The Future of Money by Eswar Prasad — balances of power

This assessment of the way cryptocurrencies will change the financial system argues that the state will always remain in control

Gavin Jackson

A bitcoin ATM in a Hong Kong shopping mall © Marc Fernandes/NurPhoto via Getty Images

In the 13th century, Kublai Khan, grandson of Genghis Khan, created the first fiat currency, money that gets its value from the state declaring it has value. 

This was not the first paper money — Chinese merchants had been using deposit certificates since the 7th century. 

It was, however, the first not backed by any kind of commodity, such as gold, but solely the power of the state. 

Indeed, anyone not accepting the tokens risked being put to death. 

It was the birth of money as most of us know it today.

Now, according to Eswar Prasad, we are in the midst of a new revolution, this time launched by private innovation. 

The spark came from bitcoin in 2009, the first digital money that needed no trusted third party — whether a government, a commercial bank or payments processor such as Visa. 

While the libertarian ideal of its creators — a financial system free of state power — will be frustrated, he argues, the decentralised record-keeping that underpins cryptocurrencies will bring cheaper and more efficient payments.

In The Future of Money, Prasad envisages an era of monetary separation between the state and the private sector. 

While modern money, mostly, consists of bank deposits, the commercial banks depend on central banks to provide the reserves backing them and to administer the system of interbank payments. 

New technologies will break apart this partnership. 

While the state’s money will provide a store of value, private currencies will, often, be used to make payment.

Take Facebook’s mooted cryptocurrency, now known as Diem. 

That could, Prasad argues, transform the creaky and expensive world of international payments. 

At present, cross-border payments hop from bank to bank with each adding fees at every step and repeating costly anti-money laundering checks. Instead, transfers could all take place by buying and then sending Diem. 

That would save often poor migrants from having to hand over to the financial sector a big chunk of the remittances they want to send home.

Diem is meant to be a “stablecoin” — a privately issued cryptocurrency backed by a reserve of fiat currency, such as the US dollar. 

These are the only cryptocurrencies that actually work as money, Prasad argues. 

The technology behind bitcoin facilitates cheaper payments, but the currency is far too volatile for making payment — rocketing one day and plunging the next.

Counter-intuitively the elasticity of fiat currency provides more stability than the artificial scarcity of bitcoin. 

It makes fiat currency a much more appealing prospect for businesses which can be assured that when times are bad the central bank can step in and print more.

That will mean central banks will remain, as Prasad puts it, central. 

Decentralised payments systems may become more common but the stablecoins built on top of them will be linked to fiat currency, leaving the central banks’ role in macroeconomic management intact. 

Central banks’ creating their own digital currencies, too, is a matter of when not if — the Bahamas has already launched its digital Sand Dollar, while major central banks such as the European Central Bank are still exploring their options.

The combination of domestic central bank digital currencies and international stablecoins will both expand and reduce the state power embodied in money since the era of Kublai Khan. 

State-run digital currencies have enormous potential as a surveillance tool. 

In many ways that might be good — Prasad points out that in his native India corruption usually involves handing over an envelope of cash — but it could, without proper safeguards, mean losing privacy.

The dollar will remain pre-eminent, he argues, thanks to the vast amount of safe assets — US government debt — available

New international currencies, on the other hand, will limit governments’ ability to keep funds in or out through capital controls as well as providing an alternative to get around US sanctions. 

The dollar will remain pre-eminent, he argues, thanks to the vast amount of safe assets — US government debt — available. 

Cryptocurrencies cannot offer such a depth of reliable stores of value neither can they offer the same ease of trading, vital in a crisis. 

Nevertheless, new rivals will mean the dollar’s dominant position will be more fragile.

The book is comprehensive to a fault and a vital handbook for anyone looking to understand how finance is changing. 

The style, however, can be quite dry and the language, often, too academic. 

And while the author’s vision of the future is, in many ways, plausible, is this really as new an era as he suggests? 

Stablecoins are very similar to existing bank deposits. 

Indeed, the US is considering regulating cryptocurrencies like banks. 

From a consumer point of view the future may look pretty similar even if, behind the scenes, payments systems work differently.

Prasad’s prediction that the monetary balance of power will shift to the private sector will depend not on the efficiency of decentralised ledgers but the state’s willingness to tolerate the challenge. 

Eras of “free banking” in Scotland and the US when banks issued their own banknotes, similar to stablecoins, were brought to an end in the middle of the 19th century not because of better technology but because the state asserted control.

Indeed, since The Future of Money was written, regulatory pushback has intensified. 

China, in particular, has cracked down on bitcoin, outlawing foreign exchanges from selling in the country. 

It has humbled Ant Group, the financial services company run by Jack Ma. 

The government has forced it to break apart, including turning over its user data to a partly state-owned joint venture. 

