructure, whether you're looking to power of payments application, or issue digital assets like stable coins or digital dollars. Stellar is easy to learn and fast implement.

Start your journey today at Stellar.org slash coin desk. In July of 2019, Facebook stunned the financial world with the announcement of Libra. Libra was a new global money to be governed by an association of corporations, and nonprofits. Importantly and disruptively, Libra wouldn't get its stability from a peg to a single fiat currency, but instead would be backed by a basket of fiat currencies. Now, much of the ensuing attention focused on questions of Facebook's legitimacy in leading the project. They had outstanding and unresolved criticism around data practices, and in the U.S. in particular, there were huge issues with the government vis-a-vis the 2016 elections. For economists,

and systems thinkers, however, it was this basket of currency's idea that was the most interesting thing. For some, it looked like a modern-day version of the Bankor, a global pan-national currency first proposed by John Maynard Keynes at Breton Woods. Macro-researcher, Luke Gromman, provides a quick synopsis of that proposal. At the end of World War II, at Breton Woods, there were two options. There was John Maynard Keynes proposed something called the Bank Corps, which was a neutral settlement asset that floated in all currencies and would have basically prevented systemic deficits and surpluses from building up over time that we have since seen because we didn't go with the bank or we went with a proposal from the United States as voiced

by Harry Dexter White, which was the dollar is the center of the system. The dollars paid the gold at $35 and pounds and everything else is then tied to the dollar. And it provided the U.S. what de Gaulle called exorbitant privilege. Now, when Facebook proposed the structure for its Libra, it sparked conversations at the highest level of global central bankers about whether the dollar system was to the continued benefit of the world. In this clip, Ferguson again discusses a similar sounding proposal from the then Bank of England Governor Mark Carney for what he called a, quote, synthetic hegemonic currency.

Mark Carney gave a brilliant paper at the Jackson Hole Federal Reserve. conference last summer in 2019, in which he argued that it was inherently unstable for the United States dollar to be world money, for a variety of reasons, one of which being that that puts the position of the Federal Reserve into being essentially the World Central Bank when it's mandated just to be the U.S. national central bank. And Carney argued that we should be looking at ways of creating some surrogate digital currency linked potentially to more than one of the existing currencies. This bore more than a passing resemblance to what Facebook was trying to do with Libra, which was going to be a digital currency linked to existing currencies that would be held

in a Swiss-based reserve. We are, I think, in other words, in an era of, experimentation. An era of experimentation. As it turns out, that experimentation would not be limited to the wide-eyed dreams of tech companies. If U.S. regulators reacted to Libra with scorn at their past transgressions and the established monetary order took it as a moment to discuss a highly theoretical new non-sovereign currency system, there was one party that reacted to Libra as a direct competitive threat. Coming up after the break, why one of the most speedy and significant responses to Libra came from China. Support for this podcast and this message come from

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Even before the discussion of Libra and Central Bank digital currencies, China had built up a comparatively advanced system of mobile money. Neil Ferguson puts it in the context of how robust the Chinese corporate mobile money system is as compared to the experiments we were just discussing. In fact, the most advanced of these experiments since Carney's paper is just a sketch and Libra is still at the launchpad stages in China, where the Chinese technology companies have created a new kind of payment system, payment platforms like Alipay and its 10-cent equivalent, which are no longer just confined to China but are being adopted in more and more emerging markets.

Now, the relationship between private companies and the Chinese state is, of course, something very different from that of governments and companies in the West. But still, if the Chinese Communist Party enjoyed the ability to surveil transactions through relationships with AliPay and WeChat pay, a digital currency would be something completely different and on a whole different level. Castle Island Ventures, Nick Carter, puts the opportunity for them pretty bluntly. You know, China has grasped that if you control someone's finances and more generally someone's credit relationships, that you effectively control that individual. And you have full transparency into what they're doing and what their life is like. And so you've granular discretion

to modify their behavior in any way. China began researching a prospective digital currency between 2014 and 2015. In the aftermath of Libra, however, there was a new significance in communications from the People's Bank of China, who were dead set on sending a clear signal to the world that they intended to be the first major nation to bring a digital currency to market. Thank you Graham is the CEO of Sino Global Capital and has been based in China for the better part of seven years. In this clip, he discusses how the crypto, tech, and finance communities in China responded to the increased focus on a Chinese DSEP or digital currency and electronics payment system last year.

I think it's important to understand that there are many different ecosystems and many different constituencies that play into something like that. So I think for some of the crypto-o-Gs in China, it's just a question of what even is this? Is this crypto? Is it not crypto? How do we interact with something like DeSep? And people choose to do that in a number of ways. For some people, they saw it as an opportunity to introduce new people to crypto through kind of a halo effect.

For other groups of people, they saw it as a business opportunity where they could service, many of the companies such as Alibaba and Pingon, which is a huge insurance company, that are trying to find ways to integrate blockchain into their business. For companies like Tencent and Alibaba that have huge existing digital payments, businesses with AliPay and with TenPay, which is WeChat Pay. I think there's a little bit of an undercover story, which is that the Chinese government with DSEP is potentially competing with their enormously lucrative digital payments, businesses.

