Welcome to Finance and Fury, the Furious Friday edition.  In this episode we will look at the concept of a one world currency and if one single currency could actually work for the world?

  1. There has been an increased level of discussion around this topic over the past few years – especially with central banks looking to adopt digital forms of currencies over the next few years
  2. However – these are based on the individual country’s central banks – There are about 195 countries – depends on who you ask – but working off the UN numbers – there are 195
  3. At the same time – There are 180 currenciesrecognized as legal tender in United Nations (UN) member states
    1. Abut 15 of these UN recognised nations use some other nations currency already as their legal tender – like the USD as the global reserve currency
    2. However – excluding the pegged (fixed exchange rate) currencies of the 180 – which there are about 50 – which also peg themselves to the USD – there are only 130 currencies which are independent or pegged to a currency basket
    3. In other words, there are free-floating exchanges – with exchange rates between different currencies –
    4. If you want to learn more about this – if you haven’t listened did an episode called: Looking at the factors behind the AUD/USD exchange rate movements.
  4. However – In the current financial system – these currencies are a digital form of fiat currency –
    1. This doesn’t include alternative medium of exchanges that have been used and are currently used – like gold – or crypto –
    2. Technically – a medium of exchange is anything that can be used in an economic transaction as long as someone will take it – it can technically be treated as a medium of exchange
  5. But the major forms of what is referred to as Currency is meant to be the legal tender that makes trade possible – in other words – what governments allow us to use within our domestic boarders
    1. These forms of currencies are meant to make transactions easier within the economy – and for everyone within the economy – which is us
    2. If you are in Australia – you will use AUD to buy goods or services – if you are in the US – USD, if you are in Germany, you will use the EUR
  6. But is having 180 currencies of which 130 are floating exchanges complicating matters?
    1. If you wanted to travel to Europe – you can’t use AUD to buy goods or services – have to transfer AUD to EUR – vice versa
    2. this begs the question – Wouldn’t a one world currency be best?
    3. 180 different currencies with foreign exchange rates for each can and does increase the complexity of an already complex international economy
    4. So, wouldn’t replacing all of these currencies with just one global currency be the optimal solution?
  7. This line of thinking was the whole point behind the implantation of having a Euro in the first place –
    1. A single currency zone to make it easier to travel and do cross boarder trade
    2. it isn’t just about ease or simplicity for travel or trade – but was about minimising transaction costs –
    3. Banks charge costs and services – there are also risks involved with currency exchange risks which we will come back to in a minute
  8. So why not expand this concept further – beyond simply just being implemented in the EU – why not do it worldwide?
    1. Some at central banking communities as well as think tanks think so – Mark Carney, Bank of England governor, has proposed the creation of a global digital currency as a way of stabilising global financial systems and protecting international economies from trade and currency wars
    2. He has made these viewpoints widely known – Speaking at a US Federal Reserve conference – Carney said that a “Synthetic Hegemonic Currency” (SHC) governed by the public sector (governments) and backed by a number of central bank digital currencies could replace the US dollar as the global reserve currency, and that this would be preferable to the alternatives, such as the Chinese Yuan/Renminbi
    3. World already has a reserve currency = USD – maybe not for long – SDR (special drawing right) is essentially a SHC
  9. A global currency wouldn’t just be implemented overnight – it would have stages and steps – have to get a cashless society – then have digital central bank currencies – then use these as a basket of currencies to replace the global reserve – like the SDR – then eventually – unlike currently where an SDR can only be used by monetary officials – it may be implemented and used by the public at large

 This sounds very nice in theory – I mean – Why not have one currency that everyone in the world works off?