Facebook’s Diem, too, has been given short shrift by western regulators. 

Bitcoin might have unleashed a revolution but, like so many revolutions, it might have now come full circle.

The Future of Money: How the Digital Revolution is Transforming Currencies and Finance by Eswar S Prasad Harvard, $35/Belknap, £28.95, 496 pages


Doug Nolan

Another big miss for non-farm payrolls, with September’s 194,000 jobs gain less than half the 500,000 forecast. 

But with the Unemployment Rate down to 4.8% and Average Hourly Earnings up 4.6% y-o-y (not to mention almost 11 million job openings), there is ample evidence that much of the labor market has turned exceptionally tight. 

The Senate passed debt ceiling legislation that should kick the can until early December. 

But let’s skip immediately to the week’s pressing developments. 

It’s turning into a debacle. 

Evergrande bonds ended the week at 20 cents on the dollar, with yields surging to 72.5%. 

China’s real estate sector was hammered this week following the surprise default by mid-sized developer Fantasia Holdings. 

October 6 – Bloomberg (Rebecca Choong Wilkins): 

“China’s property industry has suffered its first default on a dollar bond since China Evergrande Group sank deeper into crisis in recent weeks, fueling investor concerns over other highly leveraged borrowers and about global contagion. 

Fantasia Holdings Group Co., which develops high-end apartments and urban renewal projects, failed to repay a $205.7 million bond that came due Monday. 

That prompted a flurry of rating downgrades late Tuesday to levels signifying default. 

Creditors are now scanning debt repayment calendars as they try to suss out where the next flashpoints across the increasingly strained property industry may be -- nearly a dozen firms have debt maturing through early 2022.”

October 7 – Wall Street Journal (Frances Yoon and Quentin Webb): 

“Fantasia's nonpayment surprised investors because the… developer had recently said it had no liquidity issues, and indicated it had enough cash to repay the outstanding amount on a five-year dollar bond it issued in 2016. 

Fantasia, like Evergrande, was an active issuer of high-yield dollar bonds in the last few years. 

Some market participants surmised that Fantasia and its controlling shareholders had elected not to repay the company's international debt, which raised doubts as to whether other Chinese developers might do the same to conserve cash or give priority to their onshore creditors. 

‘Market confidence is shattered by the recent event, which has triggered a reassessment by investors of sponsors' willingness to pay,’ said Jenny Zeng, co-head of Asia Pacific fixed income and a portfolio manager at AllianceBernstein in Hong Kong.”

October 8 – Bloomberg (Olivia Tam): 

“Yields on Chinese dollar junk-rated dollar bonds are poised for their worst week in 18 months as Fantasia’s surprise default accelerated worries about contagion risks from Evergrande’s debt crisis. 

Onshore notes were joining the declines Friday following the Golden Week holiday.”

Chinese developer bonds were routed. 

Kaisa Group yields surged a full 15 percentage points this week to 35.5%, compared to only 13.5% to begin September. 

Easy Tactic yields were up 9.2 percentage points this week to 41.7%. 

Yango Justice International yields surged 27 percentage points to 50.9%, while Red Sun Properties yields jumped 5.2 percentage points to 20.5%. 

Times China Holdings yields spiked 18.5 percentage points to 26.7%, after yielding only 4.9% on September 15th. 

Sunac China Holdings yields rose 5.6 percentage points this week to 19.2%; China Aoyuan Group 4.6 percentage points to 16.4%; Yuzhou Group 6.7 percentage points to 23.3%; and Agile Group Holdings up 3.5 percentage points to 11.0%.

October 8 - Bloomberg: 

“Chinese property shares fell after a report that more than 90% of China’s top 100 property developers’ sales declined in September by an average of 36% from the same period last year… Sept. sales totaled 759.6b yuan, -36.2% from September 2020 and 17.7% lower from the same period in 2019: Shanghai Securities News, citing China Real Estate Information Corp. 

Research. Among companies, 60% of developers saw sales decrease by more than 30% y/y in Sept. (More than 90 developers saw a decline in their sales from a year ago). 

Beijing, Shenzhen and Guangzhou saw transaction volume of residential properties decline 30% y/y, while Shanghai fell 45%.”

Many major developers have lost access to new finance, while real estate transactions throughout China have slowed dramatically. 

Mounting evidence suggests China’s historic apartment Bubble has been pierced. 

Now it’s a matter of how rapidly prices deflate. 

There appears no place to hide. Country Garden Holdings, China’s largest developer, saw yields (7.25%, 2026) surge 181 bps this week to 7.60%. 

Yields for this perceived pristine, investment-grade credit began September at 4.74%.

An index of Chinese high-yield dollar bonds was pummeled, with yields surging 310 bps this week to 17.5%. 

