Three currency wars, not one
This short blog post describes three different types of currency wars that seem to be happening at the moment.
The phrase “currency wars” is not new – typically is has referred to deliberate devaluation of one’s own currency to increase competitiveness of exports. If your currency is worth less, then your goods are cheaper to foreigners, so they buy more of them, which is generally good for your country.
Yet with increased discussion and relevance of fintech, wallets, central bank digital currencies, Libra, bitcoin, etc, it seems to me that there is more going on. I’ve identified three distinct wars (battles? fronts?) being fought:
- Currency devaluation to increase competitiveness
- Offshore e-money supremacy
- Public money vs private money
1. Currency devaluation
This is typically what people mean when they talk about currency wars.
Countries try to keep their currencies from becoming too strong so that their exports remain competitive. There are a few ways of doing this, including officials talking down the value of the currency, lowering interest rates and talking about keeping them low (sometimes called “forward guidance”), increasing the amount of money in circulation (via quantitative easing or other means), and trading in the market, selling local currency for foreign currency.
This is the stuff Wikipedia talks about in the “Currency war” entry.
2. Offshore e-money supremacy
You may be familiar with “dollarisation” – think of physical hard currency (typically USD) being used outside of the USA. There are many examples of this, typically in emerging economies such as in Latin America, Africa and some countries in Asia.
Although a regulator may not have sight or strong jurisdiction over use of their currency abroad, it certainly increases that country’s power over the foreign country (Is is soft power? Hard power? Something in between?).
Now, with the rise of use of e-money wallets from China (WeChat Pay, Alipay etc), we see a rise of Chinese RMB being used electronically outside of China to facilitate commerce.
As an example, someone in Cambodia buying a coffee and paying from their WeChat wallet to the merchant’s WeChat wallet (in RMB but maybe any of the currencies they support – currently GBP, HKD, USD, JPY, CAD, AUD, EUR, NZD, KRW). This could look like a merchant transaction or just a consumer to consumer (peer-to-peer if you want) transaction.
The point is, commerce is happening using foreign currencies outside the visibility of local authorities, and maybe outside the direct visibility of that currency’s authorities too. And it’s not just coffees – similar methods can be used for larger business transactions too.
Once people are paying in the foreign currency, it’s not a huge leap to be pricing in those foreign currencies too.
What do we call this? Renminbification? Renminbing? Yuanning? I want to claim all of these words.
Now, if the private sector has been successful in pushing usage outside the border, imaging what a state-sanctioned central bank digital currency could do.
Electronic currency usage outside the border is a new war, and wallets (e-money) are the new weapons. Wallets and apps can spread much more quickly than physical cash: they’re more effective weapons.
3. Public money vs Private money
Central banks have a job to do – typically to keep the economy ticking along nicely and maintaining the safety and predictability of the payment systems (electronic and physical). Their tools are related to their influence on their currency – whether this is affecting the value of their currency, the cost of borrowing money, or the amount of money in circulation.
Examples of private money include:
- electronic money without issuer (including cryptocurrencies such as Bitcoin, Ether, etc)
- privately issued money (stuff like Libra, issued by private entities)
- perhaps you can include issuer-less physical money (gold).
(Of course it doesn’t really matter whether this stuff is recorded on a blockchain or not, and whether these are backed by anything or not, or redeemable or not – they’re still all examples of private money.)
Even e-money (digital money issued by a private entity, backed 1:1 with bank deposits or very low risk assets (eg government bonds) denominated in the same currency) can feel less under the central bank’s control than deposits in bank accounts. Examples are your USD in Venmo, your RMB in WeChat Pay, your INR in PayTM, your SGD in PayLah.
If private money is used extensively in a community, then the tools that central banks have to fulfil their duties are less effective. Everyone wants to do a good job and everyone wants their tools to be effective.
So central banks naturally tend to have an uneasy relationship with money outside of their control. It dilutes their ability to do their job.
Today, I’m less interested in the public vs private money competition in developed and stable economies – the public money is pretty good/stable/useful. Where it will get interesting is in emerging and unstable countries, perhaps those who already prefer to use someone else’s currencies. Is there a role for private currencies in those places? Those were Libra’s target markets. It feels like there is something brewing between public money and private money.
I’ve written a little about this before in “State sponsored money – under pressure?“
The world seems to be growing apart, with a marked increase in nationalism, trade wars, and protectionism. Currency wars seem to be another front where nation states are competing for relevance and dominance. But there’s more to it than just competitive devaluation of your own currency.
Note: I’ve written this to start the discussion, it’s probably wrong in many places – I’m not an economist and I don’t have any particular inside track. But I haven’t seen these threads put together yet anywhere in the narrative so I hope it’s helpful. Happy to discuss!
Interesting geeky tidbit: When I wrote The Basics of Bitcoins and Blockchains in 2018, the British Pound, US dollar, Chinese Yuan, and a bunch of other currencies (but not the Zimbabwe Dollar!) were all designated as legal tender in Zimbabwe.
This fun quirk sadly ended in mid-2019 when a statutory instrument was announced: “The effect of the instrument is that from today only RTGS dollars, whether in the form of bond notes or coins or electronic currency, are legal tender in Zimbabwe. All other currencies ‒ the instrument specifically mentions US dollars, British pounds, South African Rands and Botswana Pula ‒ are no longer legal tender.”
This is all pretty weird. Firstly, usually it’s your own money that’s legal tender which they’ve fixed. But also the statement itself is weird – RTGS (Real Time Gross Settlement) is typically an electronic system run by a central bank and used only by banks to settle up between themselves. Normal people and businesses don’t have access to RTGS money. Typically, physical notes and coins are not considered “RTGS” money. I don’t know why they used that phrasing.