  1. First – lets have a look at money actually is – In The Wealth of Nations, Adam Smith defines money by the roles it plays in society – there are three primary roles that it plays
    1. A store of value with which to transfer purchasing power from today to some future time – it retains its value –
    2. A medium of exchange with which to make payments for goods and services – i.e. people will accept it for providing physical goods or services
    3. A unit of account with which to measure the value of a particular good, service, saving or loan – i.e. it is divisible – or in other words- we all know the value of a $50 bill
  2. But these functions of money operate in a hierarchy
    1. There are many assets that people view as stores of value – like an investment, or property like a family home — that are not used as media of exchange
    2. At the same time – you can have an asset that can only act as a medium of exchange if at least two people are prepared to treat it as a store of value
    3. And for an asset to be considered a unit of account, it must be able to be used as a medium of exchange across a variety of transactions over time between several people – 1 house is not worth 1 other house – they will likely be different
    4. These levels of hierarchy really just point to the reality that money is a social convention that is enforced by the monetary officials by fiat – or government decree
  3. History of money – Humanity has evolved over time – from a very basic barter system to gold coins, to gold backed currency, to fiat currency to the modern era – where the majority of transactions are done digitally, or electronically –
    1. But these evolutions in monetary systems have undoubtably increased the ease of trade – as well as the possible amount of trade that can occur
    2. Image that we were back in bartering times – and you wanted to buy a pack of gum from the super market – should be less than $1 – if you have an apple – might be okay to do – but what if you only have a cow – that cow is worth much more
    3. Now imagine that you wanted to buy some goods that only another nation could produce – trying to send a cow across the world may actually cost more than the good you are purchasing itself – like some clothes off amazon
    4. But in addition – this barter or exchange of physical goods system created a situation where it was hard to store wealth in physical commodities – as many of these were perishable – be it apples, or cows or goats – created problems – perishable – may not lost a trip and have limited lifespans – you can’t save a bushel of apples for retirement
    5. This system did work okay in small communities – but on a global scale – there is a natural increase in the difficulties in carrying out an economic transaction – these difficulties are normally referred to as frictions in an economic sense
  4. Hence – global currencies are being looked at by monetary officials – And technically – global currencies aren’t a new thing – think about gold – it was universally accepted as a medium of exchange
    1. But this also had its complexities – or frictions – you had to transport the gold – which can be heavy and can be stolen
    2. there may be some pros to a global digital currency – ease of transactions – not having to worry about transaction costs for one – One of the best ways is to look at the previously and currently used systems –
    3. Examples of the EU – the single currency arrangements were established formally in 1999 – risks of dealing with foreign currency can be significant – due to currency spreads –
    4. Let’s look at a situation before this – Germany and France – say that Germany wants to produce some car parts and France is going to be exporting power to the German car plans – lets say that the deutschmark is the same as a franc – 1 to 1 – so the costs of power for the plant are the cost base for the production of the car parts – but now Germany goes through some economic shock – drops the deutschmark to be 1 to 0.75 franc – now – it is more expensive to produce car parts – then have to sell to France or other nations at a greater price – pushing up the costs for other nations but also making German cars less competitive – so someone might buy Italian cars instead
    5. The EU created a situation where this additional concern was removed – this was pretty nig as foreign exchange risks are a part of an international economy

So – beyond these eases of transactions and travel – what may be some downsides to these policies – as there are some major issues with a one world currency system – many of these can be seen with the EU as well