This index yielded 8.20% at the end of May, and 12.0% to conclude August. 

For further perspective, this yield briefly spiked to 14.0% during the March 2020 pandemic crisis (back down to 8% by August).

October 7 – Reuters (Marc Jones): 

“Investment bank JPMorgan has estimated that troubled Chinese property giant Evergrande and many of its major rivals have billions of dollars worth of off-balance sheet debt that, once added on, ramp up their leverage ratios. 

JPMorgan's China and Hong Kong property analysts said the tactic is likely to have been used to help firms look like they were conforming with new borrowing cap rules introduced last year, but Evergrande's case looks the most extreme. 

‘Instead of true deleveraging, we think Evergrande has shifted some of the interest-bearing debt to off-balance sheet debt,’ JPMorgan's analysts said. 

‘Commercial papers, wealth management products and perpetual capital securities, etc, which are not officially counted as debt.’ 

They estimated Evergrande's ‘net gearing,’ as debt as a ratio of a firm's equity is known, was at least 177% at the end of the first half of the year, instead of the 100% its accounts reported.”

October 4 – Wall Street Journal (Yoko Kubota and Liyan Qi): 

“Rows of residential towers, some 26 stories high, stand unfinished in this provincial city about 350 miles west of Shanghai, their plastic tarps flapping in the wind. 

Elsewhere in Lu’an, golden Pegasus statues guard an uncompleted $9 billion theme park that was supposed to be bigger than Disneyland. 

A planned $4 billion electric-vehicle plant, central to local leaders’ economic dreams, remains a steel frame with overgrown vegetation spilling into the road. 

The structures are monuments to the once-grand ambitions of China Evergrande Group, now among the world’s most indebted property companies, and a case study in how China’s dependence on real estate as an economic engine helped feed those ambitions.”

October 7 – Reuters (Ryan Woo and Liangping Gao): 

“Sagging demand at China's urban land auctions amid a crackdown on borrowing by private developers risks squeezing regional finances, pressuring local governments to scramble for other income sources to fund investments and support the economy. 

Land sales soared to a record 8.4 trillion yuan ($1.3 trillion) in 2020, the equivalent of Australia's annual gross domestic product, bolstering fiscal budgets in a pandemic year. 

But tighter regulations on borrowing by private developers since the summer of last year are increasingly eroding demand for land. 

The value of nationwide land sales abruptly fell 17.5% on year in August…”

A few weeks back (“Evergrande Moment”), I posited China had not reached a so-called “Lehman Moment.” 

The crisis at Evergrande was unfolding at the “Periphery.” 

There was little at that point indicating a systemic crisis at the “Core.” 

This week showed notable gravitation in Crisis Dynamics toward China’s vulnerable “Core.”

The week was notable for contagion spreading to Chinese bank credit default swap (CDS) prices. 

China Construction Bank CDS jumped six to 73, the high since June 2020, and up from 46 bps on September 17th. 

Industrial & Commercial Bank of China CDS gained five to 73 bps – the high since April 2020. 

China Development Bank CDS rose 5.5 to 66.5 bps – the high since April 2020, and up from 44 bps on September 16th. 

Bank of China CDS increased 3.5 to 70 bps – the high since May 2020, and up from 44 bps on September 17th. 

China's sovereign CDS rose a notable five this week to 52.5 bps – the highest level since June 2020. 

China CDS began September at 32.5. 

This is one to watch. 

For comparison, South Korea CDS ended the week at 20 bps, with Thailand at 43 bps and Malaysia at 60 bps. 

For a system as egregiously levered as China, spiking market yields and CDS prices are analogous to a blitzkrieg of tiny pins attacking a bloated, timeworn and thin-skinned Bubble. 

Contagion this week spread to Asian sovereign CDS. 

Indonesia CDS jumped 10 to 88 bps, the high since March. 

Philippines CDS rose eight to 61 bps, the high back to July 2020, while Malaysia CDS rose seven to 60 bps (high since July ’20). 

Vietnam CDS gained six to 115 bps (high since July ’21). 

It’s also worth noting the spike in CDS prices for some “frontier” markets. 

Sri Lanka CDS surged 104 this week to 1,688 bps; Mongolia 40 to 287 bps; Pakistan 33 bps to 475 bps; and Ghana 182 to 826 bps.

In general, the week provided corroboration for the EM de-risking/deleveraging thesis. 

Brazil’s real dropped another 2.6% to a six-month low, with the Chilean peso down 1.5%, the Turkish lira 1.2%, the Mexican peso 1.2%, the Hungarian forint 1.2%, and the Indian rupee 1.2%. 

