There are two threats which could merge to create one great threat.
First, diverging mandates of central bank policies around the world are developing as one of the greatest threats to the world economy. The systemic nature of this threat is in direct correlation with the imbalances which have grown within the international dollar based framework and the national responses to those imbalances.
As an example, while the Federal Reserve in America has started down the road of monetary policy normalization, other central banks, such as in Europe and Japan, are still struggling with recession economics and remain on the quantitative easing path. China is still struggling with deflating its massive credit bubble while at the same time broadening the internationalization of the renminbi.
All other nations are somewhere between these oppositional monetary forces. Interest rate increases in the United States serve to strengthen the dollar which puts additional strain on all nations holding USD denominated debt. This amounts to a large segment of the world. Such rate increases only enhance the problems facing other nations and puts up further road blocks to normalizing monetary policy.
It’s interesting that the Trump administration has been attempting to talk down the value of the dollar while the ongoing political drama and turmoil in Washington is creating the same depreciating effect.
The pressure building across the monetary and financial worlds is increasing with further divergence of central bank policies. This core issue is not openly discussed but the symptoms are. The symptoms are what will be used to hammer out talking points and force the directional movement towards monetary policy enhancements.
Monetary policy enhancements will represent the foundational transition points to re-balancing the global framework. Discussions around using the Special Drawing Right (SDR) as a tool for rebalancing are increasing. But there is only so much which can be accomplished without huge foundational changes.
The depth of the USD liquid market, somewhat offset by the growing RMB liquid market, will not be enough to force a realignment and rebalancing of the full international monetary framework. Something other than a dollar crisis will have to be implemented in order to create the demand for a deeper and broader change.
The SDR market is new and does not provide enough liquidity to offset the dollar imbalances. But if a swap agreement was made between central banks and the International Monetary Fund to utilize substitution accounts a liquid SDR market could develop faster than anticipated.
The use of substitution accounts have been covered on POM in previous articles and still represent the best path forward for an increased timetable on rebalancing. The threat posed by diverging central bank policies will serve as one of the catalysts for shifting towards the SDR and the use of substitution accounts.
The argument will be made that a realignment of central bank policy can be achieved through the use of the SDR and substitution accounts, both of which will release the pressure which is currently building in the global system.
But I believe there is a second part to this threat which needs to be considered. The recent worldwide hack on computer systems, and computer virus in general, have gotten a lot of press. This is a part of a growing problem in the world.
The exposure and risk associated with such hacking programs and viruses are real, even though it may seem scripted and over-saturated at times. Over the last few years there have been increasing attacks on central banks around the world. Both the central banks of Russia and Bangladesh have had money stolen through hacks. Even SWIFT was hacked at one point.
The trend in hacking, and specifically the hacking of central banks, aligned with the recent threats posed by leaked NSA hacking programs, has set a very real stage for a more intense hacking threat to central banks and as such the international monetary system.
A hacking program which was targeted to take advantage of the diverging policies of the central banks could evolve as a massive threat to world financial markets. There would be no need for a direct hack against financial markets as the same effect could be achieved by attacking one central bank or multiple central banks at the same time.
The SDR and a broader IMF framework could very well be presented as a means of protected against both diverging policies and the threat posed by hacking as central banks around the world are likely to have varying and different protections and systems put in place. This creates more areas of opportunity for hackers.
Some of this is speculation but trends associated with diverging policies and exposed systems have been developing in tandem. Both coming together under one strategy to derail the global system, or create a problem, reaction and solution scenario which leads to further consolidation and transition to an SDR framework, would cause sudden and dramatic changes. – JC
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JC Collins can be contacted at email@example.com