Monday, August 12, 2019

What will the world's currency be like in the future?

There are many opinions regarding this issue, and the problems and defects in the world's monetary system have begun to be noticed by many. Since the global financial crisis broke out in 2008, Zhou Xiaochuan, governor of the People's Bank of China had suggested to reform the international monetary system. The downfall of Lehman Brothers caused the global liquidity and international trade to suspend, highlighting the inherent vulnerabilities and implicit systemic risks of the international monetary system. Zhou proposed to create an international currency that is isolated from the economic conditions and interests of any country to develop a "super-sovereign reserve currency" in order to overcome the "intrinsic risk of sovereign credit currency."

Paola Subacchi, director of the International Economics Department of the Royal Institute of International Affairs, expressed her view in her book The People's Money: How China Is Building a Global Currency that in global history, it is a rare exception to have a single currency based on the country's economic and military forces in the second half of the 20th century. Despite moving in slow paces, the international monetary system, the global economic order, state governance, and geopolitics are changing as well. George Soros expressed his agreement towards Zhou's point of view as well. When Soros was in China back in 2009, he thought Zhou had a unique understanding of the financial market. The United States took advantage of the U.S. dollar is the main currency and the Chinese renminbi (RMB) can become a stronger currency. He agrees that a special joint currency can be formed by several sovereign currencies, including the RMB. However, there is still the need to solve the problem of converting to another currency.

Moving beyond finance, negative attitudes are present when looking at the evolution of currency from a larger historical perspective, and from the geopolitical perspective on the views of Paola Subacchi. Their denial attitude towards the existing currencies is problematic since throughout the history the majority of the currencies in the world rely on geopolitical powers and political rights. From China during its Warring States period (475 BC – 221 BC) to ancient Rome, to countless countries in the world, the situation is basically the same. Whenever a powerful country emerges, there follows its currency. Currently, we can actually give the currency a definition based on the geographical standpoint. Currency is actually a financial unit that reflects the political order. In this aspect, some say the currency is equivalent to the geopolitical strength of a country and it is not wrong to say that a superpower will have super-currency.

Therein lies the question, what makes a country powerful? Historical experience shows that in many cases, "superpower" is self-styled. Like Great Britain in the past and United States today, which had or has the essence of being a world power in a certain period of history. No one questions the status of the pound and the dollar. Once things turned around, the dollar gradually weakened and caused the crisis to break out, thereby rendering the world to be helpless. This moment then led to differences in understanding currencies. This is the background and root cause of super-sovereign currency theory.

Studies on the history of currency show that currency is strongly influenced by geopolitics. Gold is a precious metal currency has a long history and is the only super-sovereign currency in the world. Along with the evolution of the world political system, civil society and institutions, the currency has gradually evolved into a financial symbol loaded with geopolitical significance.

It started with gold itself, and then the gold standard was established. In the era of the gold standard, on the surface currencies were still hedged to the monetary system of gold where the monetary value per unit is equivalent to a certain amount of gold. In reality, this is only a theoretical value and changes were done based on geopolitical influence and the authoritarian rule. This had led to a serious currency crisis. After that, many countries gave up the seemingly unrealistic gold standard; first, it was the British pound, then followed by the U.S. dollar. Thus, the world began to enter the era of geo-currency, also known as the dollar era.

The main issue is the realization of the value of super-sovereign currencies in the global market.

Following the trend of super-sovereign currency formation, starting from the "gold standard" super-sovereign currency, the trend is towards the direction of geo-currency. This is chiefly because a global market for fair trade is more of an idea and in reality, market transactions will be more likely to be affected by the strong influence and impact of geopolitical factors. The realization of true "super-sovereignty" is not because of value, but because of the position of geographical advantage. The pound was once strong because of the existence of the British Empire; the strength of the dollar was due to the hegemonic position of the United States after the war. Therefore, from this perspective, it is a fundamental trend that the so-called "super-sovereign currency" is replaced by geo-currency.

In the modern sense, the so-called geography is space. Geopolitics is the use of spatial advantages in various resources including economics, industry, military, law, diplomacy, minerals, energy, finance, population, politics, to engage in the competition, integration, and balance of the spatial system. What makes space so important in the modern world? The key is the demand for capital. Capital is actually a function of space and needs space to digest. Capital will have a major crisis once it leaves space. Modern geopolitics, in reality, is geo-capitalism. There is a strong currency motive behind the space, and the ability to dominate or control the market space is the real foundation of currency.

This brings us to the question, will there be an era without a superpower? For example, when a superpower is defeated, the world will descend into chaos. Will the era of regional alliances emerge? This is indeed possible, but under such condition, there is not much value in the super-sovereign currency because the artificially created "walls" that impede global transactions will exist in a more visible way. The value of the super-sovereign currency will also become relatively small and may only exist in a certain area, like the unstable euro. A more pessimistic forecast is that, with the serious regression of globalization, regional currencies will only be used in international smuggling (like in Iran and North Korea) and similar shadow economic activities. This would mean that the significance of super-sovereign currency would be lost.

Another real problem is whether the transactions on the internet, especially the free trade in the virtual world, will it evolve into de facto super-sovereign currencies?

It should be said that the internet has indeed led to certain freedoms, including free trade. However, this type of free trade is also strongly influenced or even controlled by geopolitics. The internet is not a real free world. It is still under the influence of state control and cannot break through the boundaries of geopolitical factors. Now with currency digitization on the internet like blockchains and crypto-currencies, it has become more like a token akin to chips in a casino. Contrary to what some people in the financial world imagined, the reality and trend of geo-currency cannot be changed. Even if the digitization of currency is popular in the cyberspace and the world is introducing a legal virtual currency, this is a digital distortion of geo-currency which will not be equivalent to real super-sovereign currency.

Final analysis conclusion:

In summary, super-sovereign currency can only be a dream of a free world and hard to be realized. The future still belongs to geo-currencies. Geo-currencies can be destroyed by geopolitics or they can be replaced, but they will not disappear.

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