In local currency bond markets, Turkish yields surged 49 bps to 18.14%; Malaysia 24 bps to 3.60% (high since July ’19); Poland 17 bps to 2.41% (high since June ’19); Romania 17 bps to 4.65% (high since April ’20); and South Africa 10 bps to 9.83% (high since May ’20). 

Philippine dollar bond yields surged 24 bps to 2.69%, the high since April 2020. 

Indonesian dollar bond yields rose 16 bps to 2.44% (high since March). 

Contagion is even beginning to wash up on our shores. 

U.S. Investment-grade CDS traded to 55 bps Wednesday, the high since March. 

High-yield CDS ended the week at 308 bps, also trading this week to six-month highs. 

Bank CDS prices rose for a third straight week. 

Goldman Sachs CDS traded to a six-month high 62 bps Wednesday, up from 51 bps on September 15th. Citigroup (56bps), Bank of America (50bps) and JPMorgan (49bps) CDS Wednesday also traded to six-month highs. 

Those managing strategies that incorporate Treasuries as a risk market hedge must be nervous. 

Ten-year Treasury yields surged 15 bps this week to a four-month high 1.61%.

Jumping 13 bps to 1.06%, five-year yields were back above 1% for the first time since February 2020. 

Benchmark MBS yields jumped 14 bps to an almost seven-month high 2.05%. 

Inflation Angst.

The five-year Treasury “breakeven” rate (market inflation gauge) jumped 12 bps this week to a five-month high 2.67%. 

WTI crude trade above $80 for the first time since October 2014, with a year-to-date gain of 64% (gasoline futures up 68% y-t-d). 

The Bloomberg Commodities Index jumped another 1.7% this week, increasing 2021 gains to 31.5%. 

October 5 – Bloomberg (Saket Sundria and Elizabeth Low): 

“Asian buyers are paying top dollar for a variety of fuels that can be fed into steam boilers or power turbines as they seek alternatives to increasingly pricey natural gas. 

The electricity crisis is roiling energy markets from Europe to Asia, with fuels that can be used for heating or power generation such as propane, diesel and fuel oil in high demand. 

Goldman Sachs… predicts the crunch will drive greater consumption of crude later this year, while China has ordered state-owned firms to secure energy supplies for winter at all costs. 

In Asia, prices of propane -- an oil product that’s typically used for cooking or making plastics -- have surged to the highest since at least 2016, while fuel oil recently almost doubled from a year earlier.”

Panic buying and hoarding as the global energy crisis escalates. 

“China has ordered state-owned firms to secure energy supplies for winter at all costs,” as panic begins to envelop global energy markets. 

China, India and others are desperately short of coal. 

The UK and Europe are short of natural gas. 

With winter approaching, there is clear potential for the global inflation shock to intensify. 

If global supply-chains weren’t already a huge mess…

October 7 – Bloomberg (Jeff Sutherland and Tom Hancock): 

“The hit from China’s energy crunch is starting to ripple throughout the globe, hurting everyone from Toyota Motor Corp. to Australian sheep farmers and makers of cardboard boxes. 

Not only is the extreme electricity shortage in the world’s largest exporter set to hurt its own growth, the knock-on impact to supply chains could crimp a global economy struggling to emerge from the pandemic. 

The timing couldn’t be worse, with the shipping industry already facing congested supply lines that are delaying deliveries of clothes and toys for the year-end holidays. 

It also comes just as China starts its harvest season, raising concerns over sharply higher grocery bills.”

The outlines of the unfolding crisis are beginning to come into clearer focus. 

Global de-risking/deleveraging is gaining momentum. 

China’s Bubble collapse appears poised to accelerate. 

With $3.2 TN of international reserves and the PBOC mandating price stability, China’s Renminbi has been a pillar of strength. 

But for how long? 

How much speculative leverage has accumulated in higher-yielding Chinese Credit instruments over this long cycle? 

How serious is the risk of a “hot money” exodus?

The PBOC added $123 billion of liquidity over ten sessions to calm the markets. 

What will be the scope of liquidity requirements when crisis dynamics engulf the “Core” - as confidence wanes in China’s banking system and financial structure more generally? 

Beijing waited much too long to begin reining in its Bubble. 

Pandemic stimulus stoked already perilous excess. 

Now Chinese officials face a terrible predicament and onerous decisions. 

At this point, large liquidity injections could further stoke inflationary pressures, while risking a disorderly decline in the Renminbi. 

The Fed waited much too long to begin reducing historic monetary stimulus. 

Pandemic stimulus stoked already perilous excess. 

Federal Reserve officials could soon face quite a predicament and difficult decisions.

Was the jobs report good enough for a November taper? 

That just doesn’t seem the crucial question today. 

What does the world look like a month from now? 

Has China’s unfolding crisis by then enveloped the “Core”? 

