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This is an edited transcript of our podcast episode with Professor Barry Eichengreen, one of the leading thinkers on international economics and exchanges rates. We discussed the nature of past pandemics, the possibility of the Yuan becoming the dominant currency, why crypto will not topple the dollar, and much more. While we have tried to make the transcript as accurate as possible, if you do notice any errors, let me know by email.
Bilal Hafeez (02:57):
Welcome, Barry, to my podcast. It’s such a great honour to have you on because I followed your work during my entire career, for most of my investment banking research career at least. I spent a lot of time looking at foreign exchange. I would always look forward to any work that you produce on FX. I view you as one of the authorities on currencies and foreign exchange and exchange arrangements and so on.
Barry Eichengreen (03:18):
It’s good to be here.
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This is an edited transcript of our podcast episode with Professor Barry Eichengreen, one of the leading thinkers on international economics and exchanges rates. We discussed the nature of past pandemics, the possibility of the Yuan becoming the dominant currency, why crypto will not topple the dollar, and much more. While we have tried to make the transcript as accurate as possible, if you do notice any errors, let me know by email.
Bilal Hafeez (02:57):
Welcome, Barry, to my podcast. It’s such a great honour to have you on because I followed your work during my entire career, for most of my investment banking research career at least. I spent a lot of time looking at foreign exchange. I would always look forward to any work that you produce on FX. I view you as one of the authorities on currencies and foreign exchange and exchange arrangements and so on.
Barry Eichengreen (03:18):
It’s good to be here.
Barry’s Background & Career Path
Bilal Hafeez (03:18):
Great. Well, before we jump into certain macro topics, I thought it might be useful to just learn a bit about your background. Because obviously you’ve been in academia for a long time now. How did you first end up pursuing an academic career? Then why did you have a focus on exchange rates for a part of your career? Why did you pick a historical angle as well, economic history? What are some of the drivers of these career decisions that you made?
Barry Eichengreen (03:44):
Yeah. I teach today at the University of California at Berkeley. I was, in fact, born and grew up in Berkeley. One implication of that was that my parents’ dinner parties would be populated by professors. I would listen to the conversation, the intellectual conversation. I would also hear about the lifestyle, which struck me then and strikes me now as unusually pleasant that you have a greater combination of income security on the one hand and the ability to be your own boss to design your own workload on the other hand. I think that’s a singular privilege.
In terms of going into international economics, I should preface that by saying I’ve done a couple of economic history podcasts as well. I have two fields that I identify with economic history and international or exchange rate economics. On the exchange rate economics front, I would point to a couple of fact. Well, I would step back and say, going into international economics in the late 1970s, when I was in graduate school, was fairly unusual. That macro, as it was taught in the United States was very heavily closed economy macro.
We’re much more aware now that we’ve had three or four decades of globalization about international linkages, but it was a small minority of researchers who are doing open economy macro at that time. What led me to it? Two facts, I think. One was that my parents were immigrants to the United States. They took my brother and I to Europe on vacation once when we were very young. I think I was so aware of the rest of the world in a way that many kids growing up in the United States may not have been.
Secondly, I had a very close friend from nursery school, from the age of three, who I stayed in good touch with all through college and graduate school who discovered international economics before I did. I learned it from him. This is Jeffrey Frankel who teaches at Harvard.
Bilal Hafeez (05:46):
Good friend to have.
Barry Eichengreen (05:46):
Yeah, absolutely.
Why Past Pandemics Are a Poor Guide to the COVID Pandemic
Bilal Hafeez (05:47):
Yeah, that’s really interesting. I guess in terms of topics we can talk about, there’s so much we can focus on. Perhaps, we can start with something more recent. Obviously, we’re in the midst of this pandemic and there’s been all sorts of experimental policies, not necessarily experimental, even just very large or very quick policies have been implemented. We have that strand on the one side. There’s a policy story and how we can recover from this and so on. Then there’s either ongoing issue’s of populism. I know you’ve written a book. Was it two years ago? Called Populist Temptation, which went to the heart of why are we seeing populisms today. Maybe we just come up the US election as well and we’ve seen lots of very disruptive transition from one administration to another. I just wanted to get your thoughts on both of those topics, perhaps the intertwined as well in some way, but say, on the pandemic and its impact on the economy, how are you viewing that?
Barry Eichengreen (06:43):
When the pandemic erupted, I got a lot of phone calls from reporters and others just like I do whenever the stock market crashes. They say, “How does this compare with the Great Depression? Or is there a historical analogy from which we can draw inferences about what is coming?” As an economic historian, I’ve always been cautious or sceptical about drawing parallels, even the idea that history doesn’t repeat itself, but it rhymes, is a little too mechanistic for me. This time, my answer was, history is not a very good guide to what’s coming.
