Wob­bly cur­ren­cies: lead­ers’ neme­sis

The Star Early Edition - - OPINION&ANALYSIS - Arno Lawrenz is the head of fixed in­come port­fo­lio man­age­ment at Ash­bur­ton In­vest­ments. Arno Lawrenz

GEN­ER­ALLY, one of the things that politi­cians have to get right if they want to stay com­fort­able in power is to make sure that they avoid a cur­rency col­lapse. Just ask politi­cians in Zim­babwe and Venezuela if they sleep easy at night, or ask Theresa May and her Brexit team whether the path that the Bri­tish pound has taken over the past year gives them any com­fort.

Here at Davos 2017, for all Mr Xi Jin­ping’s laud­able rhetoric about com­mit­ment to glob­al­i­sa­tion, the one thing that China felt un­com­fort­able about was the re­newed and sud­den weak­ness in the Chi­nese yuan to­wards the end of 2016. Out came the new cap­i­tal con­trols and the Yuan has promptly strength­ened more than 2% since.

On the other end of the spec­trum we had Don­ald Trump and his as­sis­tants re­cently talk­ing down the US dol­lar, warn­ing of the dan­gers of a cur­rency which is too strong. Many now be­lieve that we are on the brink of some sort of global cur­rency war, as many coun­tries ex­pe­ri­enc­ing stresses in their growth path grav­i­tate to­wards some sort of ex­port-led recovery on the back of a weaker cur­rency. In South Africa we know all too well that hav­ing a weak cur­rency, though, doesn’t al­ways lead to an im­prov­ing growth rate.

Com­pli­cat­ing mat­ters en­tirely, global cen­tral banks try­ing hard to guide their cur­ren­cies to some per­ceived op­ti­mal level are now faced with a new threat to their cur­rency man­age­ment plans: Dig­i­tal cur­ren­cies, which ex­ist out­side of the usual cap­i­tal con­trols that cen­tral banks are able to en­act.

JPMor­gan chief ex­ec­u­tive Jamie Di­mon fa­mously said at Davos 2016: “No gov­ern­ment will ever sup­port a vir­tual cur­rency that goes around bor­ders and doesn’t have the same con­trols. It’s not go­ing to hap­pen.”

Well, Bit­coin dropped more than 17% against the US dol­lar af­ter that in the space of over a month, so maybe he had some in­flu­ence and in­sights? Hold your horses… just checked price of Bit­coin again, one year later, it’s up 96%.

Hmmm.

Global in­equal­ity

This year, at Davos 2017, No­bel-lau­re­ate econ­o­mist Joseph Stiglitz, one of the few economists who truly un­der­stands the prime is­sue of global in­equal­ity and the power of cap­i­tal flows, has put it plainly:

“I be­lieve very strongly that coun­tries like the US could and should move to a dig­i­tal cur­rency, so that you would have the abil­ity to trace (this kind of) cor­rup­tion. There are im­por­tant is­sues of pri­vacy, cy­ber-se­cu­rity, but it would cer­tainly have big ad­van­tages.”

Crit­ics of dig­i­tal cur­ren­cies have pointed out that the lack of con­trol over such cur­ren­cies means they are open to be­ing used for ne­far­i­ous pur­poses. But then just ask In­dian Prime Min­is­ter Naren­dra Modi why he re­moved 86 per­cent of his coun­try’s cur­rency from cir­cu­la­tion in a Novem­ber 2016 sur­prise an­nounce­ment. The rea­son? To tackle cor­rup­tion, curb tax eva­sion, and shut down the shadow econ­omy – the very things that dig­i­tal cur­rency crit­ics point to.

Cer­tainly, when one of the key ben­e­fits of a dig­i­tal cur­rency is the abil­ity to do faster and much cheaper bank trans­fers – in essence by cut­ting out the mid­dle­man (who usu­ally hap­pen to be banks them­selves) – it be­comes ob­vi­ous why banks, among oth­ers, are threat­ened by dig­i­tal cur­ren­cies.

Given the tech­nolo­gies avail­able, in­ter­na­tional bank trans­fers are ar­chaic. Dig­i­tal cur­ren­cies (and the block chain tech­nol­ogy be­hind it) are the way of the fu­ture.

In Africa, for ex­am­ple, we have seen the suc­cess of mo­bile tech­nol­ogy in pro­mot­ing com­merce. It’s es­ti­mated that roughly 60% of Kenyan com­merce takes place via M-Pesa, which is a form of mo­bile phone cred­its as a form of ex­change. It works well – un­til you want to cash in your cred­its af­ter which fees, like with banks, are very large. Again, dig­i­tal cur­ren­cies can be shown to pro­vide a safe and cheap medium of ex­change for the poor. In this way, dig­i­tal cur­ren­cies could help to ex­pand ac­cess to fi­nan­cial mar­kets at low cost.

The big­gest ob­sta­cle per­haps then is that it seems that the sta­tus quo ap­pears to suit the very 1% who are de­bat­ing the topic at Davos on be­half of the 99% who need the solutions.

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