How powerful are de-risking/deleveraging dynamics in November, globally and in U.S. markets? 

My thoughts harken back to the March 2020 dislocation in bond (and equities) ETFs. 

Since then, Fed pandemic measures spurred additional gargantuan bond fund inflows (at historically low bond yields), while simultaneously unleashing powerful inflationary dynamics. 

Quite a combustible mix. 

Clearly, the Fed is not about to “slam on the brakes.” 

Might the bond market? 


The Biden Doctrine has yet to emerge. Beware those who claim otherwise

Managing America’s complicated relations with China is an aspiration in search of a strategy

Andrei gromyko, the Soviet Union’s pre-eminent America-watcher, remarked that the object of his study had so “many doctrines and concepts proclaimed at different times” that it was unable to pursue “a solid, coherent and consistent policy”. 

And that was during the cold war, a period of relatively cool-headed American policy analysis. 

How much more applicable does Gromyko’s observation seem to the first eight months of Joe Biden’s presidency. 

Half a dozen different versions of the Biden Doctrine had been outlined by foreign-policy commentators before the president had even given a major foreign-policy speech.

Parsing the president’s campaign statements, some suggested the alleged doctrine was a return to the pre-Trump status quo, with a warm embrace of allies and the international order. 

Other prognosticators, focusing on Mr Biden’s scepticism of military intervention and his party’s protectionism, foresaw a more diplomatic version of Donald Trump’s scattergun nativism. 

Some pinpointed the president’s interest in shoring up democracy; or his rhetoric about prioritising policies beneficial to American workers. 

How to make sense of all this? “Biden’s everything doctrine” was the verdict of an essay in Foreign Affairs.

An alternative response might be to question the utility, as Gromyko did, of the competitive scramble to codify foreign policy in this way. 

Airing that sceptical view around Washington, dc, this week has been awkward at times; several of the foreign-policy experts Lexington consulted turned out to have written at least one Biden Doctrine column, if not three. 

Yet much of what they have described will not only inevitably turn out to be wrong; it is not really doctrine at all.

Experts in strategy, a rare species in the Washington menagerie, set a high bar for the word. 

To them it describes a statement of national interests so fundamental that it is liable to survive multiple administrations and events. 

Only three foreign-policy doctrines are considered to have risen to that level. 

The first was the Monroe Doctrine of 1823, a declaration of American primacy in the western hemisphere that arguably still pertains. 

The second was the Truman Doctrine, whereby America shouldered responsibility for containing the Soviet Union. 

The third, less boldly articulated, was the post-cold-war belief in American hegemony that underpinned the foreign policies of the 1990s and 2000s.

This has not deterred rampant doctrine inflation over many decades. 

Most presidents since Truman have been credited with a unique doctrine, including all the recent ones. 

Though what the doctrines of Barack Obama and Donald Trump amounted to is still in dispute. 

(A proponent of the alleged Trump Doctrine, Michael Anton, suggests it is encapsulated by a line from the Wizard of Oz: “There’s no place like home.”) 

Most of these presidential doctrines cannot be usefully compared to the three foundational ones, or even to each other.

They mostly represent relatively minor amendments to the foreign-policy status quo; or else new methods to sustain it. 

The Eisenhower Doctrine extended containment to the Middle East; the Carter Doctrine decreed that America would use military power there if necessary. 

Many so-called doctrines also mistake presidential aspirations for outcomes. 

Mr Obama was mostly concerned with avoiding the mistakes of his predecessor. 

Mr Trump’s nativism was less of a guide to his foreign policy than his zeal to undo whatever Mr Obama had done. 

It is hard to detect the strategic undergirding that purists insist upon in recent additions to the canon, such as the Bush Doctrine of preventive war or the Clinton Doctrine, a commitment to expanding the realm of democracy and human rights.

Whether Gromyko was right to consider Washington’s obsessive doctrine-spotting an impediment to good policy is debatable. 

But it has clearly propagated a misleading notion of presidential power. 

Far from being the untrammelled “decider-in-chief” that George W. Bush briefly was after 9/11, presidents tend to be almost as bound by public opinion in foreign affairs as they are at home. 

Thus, Franklin Roosevelt moved from isolationism towards engagement as his majorities increased. 

But “of course voters prefer not to take responsibility for their influence on foreign policy,” harrumphs the foreign-policy scholar Robert Kagan. 

“Hence the focus on the president.”

Another weakness of the Washington foreign-policy babble is that, by elevating the mundane, it makes the momentous moments in American and world affairs harder to identify. 

And (at the risk of contributing to the bloviating) now may be such a time.

American hegemony is over; China’s bid for supremacy in the Asia-Pacific region is unignorable. 

The failed “war on terror”, whose aftershocks distracted both Mr Bush’s immediate successors, is no longer a priority. 