That this is a different kind of shock than the global financial crisis of 2008, 2009. It’s got a supply shock component as well as a demand shock component. It’s an economic crisis with a health crisis superimposed and our normal economic models are not going to be helpful without an overlay of epidemiological dynamics. Even the 1918, 1919 Spanish flu, is not a particularly useful precedent or source of information because we didn’t have vaccines. We didn’t have sulpha drugs. We have much more fragmentary data about the state of the economy back then.
World War I was ending and demobilization was beginning. There was another gigantic shock superimposed. There have been studies that have looked at output losses and recoveries from the Spanish flu doing the same kind of thing we do today looking at the correlation between Spanish excess mortality and economic activity. But I’m convinced that that’s not a terribly useful guide for what’s happening now. I think we are very much in the dark in terms of how the pandemic will evolve. We have to worry about things like, what will the take up of vaccines be?
There are an awful lot of vax sceptics out there. If we don’t get 80% of the relevant populations to be vaccinated, it’s not clear that we will develop the herd immunity that allows people to safely go back to restaurants and concerts and get on airplanes and so forth. We’re not sure how effective the vaccines will be in the face of future mutations. There are lots of uncertainties on the epidemiological front that will affect the recovery of the economy. I also think there’s one especially interesting debate about how consumer spending is going to evolve once the pandemic is better under control, because there are two diametrically opposed views of that question. One is that there is going to be a big party. It’s going to be like the 1920s after the Spanish flu.
Bilal Hafeez (09:19):
Yeah, I was going to ask you just about that. The decades match nicely as well, the Roaring Twenties comeback.
Barry Eichengreen (09:24):
Right. People may be splurging on those restaurant meals and concerts and holidays that they’ve been denied for more than a year. In a number of countries, including the United States, personal savings rates have gone up during the pandemic, whether because the government has been very generous with relief checks or because spending opportunities have been locked down. The personal savings rate in the US most recent reading is up to 14% from something on the order of 5%. People can finance this splurge, this Mardi Gras like phenomenon.
There’s another view as well that many people have been reminded of the inadequacy of their precautionary saving by the pandemic. Two-thirds of Americans do not have savings adequate to replace six weeks of lost earnings. That’s why the relief check thing and the extension of unemployment benefits was so important. Just like the Great Depression led to more conservative financial behaviour of the generation that lived through it for many years thereafter.
My colleague, Ulrike Malmendier, has this Depression Babies article in the Quarterly Journal of Economics that demonstrates that there is a scenario in which people remain more cautious. They continue to engage in more precautionary saving. The recovery of spending from the pandemic is weak rather than strong. These two views have very different implications for inflation, more inflation in the first case than the second. They have very different implications for how long governments will have to sustain physical stimulus.
Bilal Hafeez (10:56):
I guess that this stage is too early to tell which path we’re on, because we’re just still in the midst of the pandemic.
Barry Eichengreen (11:02):
Absolutely. I think it’s too early to tell at this point. One can look at past epidemics. We’ve had bird flu and swine flu and HIV and a variety of past epidemics. There is NGO in the Netherlands that has tabulated 34 pandemics since 1970 affecting at one point or another 130 or so countries. You can look at savings behaviour there, but there is a problem of external validity. This is a different kind of pandemic. Most of those, it’s more contagious. It’s affected more countries. I don’t think we can say on the basis of past history, once again.
Bilal Hafeez (11:37):
Yeah. Then obviously, we’ve had these quite dramatic lockdowns as well, which have had clear and direct impact on people’s livelihoods. They haven’t been able to work, unlike previous other pandemics where people’s whole sectors of the economy weren’t necessarily closed down. The policy response have been different to many of the pandemics. It’s probably hard to find parallels.
Barry Eichengreen (11:57):
It is. I know of one study of the Spanish flu, once again, that has looked at different US states and cities and use newspaper articles to identify what cities used lockdowns and school closures in response to the Spanish flu and then ask, how does economic activity evolve subsequently? The answer there came in two parts. Number one, the cities that locked down did better in terms of spending and growth for five plus years afterwards. When you control for population growth in the five years leading up to the pandemic, that effect disappears for reasons that I don’t understand cities that were growing faster before the Spanish flu were more aggressive in taking non-pharmaceutical interventions in response to it.
Have We Reached Peak Political Polarization?
Bilal Hafeez (12:44):
Yeah. It’s complicated as always. The other big theme is populism, which is ongoing. The pandemics is mixed up with this as well in terms of lockdown sceptic banks and sceptics and so on. Leaving that aside, in a more general sense, we’ve had the US presidential election. President Trump lost, so populist. People define him as a populist has lost. We get President Biden who you could view as a more establishment personality, although we’ve yet to see his policies, and maybe he may not be as establishment as people think. In Europe, Brexit has gone through.
