The 4 Most Important Remarks Made By BoE Governor Mark Carney In His Talk At The Jackson Hole Symposium
From Aug. 22–24, 2019, The Federal Reserve Bank of Kansas City hosted dozens of central bankers, policymakers, academics and economists from around the world at its annual economic policy symposium. On August 23rd, Mark Carney, the Governor of the Bank of England, gave a luncheon address “The Growing Challenges for Monetary Policy in the Current International Monetary and Financial System”. It was a forward looking talk by one of the leading minds on monetary policy. Before going through the highlights of his talk, it’s important to appreciate who Mark Carney is.
Mark Carney Is An Economics Wunderkind
Carney was born on March 16, 1965, in Fort Smith, Northwest Territories, Canada. He graduated from Harvard in 1988 with a degree in economics, before postgraduate studies at the University of Oxford and Nuffield College, where he received masters and doctoral degrees in economics.
Carney spent 13 years at Goldman Sachs in a series of increasingly senior roles including co-head of sovereign risk; executive director, emerging debt capital markets; and managing director, investment banking.
He left Goldman in 2004 to become Senior Associate Deputy Minister and G7 Deputy at the Canadian Department of Finance. In 2007, he was appointed Governor of the Bank of Canada. He was just 42, the youngest central bank chief in the G8 just as financial hell was on the horizon.
In 2012, Carney was appointed the Governor of the Bank of England. He was the first non-Briton to be appointed to the role since the Bank was established in 1694. Carney has warned of the risk of “staggering wealth inequalities”, but his biggest issue he has dealt with is Brexit. In a recent statement on Brexit Carney noted that globalization had resulted in “imbalances of democracy and sovereignty”, and that Brexit “is the first test of a new global order and could prove the acid test of whether a way can be found to broaden the benefits of openness while enhancing democratic accountability”.
With a remarkable resume, and his role ending in Jan. 2020, Carney stated his intent to ‘pay it forward’ by focusing on how the nature of the International Monetary and Financial System (“IMFS” ) challenges monetary policy.
With that as context, below are the 4 most important comments made by Carney in his August 23rd speech at the Jackson Hole Symposium:
1. While the world economy is being reordered, the US dollar remains as important as when Bretton Woods collapsed
The crux of Carney’s argument is that the dominance of the dollar as the world’s reserve currency is creating a destabilizing asymmetry that demands that central bankers rethink generally accepted economic principles.
For decades, the consensus view has been that “countries can achieve price stability and minimize excessive output variability by adopting flexible inflation targeting and floating exchange rates”. But globalization has increased the impact of international developments on all economies. In particular, growing dominant currency pricing (DCP), which today, means pricing in the U.S. dollar, is reducing the shock absorbing properties of flexible exchange rates and altering the inflation-output volatility trade-off facing monetary policy makers.
Today, the combination of heightened economic policy uncertainty (see Chart 2 below), outright protectionism, and concerns that further, negative shocks could not be adequately offset because of limited monetary policy wiggle room, is exacerbating the disinflationary bias in the global economy.
2. “In the longer term, we need to change the game”
In the short term, Carney believes that central bankers must play the cards they’ve been dealt, like using the full flexibility in flexible inflation targeting. Obviously, everyone can’t export their way out of these challenges. Rather, central bankers should focus on gains from coordination and fiscal policy, and the earlier and more forcefully their enacted, the better.
But Carney appreciates there’s a new world order, and that “In the longer term, we need to change the game”. As the German economist Rudi Dornbusch warned, “In economics, things take longer to happen than you think they will, and then they happen faster than you thought they could”.
Carney doesn’t believe the IMFS should just swap one currency hegemon for another. Rather he thinks it’s time to rethink everything. The international linkages have deepened over the past few decades, necessitating new economic mechanisms. The days of optimizing global monetary policy through operationally independent central banks adopting flexible inflation targeting, and allowing their exchange rates to float, are over.
3. “ultimately a multi-polar global economy requires a new IMFS to realize its full potential”
In other words, the best solution is a multiple reserve currency based on the virtual rather than the physical.
Carney believes that the most likely candidate for true reserve currency status, the Renminbi (RMB), has a long way to go before it is ready to assume the mantle.
Looking back at the transition from the sterling to the dollar as the global currency post World War I, highlights the problems that can occur during currency reserve transitions. Having two competing providers of reserve currencies destabilized the international monetary system, and, coupled with the lack of coordination between monetary policy makers, contributed to the global scarcity in liquidity, worsening the severity of the Great Depression.
While the rise of the Renminbi may provide a second best solution to the current problems, the best solutions include multiple reserve currencies. This would increase the supply of safe assets, alleviating the downward pressures on the global equilibrium interest rate that an asymmetric system exerts. A more diversified IMFS would lower the synchronization of trade and financial cycles, reducing the fragilities in the system, and increase the sustainability of capital flows, pushing up the equilibrium interest rate. While the likelihood of a multipolar IMFS might seem distant at present, technological developments provide the potential for such a world to emerge. Such a platform would be based on the virtual rather than the physical. Carney dubs such a basket of reserves a Synthetic Hegemonic Currency (“SHC”).
4. “… it is an open question whether such a new SHC would be best provided by the public sector”.
An SHC would lessen influence of the US dollar on global trade, making shocks in the US less impactful on exchange rates and trade, while making the world more sensitive to changes in conditions in the countries of the other currencies in the basket composing the SHC.
A new financial architecture developed around the new SHC could similarly displace the dollar’s dominance in credit markets, reducing the influence of the US on the global financial cycle, reducing the volatility of capital flows to emerging market economies (EMEs).
Widespread use of the SHC in international trade and finance would imply that the currencies that compose its basket would gradually be seen as reliable reserve assets, encouraging EMEs to diversify their holdings of safe assets away from the dollar. This would lessen the downward pressure on equilibrium interest rates and help alleviate the global liquidity trap.
The Bank of England and other regulators have been clear that unlike in social media, where regulations are only now being developed after the tech has been adopted by billions of users, the regulations for a new private payments system must be in force in advance of any launch, whether its by the private sector (e.g. Libra) or by central bankers or other government backed entities.
Carney’s Comments Are Hugely Positive For Bitcoin
Carney’s not only recognizes the problems associated with the dollars current dominance, he knows that the solution is virtual/digital. To be clear, Carney has not been a fan of Bitcoin. But any initiative, like a digital Synthetic Hegemonic Currency (SHC), that brings digital currencies to the forefront, has to be positive for Bitcoin. I also believe that any initiative that opens up people’s mind to alternative currencies to the dollar, is also hugely positive for Bitcoin.
At a macro level, Carney recognizes the severity of the economic problems the world is dealing with, and the fact that the tool kit we’ve used to address past problems is tired and no longer effective. He knows we need to “change the game”. Bitcoin is the biggest game changer in history. Long Bitcoin.
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