It therefore falls to Mr Biden, a longtime foreign-policy bungler yet arguably the first grown-up president of the post-unipolar age, to construct an appropriately weighty response. 

Containment cannot be his guide. 

Climate change and economic integration call for much more co-operation between the rival powers than occurred during the cold war. 

Meanwhile the impulse to strengthen alliances leads to arming Australia with nuclear submarines, partly as a counterweight to China. And Mr Biden’s ability to shape public opinion is limited.

The Truman show

Strategy experts are awed by the intellectual and political challenge this represents. 

“It’s Truman-level stuff,” says Andrew Krepinevich, a veteran strategist of the Pentagon and elsewhere. 

There is little doubt that grappling with it is the administration’s priority; senior Biden officials discuss the two-track China challenge all the time. 

But again, noble aspirations do not predict successful outcomes. 

A Biden Doctrine worthy of the name may yet emerge. 

It hasn’t yet.  

World Bank and IMF face fight for survival during US-China rivalry

The debate around Georgieva’s actions has huge geopolitical consequences for multilaterals

Edward Luce

© Ewan White

Kristalina Georgieva’s alleged sins may look trifling to some. 

The IMF’s managing director is accused of having manipulated the World Bank’s Doing Business index in 2018, when she was the institution’s CEO, to give China a higher ranking than it merited. 

Compared to Dominique Strauss-Kahn, one of her predecessors, who in 2011 was accused of sexual assault in New York, or Rodrigo Rato, an earlier occupant, who was jailed for embezzlement, Georgieva’s clerical meddling looks like a victimless misdemeanour. 

Yet in geopolitical terms, her fate will be of far greater consequence.

An independent report published last month claims Georgieva interfered heavily in the Doing Business ranking to appease China in the midst of trying to secure a capital increase from Beijing. 

It is doubtful this would have generated anything like this fuss had Georgieva interfered on behalf of any other country, let alone kept its ranking at a paltry 78th rather than let it drop a few rungs.

Yet we inhabit a Thucydidean world in which today’s hegemon, the United States, which has dominated the Bretton Woods system since it began in 1944, faces a challenger, China, that is knocking with growing conviction at the door. 

How could such a damning report land without a thud?

The sharpest contrast between today’s emerging cold war and the one between the US and the Soviet Union is that China is deeply integrated into the global economy. 

The USSR boycotted Bretton Woods and had no meaningful presence in the global trading system. 

China, on the other hand, has played a strong role, first as a recipient of Bretton Woods’ largesse and now as a creditor. 

Today it is the largest trading partner to many more countries than the US. 

In purchasing power parity terms — calculated by what you can buy in local currency — China’s economy is larger than America’s. In dollar terms, the gap is closing fast. 

Yet China only accounts for six per cent of the IMF quota — a proxy for shareholding — against America’s 17 per cent.

Should she remain in post, one of Georgieva’s biggest tasks would be to reweight China’s quota next year. 

Were she to recommend a big increase in China’s share, as she should, her motives might now be called into question. 

There are plenty of China hawks in the US Congress searching for pretexts to vote against any change. 

The larger question is whether the world’s institutions are robust enough to cope with what looks likely to be a prolonged contest for global primacy between the two titans.

Since their inception, such bodies have been dominated by the United States, which has been happy to apply its rules to others while exempting itself when it suits. 

Global bureaucracy is littered with US-coined acronyms to which America is not party: the UN Convention on the Law of the Sea, the International Criminal Court, the Arms Trade Treaty and many others. 

Some call such double standards “US exemptionalism”. 

America remains a reluctant member of other bodies, such as the World Trade Organization and the World Health Organization. 

But US-China rivalry has essentially disabled both. 

In the case of the WTO, which China joined in 2001 on favourable terms, the US has refused to fill appellate vacancies to adjudicate trade disputes, rendering the body toothless. 

The global trading system has changed dramatically since then.

China was a $1tn economy at the turn of the century. 

Now its gross domestic product is $15tn. 

Donald Trump withdrew America from the WHO in a fit of Sinophobia early in the pandemic. 

Joe Biden rejoined. 

But China’s refusal to co-operate with the Geneva organisation’s probe into Covid-19’s origins has left it adrift. 

An institution is only as effective as its big members want it to be. 

Like the proverbial dog, a multilateral body’s staff often get kicked when their masters lose patience. 

That they are exempt from income taxes may be reasonable compensation.

America faces a choice between relaxing its grip on global bodies to encourage Beijing to stay in the game, or refusing to acknowledge China’s rise and risk it exiting parts of the system altogether. 

Beijing has already created parallel tracks, such as the Asian Infrastructure Investment Bank, and the Belt and Road Initiative. 