On the European side, you could say there is some elements of populisms ongoing. Say, on the US side, what’s your sense of why we’ve had this wave of populism in multiple parts of the world? At the moment, do you think we’ve reached peak populism? In the coming years, we may not see as much populism because the US picture is changing.
Barry Eichengreen (13:37):
I think we have to place the populist revolt of, I don’t know, 2016. That was the Trump election and the Brexit referendum, both against the backdrop of the long-term increase in political polarization, which is clear on the data for the United States. For example, since the 1960s, it’s been going on for half a century, and the long-term increase in income inequality, which has been going on in the United States since at least the 1980s for 40 years or so. That made for a fertile ground for demagogues of all sorts, including populist demagogue.
There were lots of people who were distrustful of the other side of the political spectrum because they weren’t meeting in the middle anymore, and lots of people who were unhappy about the development of the economy because they felt rightly that they were not respected, and they were being left behind. Superimposed upon that, of course, was the identity politics element that people felt threatened by the other. That’s the second strand of populism. Always and everywhere, there’s economic grievance strand.
There’s the identity politics strand, where the traditional dominant majority for the United States we can point to adult White men for convenience, felt threatened by people of other religions, other races. They were threatened by feminists. I think the way Trump attacked Hillary Clinton and more generally, and the access Hollywood tape, if you remember, that is indicative of what resonated with his populist inclined supporters. That identity politics element is still there.
Although maybe the Black Lives Matter movement and so forth has begun to create a reckoning and set the stage for a healing there, the economic grievance part is still there. Although a higher minimum wage and stronger trade unions and better education and training, which is all part of the Biden agenda, will set the stage for addressing that as well. If you believe what I just said, which is the hopeful version, then we are seeing peak populism. I’m not 100% sure, I believe it personally, but that would be the peak populism version of the answer.
You and I are talking in the wake of the demonstrations, the riot at the US Capitol in early January, and people are asking, I’ve had conversations with friends about whether this will also lead to a reckoning and cause people to move to the political middle and avoid political extremists. Populists on the left, fascists on the right, what have you, it’s hard to distinguish left from right in this context. I think there is a scenario, unfortunately, in which there is this reckoning and a decline in political polarization and people move toward the middle, because the vast majority of people have seen the dire consequences that can flow from populism and extremism.
You get an extremist fringe then that’s even less reconciled with the mainstream. Mainstream Democrats and Republicans in the US learn to cooperate with one another, but we also have domestic terrorists. The United States looks more like Italy in the 1970s with the red brigades. It’s not a happy scenario.
Bilal Hafeez (17:01):
On the income inequality side, as you said, that trend has been in place at least since the 1980s, possibly earlier. Why do you think we’ve seen this growing trend? I mean, it’s a global phenomenon as well. It’s not unique to the US. Because if we know the why, it may help us understand whether it will continue for the next five years or so.
Barry Eichengreen (17:21):
I have a chapter on this in my book, The Populist Temptation. There’s the plug. The two factors people point to are globalization and skill biased technical change that computers and robots and the like complement the labour of skilled workers and they substitute for the labour of the unskilled. I think the studies that we have done suggests that it’s primarily the skill biased technical change and only in a subsidiary way the globalization that’s been responsible for what we’ve seen. Then you’ve got to ask the question, why this skill biased technical change?
Why did we have technical issues change that work to the advantage of less skilled workers before 1975 or so, assembly lines and all that? Then we had skill biased technical change thereafter. The best answer to that question I’ve seen is that we invested after World War II heavily in higher education. Once the supply of skilled workers became larger, it paid for companies to redirect their R&D efforts in ways that produced technologies that complemented the now more abundant skilled labour.
When you have primarily less skilled workers, you built assembly lines where those workers could carry out simple tasks. When you had mainly skilled workers, you started to build robots and use computer technology. What this suggests is that we can direct the bias in technical change. Government can subsidize in tax, different forms of R&D in ways that direct R&D so that the resulting technologies benefit the vast majority of workers and not only the most skilled. Daron Acemoglu has a series of articles that make this point very, very well.
The other thing I would observe is that this increase in income inequality is seen in many different places, but it’s more extreme in some countries like the US and others. It’s more extreme in the English-speaking countries than in the others. That suggests that something else, maybe speaking English or more plausibly tax policy. The state can affect the distribution of income.
Has Financial Globalisation Constrained Central Bankers?
Bilal Hafeez (19:28):
I can see where you’re coming from. Also, I mean, do you think there is something about free flow of capital or not? When you say globalization that can be interpreted as trade policy, global supply chains, China coming online and so on, but also the free flow of capital. Do you think that’s exacerbated inequality or not?
