The global recession caused by the COVID-19 pandemic has wreaked havoc around the world.it is Worst recession the world has experienced since World War II and, Global GDP fell by 3.4% Surface-level analysis suggests that the COVID-19 recession was caused only by drastic measures such as lockdowns taken to contain the spread of the disease. In fact, there is an even deeper reason behind this. If left unchecked, these factors could continue to cause global economic stagnation in the future.
A comparison of US, UK and EU interest rates, money supply and inflation over the past 20 years reveals that these economies have followed the US. When the United States increases its money supply, other countries often feel justified in increasing their own money supply because they have more money to spend. This coordinated expansion of the money supply has contributed to the global economic crisis.
(Correlation coefficients of US, UK and EU money supply, inflation and interest rates from 2002 to 2022)
The pandemic recession is the latest in a series of economic disasters that have resulted from this currency correction. The coronavirus stimulus package is one example of how countries are coordinating the expansion of the money supply with the United States.US unveiled first package March 6, 2020followed soon UK on March 11th and the EU on May 27. Although well-meaning, they were issued in response to the loss of jobs and economic activity due to lockdowns, but as a result they have become one of the main causes of inflation today.
The current recession, which has affected a third of the planet, has been driven by the impact of the COVID-19 pandemic on human health and productivity, not necessarily by coordinated monetary policy. Some would argue no. But past recessions that started with regional economic mismanagement eventually turned into global economic crises. For example, the Great Recession of 2007-2009 began as a problem in the United States, where American banks and financial firms had excessive bad debts. When the bad loans surfaced, a market crash followed, eventually spilling over to other countries. The coordinated monetary policy of each country has become an important factor in spreading the stagnation of the regional economy internationally. The recession timelines in the UK and EU bear this out.America’s recession has officially begun December 2007Meanwhile, Europe’s recession began in 2016. First quarter of 2008 and finally the British one Second quarter of 2008.
Some may wonder why expanding the government’s money supply for public spending is such a bad idea. Expanding the money supply simply means printing more money. Printing money from scratch causes inflation and increases the cost of living. To curb rising inflation, the government raises interest rates. This reduces economic activity, often leading to a recession.
How to deal with a coordinated global recession?
Decoupling U.S. monetary policy from that of other central banks in the West could alleviate the global recession. Countries would then be able to direct monetary policy according to prevailing regional economic conditions, rather than being driven by a desire to keep pace with the dollar. Here we present Keynes’ Bancor system, Hayek’s modified version of the competitive private currency system, and his three potential solutions for cryptocurrencies.
The first method is by economist John Maynard Keynes. Together with his colleague EF Schumacher, was suggested A new international trading system. In this system, the bancor, a supranational currency, serves as the unit of trade. Exports are credited to Bancor’s country account and imports add to Bancor’s debt. This is an evolution of the multilateral clearing system proposed by Schumacher. The Bancor system is designed to decouple international trade from the dollar and US monetary policy. But building political buy-in for such a system would be a daunting task. Countries around the world will disagree on its introduction and who will manage it. The system allows countries to isolate themselves from U.S. monetary policy, but its practical implementation is problematic and unfeasible.
The second method is from FA Hayek. in his book, denationalization of money, an Austrian economist proposed abolishing government legal tender and switching to a private monetary system that treated money like any other commodity. In Hayek’s model, the funds with the most stability, credibility and purchasing power win in competitive markets and are widely adopted. However, in today’s environment, it is not realistic that governments cannot control money. No government would voluntarily give up control of its own currency because of private currency instability or a fragmented payment system.
Hayek’s system could be modified for international trade, but instead of competing private currencies there would be competing national currencies. Exchanges will not be done solely in dollars, but in the currency each country wishes to trade in. This would diversify foreign exchange and reduce reliance on the dollar. An example of this system is Direct trade in rupee rubles between India and Russia After Russia was sanctioned by the West for having waged the war on Ukraine. But the problem with this system arises in case of trade imbalance. If Country A has a balance of payments surplus with her Country B, you are left with a currency that cannot be used outside of Country B. In fact, in the example of direct rupee-ruble trade mentioned earlier, Russians stopped accepting rupees It is for this very reason.
Cryptocurrency is the third potential solution. It is the closest thing to a unified medium of international trade settlement since gold. It can be used for international trade, where trade is done through cryptocurrency and can be converted back to local currency later. Cryptocurrencies have unique advantages that make them easier to use than dollars in international trade. Countries can buy cryptocurrencies like Bitcoin instead of being distributed by supranational authorities like the Bancor system. Also, cryptocurrencies can be purchased in any country’s currency, thus solving one of the problems of direct transactions. A nation is not independent of any governmental influence, so it can hold surplus currency to buy cryptocurrencies and use it to trade with other nations. However, this also comes with practical problems. One is that the excessive volatility of cryptocurrencies may prevent countries from conducting trade via cryptocurrencies.the current US virtual currency But after the collapse of one of the biggest exchanges, FTX, it’s pretty confusing. This results in the catch 22 we often see. In other words, cryptocurrencies will only be stable if they are widely adopted, but unless they are stable, people will not adopt them. Also, countries like China hate cryptocurrencies that undermine their sovereignty over their currency supply. In such cases, countries like China can use cryptocurrencies for international trade while continuing to ban retail usage. Only China’s central bank will have access to cryptocurrencies, and all trade will be conducted directly through the central bank. However, the concept can still work well if sufficient stability can be achieved as cryptocurrencies mature and derivatives markets emerge.
Countries around the world are beginning to recognize the disadvantages associated with dollar trading. As more and more economies de-dollarize over the next few decades, we could see major changes in the way international trade is conducted.
In the long term, private market participants and world governments will need to use a combination of all of the above approaches to achieve true financial independence detached from the dollar. As cryptocurrencies mature and related derivative instruments bring stability, these digital currencies could be the future of international trade.
Sarkesa Naramotu belongs to the Fellowship for Freedom of India.
