Global Currency is inevitable, question is what’s next ?

With dollar as a reserve currency gives United States a de-facto dominant role in the global economy.  Why will other countries subject themselves to U.S. fiscal and monetary policies over which they have no control?
In post-world war eras where US have come out as a winner, this acceptance would have been there, but today, in 2016, the world has changed a lot.

What happens today is that a nation’s currency is serving the geo-politically motivated perception of a global proxy for depth, strength and productivity of its economy and the stability of its political system. In many cases, particularly developing countries are suffering because of this perception. A number of developed countries while having a stable political system are not as productive as compared to several developing countries.  Yet people residing in these countries are enjoying a higher wage rate and luxuries for certain labor which could be produced elsewhere at much reduced cost. While morally this is exploitation but in pure economics term, from a global perspective, this is wastage of precious resources. This benefit of ease in price comparison (fringe benefit will be reduced transaction cost) along with labor mobility that is possible in today’s world outweighs everything.

Imagine a scenario; Britain has a negative shock because of fall in the prices of its largest export. Wages in Britain must fall compared to wages elsewhere in the world. With a global currency in play this will happen with macroeconomic adjustment and wages will fall in real terms. Today this do not happen , the nominal wages remain almost same and because of  ’perceptive’ exchange rate mechanism  the slack is mostly cut with a slight fall in the real rates.

As we all know that theoretically currencies should be valued based on trade flows but in reality that is flouted from both sides. While China may have been keeping its currency exchange rate low to boost exports, on the flip side, the developed countries have been trying to maintain a high exchange rate to keep its transaction cost lower. Some economist will say a new form of exploitation tool is the currency exchange rate. 

There is benefit for everybody, the developed world will get a level playing field for its industries and the developing countries will have stable currency and free from the dependencies on foreign monetary policy. Hegemony of exchange rate exploitation will end allowing them to benefit from pure productivity and efficiency of their economic activity.  The world will align itself more towards the mission of Finance that is efficient allocation of resources, no matter where in the world.

Yes there are significant hurdles to achieve that end as monetary policy could not be enacted on a country by country basis. Any change in monetary policy would have to be made at the worldwide level. The supply and printing of a global currency has to be maintained by a central banking authority, sealed from all external political interests. Unless we have a single global government to maintain uniform fiscal and monetary policy, I think it is almost impossible to create such an independent body with sufficient powers to manage a world currency. As long as we have multiple countries, we will have a collection of local economies restricted by the political boundaries, a world currency will not help as even though the currency/finance might flow easily, real economy will not flow easily, example labor movement will be restricted. Politics is the horse and economy is the cart.

The dream remains; it is just a matter of human ingenuity to solve. To start with we are already expanding the basket of global reserve currencies, stepping away from the dependency with dollar.  Then there is a rise of new technology, bitcoin offering the possibility of a technology based system that works with little human intervention, this might eliminate the conflict of the global vested interests.

Lastly I would say that this debate is same as thinking when to go for centralization (in this global currency) vis-a vis decentralization (local currency as it exists today). Human civilization, as a whole  always had political structure which was an open decentralized system (each country have its own system),  is one in which the entry of peers is not regulated. Any peer can enter or leave the system at any time. The idea of money, as it was discovered while we evolved as a society was also implemented in similar manner. There is no single centralized authority (there are central banks for each country but not for the whole of civilization) that makes decisions on behalf of all the parties. Instead each party, also called a peer, makes local autonomous decisions towards its individual goals which may possibly conflict with those of other peers. Peers directly interact with each other and share information or provide service to other peers.

Standing today , in the 21^st century if we look at human history , from Mesopotomia-Mohenjadro to Ashoka-Alexander to Mao-Lenin-English colonialism to information technology driven society of today on thing is always common i.e. an effort to centralize and control political structure (whatever its form is ) and reap the subsequent economic  benefits of a larger financial entity. With that trend in mind , in a global context the introduction and operation of global currency (centralization of the currency,  maybe managed via a centralized global bank ) is inevitable. It is just a matter of time , human society is inevitably is moving towards it.

The questions is what’s next ? like any natural phenomena this push towards centralization will reach its peak ,politically with a global government and economically with a global currency and then ….like a cycle decentralization will start. With higher fragmentation and entropy, what will our society look like then ? I don’t know. Will we believe in universal human rights then? One thing for sure whatever be it , this cycle of centralization and decentralization will continue forever, that is the balance , the spinning Chakra.