Barry Eichengreen (19:47):
I do. Funny you should ask. I have a brand-new January 2021 IMF working paper on financial globalization and inclusive growth. That’s World Bank language, IMF language. I think of the paper as financial globalization and inequality. There is strong evidence to that effect. For example, that financial globalization makes taxing footloose capital more difficult. That’s a large part of this story for why capital taxation has a share of GDP in the US and globally, has gone down over decades.
At the end, again, we point to policy measures, macroprudential measures, tax and transfer policy, educational policy that can mitigate that effect. There are ways to reconcile open capital markets with inclusive growth, desirable degree of equity and income distribution that can be done.
Bilal Hafeez (20:40):
This leads us on to some of the international finance questions. One is the trilemma versus the dilemma. The trilemma, historically, you look at the free flow of capital, independent monetary policy, and free floating currencies. If you do have free flow of capital, then in order for you to have independent monetary policy, you need to have free floating currencies. That’s the classic policy interpretation of the trilemma.
Professor Helen Ray, a number of years ago, talk more about the dilemma, arguing that even with free floating currencies, policymakers have lost control of monetary policy because of global financialization. You need to have some management of capital flows. What do you think of that, that kind of critique of the trilemma or dilemma of the international finance system?
Barry Eichengreen (21:25):
Helen is a dear friend of mine. However, I grew up with the trilemma. It’s hard for people to change their minds and statement about when the facts change, notwithstanding. I am a believer in the trilemma by and large, rather than Helen’s dilemma. They’re developed in response to Helen’s work some more work by my Berkeley colleague, Maury Obstfeld, and others that suggested that maybe the dilemma view was correct for emerging markets in developing countries.
Advanced economies could exercise the relevant degree of monetary autonomy and have plenty of monetary room for manoeuvre. That’s what the global financial crisis suggested. Now, in 2020, 2021, we have the unprecedented fact of lots of emerging markets using monetary policy in asset purchase programs and big cuts in interest rates as if they really do have significant degree of monetary autonomy. Maybe the facts are changing. Maybe the problem in the historical data that Helen analysed was that emerging markets, central banks didn’t have the policy credibility.
Their economies didn’t have the financial depth. The domestic currency denominated debts that were necessary to conduct independent monetary policy, but that they’ve made a lot of progress in the direction of putting those preconditions in place in the last 20 years or so.
Bilal Hafeez (22:48):
Your view on managing capital flows, there’s a view that if you do want to manage capital flows, you should try to incentivize or restrict short-term speculative flows and try to encourage so-called long-term flows. There’s another viewpoint to say that you just don’t know the nature of the flows, things might get disguised one for the other. You just let markets determine that. Do you have a view on that?
Barry Eichengreen (23:14):
There again, my view has evolved, but only a little bit. In the late 1990s, Ricardo Hausmann at Harvard and I worked together on this problem of original sin, Ricardo’s term, not mine. That was the view that short-term debt and foreign currency debt are risky. Emerging markets find it difficult to borrow in any other form because of some intrinsic problem, perhaps credibility, perhaps something else. I think what we’ve learned over time points in the direction that domestic currency debt and long-term debt can be highly risky as well.
Hyun Shin and co-authors at the BIS have a really influential working paper from last year showing that countries that issued domestic currency debt haven’t done better in terms of financial stability and economic stability than countries that issue foreign currency debt, reason being that they’re still marketing their debt to foreign investors, even if it’s now denominated in their domestic currency and a foreign investor that sees the possibility of a default or a decline in bond prices and sees a depreciation of the country’s exchange rate gets hit twice.
They’re even more likely to scramble out of those assets than if they were denominated in the foreign currency. The exchange rate was not a consideration from the investor’s point of view. I think the answer is that all forms of debt come with risks. Now people are talking a lot about the need for indexed debt, GDP index debt or some other kind of indexed debt. That may help along certain margins, like when it comes time to restructure a debt.
You can get the creditors to agree on terms more easily if you give them an indexed bond where they gain if the economy does unusually well, like Argentina, after it’s not the most recent, but the restructuring before that. There are risks there as well.
Bilal Hafeez (25:02):
Yeah. How does China fit into this? Because obviously, they were an emerging market or they still are or it’s hard to define them. Obviously, they’re one of the largest economies in the world. If you look at the growth of their government debt issuance, it’s increased quite sharply. At the same time, there’s been huge foreign interest by Chinese debt. If you look at the way Chinese government bonds trade, they trade like an advanced economy bond. It trades in that way. How do you see the evolution of Chinese markets over the last, let’s say, 10 years since the financial crisis, say?