Given that China, along with the US, is one of the five veto-wielding members of the UN security council, it is unlikely to reduce its presence there. 

But it takes little imagination to picture China losing interest in bodies such as the IMF if it does not receive its due as one of the world’s two great powers. 

It is surely not in the west’s interests to discard key tools for engaging China in an increasingly bifurcated world.

Where does this leave the IMF’s Georgieva? 

America is being lobbied by poorer members in Africa, Latin America and elsewhere to retain her. 

She has won plaudits for responding nimbly to the pandemic and retooling the world’s lender of last resort to address threats such as climate change. 

Yet US hawks now depict her as irredeemably pliable to China. 

A reputation for fearless probity will come at a rising premium amid the battle for the future of the big global bodies. 

The worst of both worlds would be to keep Georgieva in place without having banished doubts about her neutrality.

World trade

Why skippers aren’t scuppered

Supply chains are adapting, not failing

Much of the time most people do not think about the complex choreography that makes modern shopping possible. 

You just click and wait—and not too long, mind—for a package or three to arrive on your doorstep. 

Over the past few months, however, the world’s supply chains have elbowed their way into the foreground, as surging demand for goods and supply disruptions have restricted the flow of trade. 

At ports around the world, dozens of ships stacked high with containers wait at anchor for their turn to unload, while the cost to ship a box from China to America’s west coast has jumped roughly tenfold from the pre-pandemic level.

You may think the snafus represent the beginning of the end of globalisation. 

Consumers are learning how infections half a world away or a ship stuck in the Suez Canal can disrupt the near-instant access to goods they take for granted.

Manufacturers are discovering that lean supply chains can mean inadequate access to essential components as well as low costs. 

The disruptions are one reason inflation is high in America, Britain and elsewhere. 

But amid the logistics blues, markets are working as they tend to do, and firms are finding routes around blockages. 

Under intense pressure, global supply chains are not in fact failing; they are, rather, adapting.

The troubles began in 2020, when firms that had idled production in the expectation of a slump instead faced heavy demand for cars, electronics and home-exercise equipment. 

Generous stimulus, in America especially, kept order books full while the pandemic skewed spending toward goods rather than services. 

Producers of computer chips have been unable to keep up with the rush. 

The shipping industry had no spare capacity and has faced a series of disruptions, from the saga of the stuck ship Ever Given, to the closing of ports amid outbreaks of covid-19 and storms like Hurricane Ida. 

With the system stretched thin, a mishap anywhere affects the movement of goods everywhere. 

Experts reckon it may take a year or more for conditions to return to something like normal.

In the meantime, firms are neither twiddling their thumbs nor abandoning global supply chains. Instead, they are improvising. 

Some retailers, like Walmart, have taken to chartering entire ships exclusively for their own cargo. 

Passenger aircraft are being refitted for freight. 

Chipmakers are weighing their priorities: tsmc, from Taiwan, is supplying some carmakers and Apple before producers of computer servers, say. 

Soaring shipping fees themselves help adjust the flow of goods. 

Higher freight costs scarcely affect the price of expensive electronics which can be crammed into containers, but matter more for bulky, low-value goods like garden furniture. 

Some consumers may be disappointed, but this means that shipping tangles depress the value of trade by less than might otherwise be the case.

The strains on supply chains will leave their mark. 

This year capital expenditure will be exceptional—global investment is likely to be 15% above the pre-pandemic level by the end of 2021, reckons Morgan Stanley, a bank. 

Firms are aware of the risk from shipping disruptions and trade disputes and are tailoring their investment programmes accordingly. 

In places like America and Japan they have been encouraged by government policies to incentivise the “reshoring” of production. 

Toshiba, a Japanese electronics firm, is closing a long-standing factory in China. 

A number of carmakers are bringing bits of their supply chains in-house or at least closer to home, especially for chips. 

New orders for smaller container ships may reflect the view that production will become more regionalised.


Global supply chains will survive this trial. 

Indeed, the adjustments and investments made in response to recent woes are likely to make them better able to cope with disruptions—by ensuring adequate supplies of critical components, for example. 

That should allow them, eventually, to fade once more out of sight and out of mind. 

Where Has All the Money Gone?

Quantitative easing risks generating its own boom-and-bust cycles, and can thus be seen as an example of state-created financial instability. Governments must now abandon the fiction that central banks create money independently from government, and must themselves spend the money created at their behest.

Robert Skidelsky

LONDON – Amid all the talk of when and how to end or reverse quantitative easing (QE), one question is almost never discussed: Why have central banks’ massive doses of bond purchases in Europe and the United States since 2009 had so little effect on the general price level?

Between 2009 and 2019, the Bank of England injected £425 billion ($588 billion) – about 22.5% of the United Kingdom’s 2012 GDP – into the UK economy. 