  1. Monetary control – and monetary policy – If you have a one world currency – who is in charge of this? Who determines the money supply, and what the interest rates should be?
    1. Looking at the economies of Greece compared to Germany is an example – Germany is a very stable county economically – Greece is not so much –
      1. Greece has gone through some debt issues – technically – nobody wants to lend to them as they are at a massive risk of defaulting – so if you are a Greek company or the government – looking to finance projects – you may normally be in trouble – however – the economic functions of bonds and FI have a solution to this – you get compensated more through higher yields on debts
    2. So if someone is going to be looking for investment – say the German government – and they are looking for lenders – they are economically secure – but the money is gong to be lent in euro – regardless of – the risk – the only return is now in coupon payments of debt
    3. So nations like Greece – which aren’t as secure – as Germany – all the debts are being issued in EUR – what happens then if Greece defaults? Creates a massive shock in the EU – saw this in the post GFC era – the EUR and global economy went through a massive shock – for a country that made up 2% of the EU economy
    4. So this form of monetary system – having every nations interconnected creates an increased fragility for the globe – rather than having individual floating currencies – where the collapse can be semi-contained to that one nation – all nations on earth have to soak up the losses – however – you may not know it is going on if everything I priced in the one world currency – it may just be represented in inflationary pressures
  2. Trade – may create a beggar thy neighbour situation without even manipulating the currency
    1. If a country is struggling economically – then its currency should depreciate – this in turn makes it more competitive – This means it is cheaper to travel to or to purchase goods from – this is what should have happened to many EU nations – like Greece – where they could set their own interest rates and have their currency depreciate to attract investment or trade – however under the EUR – they couldn’t – so the road for economic recovery is very limited for them – Floating currencies tend to stabilise over time
    2. Imagine that the whole world is on this system – it would eventually create economic ruin for most of the world – with a few winners – like in the EU – Germany and France are doing okay out of the system – Greece, Slovakia, Czechia and Hungary as just a few – not so much
  3. Biggest question – who would control it? BIS or IMF?
    1. In most countries the currency is controlled by the central banks and the government – one controls the supply and the cost and the over enforces its use
    2. This wouldn’t be allowed under an international system – there would need to be a one world system of control of the currency and enforcement
    3. Why? Well what stops every country on earth printing trillions of dollars if this isn’t in place?
      1. With individual currencies this punishes the nation – devaluation of their currency – if it can’t keep up with the demand for their currency
    4. But if the currency is the only one that can be demanded – then what is to stop each nation – especially the poorer nations from printing all the money – it becomes a race to the bottom for everyone – the whole world may become a hyperinflated mess
  4. This leaves the other option – that one central power – like the BIS controls the printing of money – or the growth of credit –
    1. However – this has major downsides – What happened under the gold standard? Well nations would hoard wealth – System of mercantilism – countries hoard the money as a store of power –
      1. The idea that countries could achieve additional wealth through exporting more than it imports – in other words – current accounts of a country would increase and that nations wealth – in an economic sense would also increase
      2. So a country trying to game the system may be incentivised to limit imports and maximise exports – be it natural recourses – or food
    2. However – the real-world implications of this may be dire for the population
      1. Sure – economists and the politicians may be able to point to budget numbers –
      2. But it may create shortages of goods and services for the nation – especially in a world that is so reliant on other nations for goods and services
    3. The end result may be a restriction of trade – would hurt the world economy – which at the end of the day is us
  5. Also – what about the other rules and regulations that may come along with this
    1. Monetary policy – In the EU – the ECB controls the currency’s interest rate
      1. The other issue is who is in control of the policies – think about nation to nation interests
      2. If the head of the currency was someone who was Aus – would they do things that may be unfair to someone in south America
    2. Fiscal or trade policy – trying control the economic activity of each nation to avoid a situation like currency hoarding
  6. Where we stand at the moment – many nations are moving towards a cashless society or a pure digital currency style monetary of system –
    1. I personally think this is bad –
  7. a one world currency is a long way off at this stage – but it doesn’t mean that many monetary officials don’t have there eyes set on this down the road in the next 10+ years
    1. At this stage it is not possible to do – in 10 years once the SDR is likely to be the reserve currency and most nations currencies are purely cashless – it becomes more possible – but it may not provide much in the ways of benefits – To have any benefit – The assumptions are that it is administered responsibly – that is a huge assumption – one that is almost laughable when looking at how a single nations currency is administered – between the cost of the cash rate and the amount of the money supply – now expand this by an order of magnitude of 195 – not just timing it by 195 – but to the power of 195 – as the complexity of the world economic system is enormous
  8. But in short – I think this would be a bad idea to implement – just my two cents – as greater controls over the economy often don’t lead to the intended outcomes

Thank you for listening to today’s episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/

 

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