Barry Eichengreen (25:35):
The Chinese authorities are making slow, but steady progress. They focus on the slow, but steady part after 2015 when they had a bout of turbulence toward deepening and toward opening their domestic financial markets. I think what’s going on today is unusual, because the circumstances are unusual for two reasons. Number one, Chinese government bonds actually offer positive interest rates, which makes them rather more attractive compared to all the other countries with large government bond markets where interest rates are zero or negative. Investors are looking for positive yield and China offers it.
This differential between Chinese interest rates and the rest of world interest rates probably won’t last forever. At some point, interest rates in other countries will turn positive again, or at least we hope. Secondly, the Chinese government’s implicit liabilities haven’t materialized yet. There’s the debt of the SOEs and all that. China’s central government is likely indebted by international standards debt to GDP ratio of 50%, but if corporate debt in China is somewhere between 160% and 200% of GDP and significant fraction of the latter is SOE debt implicit liabilities of some level of government. China will not look as attractive as those defaults ramify through the system or those debts are assumed by the government.
The Recipe for Being Top Reserve Currency: Can the Chinese Yuan Displace the Dollar?
Bilal Hafeez (26:59):
From historical perspective, when you have a leadership change on the economic side or new hegemons rising, so you had, say, the US in the late 1800s start to overtake, economically, the UK and then I guess by the First World War was evident that the US was top dog. You have these transitions, but then you have counterpoint like Japan was viewed as the next big challenger to the US economically in the 1980s, and that faltered. How do you put China’s rise in a historical context?
Barry Eichengreen (27:31):
Again, I think it’s hard to generalize from one transition from the pound sterling to the US dollar, but the recipe that my co-authors, Arnaud Mehl and Livia Chitu, and I put forward in our 2017 book, How Global Currencies Work, 2nd blog was that to have a first class international currency, the issuer has to have size, has to be a big economy. China satisfies that. It has to have stability. China arguably satisfies that 2015 wasn’t stable. Politically, it appears to be stable. Economically, it has skated through the last two crises relatively well.
I think it satisfies the stability criteria. The third element is liquidity. China has to build liquid financial markets. That’s a process that takes time. I don’t think it’s there yet with its residual capital controls and so forth. Those were the three elements we emphasized in the book. Nowadays, I tend to emphasize a fourth one as well, which is the political prerequisite for international currency status. When I go to China, I put it in the following way. Haven’t been there for a year-and-a-half.
Every crew first class international currency in history has been the currency of a political democracy or republic. This is true of the US, was true of the UK. It was true of the Dutch Republic. Before that, it was true of the republic and city states with their citizen legislators of Genoa, Florence, Venice. Investors, whether they’re central bank reserve managers or private investors, want to be reassured that the rules of the game are not going to be changed arbitrarily by the executive before they will, say, park a large share of their portfolios in Shanghai.
If China were to keep its current political system and the renminbi were to become a leading international currency or a coequal with the dollar, that would be historically unprecedented. One can ask, I think, would more limited political and institutional changes suffice for the renminbi to emerge as a first-class international currency, like making the PBOC independent? That seems like heavy lift for the current Chinese government anyway. If they really made the regulators in their central bank permanent, would that be enough? Maybe.
Bilal Hafeez (29:50):
Yeah, yeah, I see your point. This goes on to the larger point, which I’ve tried to avoid until now, which is, are we seeing the end of the dollar or not? Every time the dollar falls for a year, these days, it’s like a month, people say, this is the end of the dollar, whether it’s renminbi or bitcoin or something like that, Trump or something like that, is the end of the US legitimacy. What’s your stance on the dollar?
Barry Eichengreen (30:13):
For the dollar to lose its international currency status, there has to be an alternative. As I just argued, I don’t think the renminbi is ready for primetime. We’re going to have to wait and see whether the euro area had a crew Hamiltonian moment last summer by creating the recovery fund and issuing 850 billion euros of EU bonds. Whether that’s a one off or the start of something new and big, we don’t know yet.
The Status of the Euro
Bilal Hafeez (30:42):
On the Euro, because Euro, obviously, is a large economic bloc, it’s a liberal democracy, rule of law and so on. It meets all those criteria. Do you think it’s the fact that we don’t have some kind of fiscal union or fiscal risk sharing that stop the Euro from challenging the dollar?
Barry Eichengreen (30:58):
I think the most serious obstacle to the Euro playing a larger international role is that there is a shortage of safe euro denominated assets. If you compare the volume of AAA government bonds issued by euro area countries with the comparable number for the United States, it’s like four times as large for the US. If you then subtract off the euro area bonds held by the European Central Bank, not available to investors. If you subtract off the bonds, euro area bonds held by euro area commercial banks as reserves, not available to investors.
There’s simply aren’t enough high-quality euros to go around. We’re talking about the bonds of Germany, Austria, the Netherlands, and one other country that escapes my mind at the moment. That’s why I think that there’s the need for EU bonds to supplement the others.