So there are a lot of moving parts here that are all kind of interacting. But the one thing then in common is that there are more eyes on blockchain and on crypto, both in China and internationally as a result of DSEP and, of course, Libra as well. Going into 2020, many believe that China's DeSepb would be one of the most important stories not only in crypto, but in global financial markets as a whole. Venture capitalist Catherine Wu put it like this in January of 2020. I think every major Chinese tech company will launch a blockchain solution and all of their payment platforms will incorporate the Chinese Decep, which is their digital currency

electric payment system. And I think, like, you know, I've always long thought that the only state-backed stable coin or digital currency or whatever you want to call it that will gain adoption and wide usage would be a China state-backed currency instead of of something like Libra. And, you know, we sort of saw the announcement of Decept, like sort of this fall, but I think this reality will gain fruition in 2020. Interestingly, some argued that, if anything, COVID-19 created even more of a motivation for China to push forward with their DECD project. China's economy went, you know, into a tailspin before everybody else's. It went down into lockdown earlier than others. And the Chinese government needs these rapid growth rates to basically stand up the political. bargain that they've maintained with their population for the last, you know, 30-odd years,

that, you know, we control your lives. You know, we have certain constraints on your ability to move capital and to do certain things, but in return we'll give you economic growth and well-being and it'll continue to improve your lives. So on that basis, the Chinese have, from time to time, just put their foot on the accelerator and throw on massive amounts of stimulus money to build bridges to nowhere and all sorts of ghost cities and everything else. And it makes to keep the machine going, building up massive amounts of debt in the process. And now they have to come out of this and just say that bargain is under threat because of the massive downturn we will have faced. How do we get out of it? And there's two things I think

that they do. One is they entered into a currency war. It's just, it's what you do. They desperately need to boost it, and the currency is one tool that they have, that is, in terms of the value of the yuan. And the other is that they use all this technology to absolutely fast-track innovation and development, both domestically and overseas with all of their various partners, using the digital currency as the vehicle through which they integrate all of those relationships. That was CoinDisc's chief content officer Michael Casey again on how COVID has created a new context for China's DeSep currency. All right, let's take a moment to gut check on the actors in this battle for the future of money. The euro is mired in its own crises as it tries to figure out the politics

of individual national health care response in the context of a common economic response. This is especially tricky as the ability for the European Central Bank to engage in the sort of quantitative easing that has become de rigour in the USA is being challenged in court. Add it up, and you certainly don't see or don't expect a big move into the euro. What about China? As we've seen, there's no doubt that they're moving aggressively forward with their digital currency project. The problem is that the fancy new digital model is still resting on shaky foundations. First, the world's opinion of Chinese leadership is flagging. Reuters is reporting that an internal report presented to the leaders of the CCP can

included that anti-Chinese sentiment was at the highest it's been since Tiananmen Square. Second, the yuan to date has been primarily an internal currency. Peter Zayon explains. China is a bit of a black box because what data they do share, they tend to lie about, but we know that 99% of the yuan in circulation is all within the mainland. It's not an internationally traded currency at all. And what about Libra? While the basket of currencies approach may have intrigued economists and even a few global

central bankers, it created an instant regulatory brickwall in the USA. Lieber tried to argue that the U.S.'s position in the global order was being maintained by having the U.S.D comprised the largest single stake in the basket, something like 50% of the basket was intended to be U.S. dollars. What's more, as they saw their positive message of banking the unbanked wasn't working, Libra switched pretty aggressively to an argument that if we don't do this, China will. U.S. regulators simply weren't buying it. And this is to say nothing of the European countries who immediately called Libra an affront to their monetary sovereignty.

By April of 2020, Project Lead David Marcus summoned all of his optimism to announce that they had decided to pursue the much less ambitious model of individual fiat-pegged stable coins. Instead of allowing anyone to build wallets and applications for the currency, it would be entirely permissioned and within the system. Instead of the disruptor that would usher in a new non-sovereign modern bank corps, they were effectively setting themselves up to compete with Tether and USDC and maybe to build the rails and be the consultants for central banks who wanted to make their own digital currencies. From this vantage point, the continued supremacy of the U.S. dollar in its current form seems assured. But we don't live in a world anymore where the only types of money are those that come from governments or even work through the official channels.

The Times, O3, January, 2009, Chancellor on the brink of a second bailout for banks. These are the words embedded in the Bitcoin Genesis block, words that harken back to the last financial crisis. Even as Libra failed to impress, there were those in power who recognized a new force on the scene. Representative Patrick McHenry in his opening remarks at the first Libra hearing.

Change is here. Digital currencies exist. Blockchain technology is real, and Facebook's entry in this new world is just confirmation, albeit at scale. The world that Satoshi Nakamoto, author of the Bitcoin white paper envisioned, and others are building, is an unstoppable force. We should not attempt to deter this innovation. and governments cannot stop this innovation. And those that have tried have already failed.

In our next episode of Money Reimagined, we look more closely at that unstoppable force. Can Bitcoin, or any permissionless decentralized cryptocurrency, compete in this battle for the future of money? You've been listening to The Breakdown, Money Reimagined, a special podcast. micro series where we dig into some of the conversations we're hosting a consensus distributed, a free to attend virtual event from May 11th through the 15th, hosted by CoinDesk. Our theme song is Money Printer Go Burr, a new track by DJ Scrilla, which is available as part of his newly released Sound Money album. This episode featured content from Nathaniel Whittamore, Neil Ferguson, Michael Casey,

Luke Groman, Nick Carter, Matthew Graham, Catherine Wu, Peter Zion, and Patrick McHenry. This episode was written and produced by NLW, announced, scored, edited, and executive produced by Adam B. Levine and the rest of the team at CoinDest. If you have any questions or comments, email podcasts at CoinDest.com. And stay tuned for the next installment on Friday, May 15th, with episode three in our continuing story. Another disaster is just waiting around the corner. Chancellor on spring of second bailout for...