Libra’s Stumbles, Coronavirus Gains Show Pitfalls of A ‘Global’ Currency

Global events — which include the coronavirus, now stretching across more than 60 countries – make one’s mind cast toward what else might be on the universal stage.

Global currency, anyone?  In the age of Libra, in a new decade where at least some central banks are exploring their own fiat issued in bits and bytes, would a global currency set the stage for relative calm?

Or would it prime the pump for disaster, especially in the face of crisis, whether man-made or triggered by a microbe?

Our bet is on the latter scenario playing out — were it ever to come to pass.

The question is timely, given the fact so many of the best-laid plans are now going a bit astray or at least are seeing a delay.

In China, research on a central bank currency, a digital version of the yuan, has been delayed, reported The Global Times, at least from the current quarter.  The project will likely proceed as planned, with a  pilot program of the Digital Currency Electronic Payment expected to launch at some point this year.  There were 65 patent applications filed by the central bank’s research institute, as reported at the end of the month.

Elsewhere, news came Tuesday via Bloomberg that the consortium backing the Libra cryptocurrency — a group whose public face is Facebook — is “considering redesigning” the project itself.

As reported, that redesign would offer up a network that would accept “multiple” coins such as those issued by central banks (including, we presume, China), which would ostensibly placate regulators.

If that’s the case, then Facebook seems to be stepping away from its earlier plans, stated last year, to create a single global currency. The uniformity would, at least some proponents have stated, help eliminate the costs of cross border transactions, and would be able to bring 1.7 billion unbanked individuals into the world of financial inclusion.

The Bloomberg reports, citing unnamed sources, states that the revamped Libra/network would include coins backed in turn by the U.S. dollar or the euro, among other currencies. Welcome, then, to the idea of a global network underpinning a range of currencies, and not a single, one-size-fits-all offering.

Those who advocate a global currency might expect that currency risk, effectively, goes away, which reduces friction in international trade, and reduces FX costs — the ripple effects impact end consumers who no longer pay higher prices when those costs are baked into the equation and passed along. The global currency offering would, at least theoretically, eliminated currency manipulation, which then increases the manipulating nation’s exports (higher) at the expense of another’s.

The Risks

All of the above are beneficial scenarios.  But what happens when a crisis hits, when sentiment is roiled — such as we see now?  The Federal Reserve’s actions on Tuesday are a perfect case in point, stock market swoons notwithstanding.

Currency uniformity across a global stage means that individual nations would not be able to use the levers of monetary policy to help stimulate economic growth (or at least keep the status quo) — which of course helps to blunt downturns, which hurt everything from jobs to wages, and by extension, commerce (and by extension of that extension, for our purposes, payments).

Lowering interest rates means the money supply is increased and can help address the financial/economic/social situations that vary from country to country, where, say, a virus impacts some nations more than others.

Take that lever away through a global currency, and a rising tide lifts all boats; a tidal wave swamps all boats.

Uniformity is great for fast food burgers, but less so for dealing with the vagaries of everyday life.