Bilal Hafeez (31:53):
Yeah, it’s quite funny. Because over the years, I’ve spent a lot of time speaking to policymakers in Europe. Whenever I speak to the Bundesbank, they always have this view that they don’t want the Euro to internationalize too much or become a reserve currency. Because that would allow a loss of discipline on monetary policy, that the seigniorage benefits, they view in a negative sense that you need to have tough love, very dramatic kind of view. It always struck me that the Germans, in particular, don’t really have this appetite to challenge the dollar.
Barry Eichengreen (32:23):
I think this may be changing as we speak, that COVID has changed German attitudes toward fiscal policy or minded them that in exceptional circumstances, exceptional fiscal actions should be taken. The fact that the United States, for the last four years, has been an unreliable alliance partner, means that the argument that François Mitterrand and other Europeans through the ages made that he scarred made about the dollars exorbitant privilege, that its foreign policy lever for the country that issues that Germany’s traditional aversion to being a foreign policy power, that we don’t want an army.
We don’t want a foreign policy. We leave that to the European Union. All of a sudden, Germany recognizes the need to be more assertive in the geopolitical domain because it can’t rely on the United States to do the right thing, that may translate into more support for an exorbitant privilege for the euro.
Bilal Hafeez (33:21):
A couple of years ago, you wrote this really interesting paper on the relationship between US military allies and those countries holdings of the dollar. Do you want to just elaborate on that?
Barry Eichengreen (33:33):
Yeah. We looked at some recent data and saw that countries like South Korea and Japan hold a larger share of their reserves in dollars than their economic characteristics trade in financial flows, et cetera. With the United States and the behaviour of other countries, would lead you to expect those two countries rely on the United States for their nuclear weapon umbrella. It led us to the broader question of whether alliance politics are important, whether central banks and governments tend to hold and use the currencies of their alliance partners.
At that point, we put our economic history hats on. We, being once again, Arnaud Mehl and Livia Chitu, looked at the alliances that existed before 1913, this tangle of alliances that caused the assassination of Archduke Ferdinand to spiral into the Great War as country after country came in in support of their alliance partners. That confirmed the supposition that countries do hold the currencies of their alliance partners. That is clearly a negative from the point of view of reliance internationally of the dollar if the US has become a less reliable alliance partner.
I thought compelling argument prior to the November 2020 election, now we’ll find out whether it remains a compelling argument or international views of the United States as an ally begin to change in a more positive direction.
Why Crypto Will Not Topple The Dollar
Bilal Hafeez (35:04):
You mentioned earlier the issue around how the dollar can be used as foreign policy tools, the so-called weaponization of the dollar. There’s a number of efforts by countries, so for example, China is very active on its digital currency, the central bank digital currency programs to create almost like an alternative settlement system with the renminbi that could allow payments to avoid touching the US system. Then at the same time, you also then have the decentralized crypto world, bitcoin, Ethereum, and so on, where many crypto enthusiasts see that as the future that will topple fiat currency. How do you think about this intersection between digital currency crypto and the dollar?
Barry Eichengreen (35:48):
I would distinguish three kinds of digital currencies. Number one, the bitcoin type where value can be volatile where people hold it because other people hold it. They think for their own reasons that might have some value. The reality is it has value because other people think it has value. I think that those crypto assets are great for gamblers. They’re great for money launderers and tax evaders. They’re not great as a form of money, which supposed to be a stable store of value means of payment widely accepted unit of account. Bitcoin is none of the above.
Category number two is stable coins like Facebook’s Libra, whatever it’s now been renamed as, because I’ve worked for a long time on pegged exchange rates and currency crises. I see the analogy between stable coins and pegged exchange rates. That makes me sceptical that the peg will remain the peg forever. That makes me think that there can be runs on stable coins, even if the stable coin is fully collateralized, meaning it’ll be really expensive to operate. The derivatives built around it will not be fully collateralized.
That tells me that Libra or whatever it’s been renamed as needs the lender of last resort and it doesn’t have one. The feds not going to act as lender of last resort to the Libra ecosystem. I don’t believe the second option has legs either. The third option is central bank digital currencies, and that’s the one that is going to survive. I think lots of central banks will, in the end, create a system of digital accounts for retail customers or digital wallets for individuals once they’re really, really convinced that the system is secure. The fed is going to move slow.
I think other central banks will, by and large, move more slowly than people think. Because if a hacker can invade a variety of US government agencies, as happened this year, what happens if they invade the central bank digital currency system? That would bring down the whole economy. Don’t want to go there. China, the People’s Bank of China seems to be convinced that they’ve done enough work to make a central bank digital currency be secure. What effect would that have that would make cross border payments more convenient and lower cost?