This was aimed at pushing up inflation to the BOE’s mandated medium-term target of 2%, from a low of just 1.1% in 2009. 

But after ten years of QE, inflation was below its 2009 level, despite the fact that house and stock-market prices were booming, and GDP growth had not recovered to its pre-crisis trend rate.

Since the start of the COVID-19 pandemic in March 2020, the BOE has bought an additional £450 billion worth of UK government bonds, bringing the total to £875 billion, or 40% of current GDP. 

The effects on inflation and output of this second round of QE are yet to be felt, but asset prices have again increased markedly.

A plausible generalization is that increasing the quantity of money through QE gives a big temporary boost to the prices of housing and financial securities, thus greatly benefiting the holders of these assets. 

A small proportion of this increased wealth trickles through to the real economy, but most of it simply circulates within the financial system.

The standard Keynesian argument, derived from John Maynard Keynes’s General Theory, is that any economic collapse, whatever its cause, leads to a large increase in cash hoarding. 

Money flows into reserves, and saving goes up, while spending goes down. 

This is why Keynes argued that economic stimulus following a collapse should be carried out by fiscal rather than monetary policy. 

Government has to be the “spender of last resort” to ensure that new money is used on production instead of being hoarded.

But in his Treatise on Money, Keynes provided a more realistic account based on the “speculative demand for money.” 

During a sharp economic downturn, he argued, money is not necessarily hoarded, but flows from “industrial” to “financial” circulation. 

Money in industrial circulation supports the normal processes of producing output, but in financial circulation it is used for “the business of holding and exchanging existing titles to wealth, including stock exchange and money market transactions.” 

A depression is marked by a transfer of money from industrial to financial circulation – from investment to speculation.

So, the reason why QE has had hardly any effect on the general price level may be that a large part of the new money has fueled asset speculation, thus creating financial bubbles, while prices and output as a whole remained stable.

One implication of this is that QE generates its own boom-and-bust cycles. 

Unlike orthodox Keynesians, who believed that crises were brought on by some external shock, the economist Hyman Minsky thought that the economic system could generate shocks through its own internal dynamics. 

Bank lending, Minsky argued, goes through three degenerative stages, which he dubbed hedge, speculation, and Ponzi. 

At first, the borrower’s income needs to be sufficient to repay both the principal and interest on a loan. Then, it needs to be high enough to meet only the interest payments. 

And in the final stage, finance simply becomes a gamble that asset prices will rise enough to cover the lending. 

When the inevitable reversal of asset prices produces a crash, the increase in paper wealth vanishes, dragging down the real economy in its wake.

Minsky would thus view QE as an example of state-created financial instability. 

Today, there are already clear signs of mortgage-market excesses. 

UK house prices increased by 10.2% in the year to March 2021, the highest rate of growth since August 2007, while indices of overvaluation in the US housing market are “flashing bright red.” 

And an econometric study (so far unpublished) by Sandhya Krishnan of the Desai Academy of Economics in Mumbai shows no relationship between asset prices and goods prices in the UK and the US between 2000 and 2016.

So, it is hardly surprising that, in its February 2021 forecast, the BOE’s Monetary Policy Committee estimated that there was a one-third chance of UK inflation falling below 0% or rising above 4% in the next few years. 

This relatively wide range partly reflects uncertainty about the future course of the pandemic, but also a more basic uncertainty about the effects of QE itself.

In Margaret Atwood’s futuristic 2003 novel Oryx and Crake, HelthWyzer, a drug development center that manufactures premium-brand vitamin pills, inserts a virus randomly into its pills, hoping to profit from the sale of both the pills and the antidote it has developed for the virus. 

The best type of diseases “from a business point of view,” explains Crake, a mad scientist, “would be those that cause lingering illness [...] the patient would either get well or die just before all of his or her money runs out. 

It’s a fine calculation.”

With QE, we have invented a wonder drug that cures the macroeconomic diseases it causes. 

That is why questions about the timing of its withdrawal are such “fine calculations.”

But the antidote is staring us in the face. 

First, governments must abandon the fiction that central banks create money independently from government. 

Second, they must themselves spend the money created at their behest. 

For example, governments should not hoard the furlough funds that are set to be withdrawn as economic activity picks up, but instead use them to create public-sector jobs.

Doing this will bring about a recovery without creating financial instability. It is the only way to wean ourselves off our decade-long addiction to QE.

Robert Skidelsky, a member of the British House of Lords, is Professor Emeritus of Political Economy at Warwick University. The author of a three-volume biography of John Maynard Keynes, he began his political career in the Labour party, became the Conservative Party’s spokesman for Treasury affairs in the House of Lords, and was eventually forced out of the Conservative Party for his opposition to NATO’s intervention in Kosovo in 1999