Wouldn’t change anything else. It wouldn’t make Chinese financial markets more liquid, which is necessary for an international currency. It wouldn’t make people feel more secure about doing transactions or with or holding significant shares of their portfolio in renminbi. I saw a survey of merchants in Seoul, South Korea sometime back. They were asked two questions, “Would you accept Alipay from your Chinese customer?” By and large, they said, “Sure.” Then they were asked, “Would you accept a Chinese central bank digital currency?” They said, “Well, maybe not?”
Would it have a backdoor? Would the PBOC be able to monitor everything we were doing? The same security considerations come in there as well. When central bank digital currencies become more widespread, which, as I’ve said, I think will be further into the future than many people think, that may help to solve the problem that we’re so reliant on the dollar for cross border transactions. At the moment, there really is no alternative to the dollar, because other issuers lack the size or the stability or the liquidity, those three elements that I talked about before.
The size problem goes away when it’s easy to get value on Australian central bank digital currency or a Canadian central bank digital currency. Those things can’t really be used as reserves now, because there’s not much of them. It’s expensive to cap yet an additional market and manage yet an additional currency. The convenience of the CBDC, I think, can help with that and you’ll get a more diverse currency ecosystem.
Bilal Hafeez (39:40):
Actually, CBDC could… Ironically, it could end up helping some of the smaller currencies like the Australian dollar, Canadian dollar, end up having a large allocation in some way, that that could end up being one of the consequences or the less thought-out consequences.
Barry Eichengreen (39:53):
I had a colleague in London who’s thinking about this stuff suggest that to me recently. I think it’s plausible. The first rule of forecasting is give them a forecast or give them a date, never give them both. I think it’s plausible if we don’t pin ourselves down to a date.
Bilal Hafeez (40:09):
For now, at least, the dollar is still going to remain the dominant currency. If there is a challenger at this stage, the Euro is probably still the most likely candidate, although that’s still quite far off as well. Is that fair?
Barry Eichengreen (40:21):
I agree with that, that the dollar is the cleanest dirty shirt in the pile, the analogy that everybody uses, and that the Euro is probably the second cleanest shirt.
The Two Key Reforms For The International Financial System
Bilal Hafeez (40:30):
Just to round things off, in terms of reforms of the international financial system, I remember after the global financial crisis, there was so much talk. There’s the G20 meeting and that reforming the system. This time, around the pandemic, there hasn’t really been as much. It’s obviously has been much more to do with health. Are there any things that are really pressing on your mind that you think that these reforms or certain reforms should be considered right now?
Barry Eichengreen (40:54):
Yeah. I would focus on two items, I think. Number one, we haven’t had more discussion, because we haven’t had more problems. The reason we haven’t had more problems is the feds dollar swap lines, which extended to big advanced country central banks. It’s extended to the same for emerging market central banks, that it arbitrarily decided to provide swap lines in 2008. It went back to Mexico, Brazil, Singapore, and South Korea. Why those four countries? Who knows? That’s not an equitable or efficient way to allocate dollar swap lines.
I think doing that should be the business of the IMF. The IMF needs more resources if it’s going to step up and do on its own what the Fed had to do in March of 2020. More resources and yet another attempt to provide short-term liquidity lines to foreign central banks, I think, is important. We currently have a Federal Reserve Board that understands that it also has to act as a global lender of last resort. There’s no guarantee that that will be true of a future Federal Reserve Board or that a future Congress will let the fed act that way.
The second reform, I think, is important is on the debt restructuring front. A sovereign debt restructuring and international monetary and financial flows are closely connected to one another. When you get debt problems, you get volatile capital flows. We haven’t had enough talk about that problem yet, because we haven’t seen the emerging market defaults yet, four or five this year, one last year. Potentially, a tidal wave of defaults and restructurings coming next year and we still approach that in a very ad hoc and chaotic manner.
Though the DSSI, the debt sustainability initiative, that was put in place in April addresses the official bilateral government to government debts of a six-tier so poor countries, it doesn’t do anything for the middle-income countries and it doesn’t do anything about the commercial debts. IMF and World Bank outsource the last problem to the Institute of International Finance, which I characterized as putting the fox in the henhouse. Their interests are aligned with those of hedge funds, ultra-funds, investors, more generally, not with the global community or the governments of emerging markets.
There hasn’t been enough discussion yet about whether we need to revisit Anne Kruger’s sovereign debt restructuring mechanism idea. Whether we can solve the problem by introducing single limb provisions, aggregation provisions into collective action clauses in debt contracts, whether we need to do for governments, what the United Nations Security Council did for Iraq in 2003, shelter its assets from litigation in foreign courts. There are different approaches to this problem. Those are the obvious ones. Maybe there’s less obvious ones that should be considered as well.
I think that should be a priority. That’s a problem I’ve been writing about debt restructuring since the 1990s and made a little bit of progress with simple collective action clauses and transparency rules for debt. There’s a lot more still to come. We’re going to have a serious stress test of the system next year.
Bilal Hafeez (44:16):
Yeah. It sounds like a lot of these paths lead to the IMF having to have more resources and be more proactive, which it sounds like the IMF is quite central in all of this.
Barry Eichengreen (44:26):
Absolutely. I think any serious international monetary reform will have the IMF at its centre and countries around the world will be more comfortable having a multilateral organization in which everyone has some level of voice taking the lead than having the US Treasury, even under the admirable control of Janet Yellen taking the lead.
Bilal Hafeez (44:47):
Yeah, that makes sense. Okay, that’s really, really good. I like to round off my conversations with a few more personal questions. One is around how you manage your research and information overflow, overwhelmed with data and information, research papers, articles, blogs, Twitter, and so on. You’re quite prolific in what you do. How do you manage all of those things?
Barry Eichengreen (45:11):
I work too many hours, my wife complains. I try to not look at the news first thing when I get up, but make research or actually, not do teaching. That’s the first thing when I get up. I do my teaching in the afternoons, and the morning as fresh and researched focused as I can. Then later in the day, start to read blogs and newspapers. I haven’t read, as we speak, in the late California morning, I haven’t read today’s newspapers. I will admit this has become harder and harder in light of recent events between, first, the global financial crisis and now the pandemic and what followed the election in United States. That’s the best I can do by … I turn off my email first thing in the morning and try to turn it on later.
Books That Influenced Barry
Bilal Hafeez (45:55):
Yeah, I hear you on that. I tried to do something similar as well. I find often the news very distracting. It can really absorb a lot of your time, and email as well is also quite distracting as well. The other question I wanted to ask was, are there any books or a single book that really influenced you a lot over your life, whether on the work side or at a personal level?
Barry Eichengreen (46:16):
Well, it’s probably easier to answer on the work side. Let me mention three. When I was in graduate school, Charles Kindleberger’s The World in Depression, 1929, 1939 was very influential to me because it was international economic history with a prominent role for exchange rates and capital flows and explaining the Great Depression. It’s a story about how the Great Depression occurred because Britain was no longer able to lead the world economy and the US was not yet prepared to lead the world economy, that even today resonates with the US and China.
I didn’t, at the time, appreciate Friedman and Schwartz’s Monetary History of the United States as much because where I went to graduate school at Yale, we were Keynesians rather than monetarists. That’s how James Tobin taught us. I’ve come to admire that book and see it as a way to write monetary and financial history with a real organizing framework behind it, which makes that book an admirable model. The third one I would point to is not quite a book, but it should be a book. That’s the Yellen notes. Have you heard of the Yellen notes?
Bilal Hafeez (47:25):
No, I haven’t, no.
Barry Eichengreen (47:26):
Well, we Yale-s … and many of us have them. Janet Yellen was a graduate student at Yale who worked with James Tobin, as many of us did. He took Tobin’s macro and monetary economics courses. He wrote the most amazing set of notes that have been Xeroxed and passed hand to hand by generations of graduate students and young professors. That’s really where I learned macroeconomics in a way that made a difference for me. Dr. Yellen has made many important contributions to economics in the world. I would put her beautifully worded and handwritten notes of Tobin’s course right up there.
Bilal Hafeez (48:09):
Is that available in electronic form, by any chance, as a scanned copy or something?
Barry Eichengreen (48:14):
I haven’t looked. I have them on my bookshelf. I might be reluctant to put them up there without Janet’s approval. Now all of a sudden, it becomes a political issue with her confirmation hearings coming. I think in the same way that Lorie Tarshis’ notes of Keynes’ lectures in the 1930s became a book. I think these notes ought to become a book as well.
Bilal Hafeez (48:35):
Okay, yeah, yeah. I’ll take around online to see if there’s something floating around. That sounds really good. I guess also one can then just maybe review her speeches over the years and collate those even. She’s a very clear thinker. Okay, with that, thank you very much. One question I did have was, if people wanted to follow your work, what’s the best place for them to go to?
Barry Eichengreen (48:58):
I have a Berkeley homepage. Twitter now is better. My publisher made me do it a decade ago. When something new comes out, I tweet about it.
Bilal Hafeez (49:08):
Okay, great. Okay. I’ll include links to all of those in my notes in the show notes.
Barry Eichengreen (49:11):
Very good.
Bilal Hafeez (49:12):
Great, okay. That was excellent. I really enjoyed the conversation.
Barry Eichengreen (49:14):
As did I. That was fun.
Bilal Hafeez (49:20)
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Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
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