Nixon reshaped the global economy 50 years ago. Is crypto about to do the same now?

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Is the global economy heading towards a Bretton Woods for the digital currency era?

Sunday marks the 50th anniversary of what has been described as the dropping of a currency bomb on the global financial system, when President Richard Nixon announced that the dollar would no longer be pegged to gold, effectively pulling America d ‘an international monetary regime established by the Bretton Woods Agreement.

The international monetary system was forged in the 1940s amid political turmoil, the fight against fascism and global economic instability, economists and historians have said. The main objective of the Bretton Woods agreement was to create a monetary system less rigid than the gold standard while ensuring stability. As part of this effort, the conference laid the groundwork for the International Monetary Fund and the World Bank.

Today, five decades later, the monetary regime following the dissolution of Bretton Woods on August 15, 1971 is not much different from what it was before. The dollar still serves as the world’s reserve currency. But in the era of bitcoin BTCUSD, -2.83% and crypto and an apparent increase in stablecoins, linked to fiat currencies, and central bank digital currencies, aka CBDC, a new global regime could be handy.

The case for an international currency is as strong today as it was then, but remains difficult to implement, wrote Ousmne JacquesMandeng, director of the consultancy firm Economics Advisory Ltd, in a guest column. of the Financial Times published Monday (paywall). Mandeng described the detachment of gold from the dollar as a money bomb.

There are some similarities between Nixon’s period and 2021. Inflation accelerated in the 1960s and reached nearly 6% in 1970, and world dollar reserves rose sharply. Inflation was around 5.4% in the past 12 months, up from 1.4% in 2020, according to the Bureau of Labor Statistics.

However, the share of US dollars held in global foreign exchange reserves is approaching the lowest levels in 25 years, during the fourth quarter of 2020, the most recent data available, according to the IMF’s survey of the currency composition of official foreign exchange reserves.

IMF

Meanwhile, the supply of stablecoins, like Tether USDTUSD, + 0.04% and Circle-backed USDC digital currencies, usually backed by fiat currency or other asset to keep values ​​fixed, increased by 900 % to over $ 100 billion from a year ago. , reported the Block at the end of May.

Cryptocurrencies like bitcoin have not become widely used as a form of payment, in part because their values ​​are so volatile against the US dollar DXY, -0.55%, or other government backed currencies. Because stablecoins are pegged to the dollar, many crypto enthusiasts see them as essential in promoting the use of digital currencies for everyday purchases. Meanwhile, proponents of a so-called central bank digital currency have argued that a CBDC could work the same as a stable coin, but with reduced risk.

It seems that a move towards a digital diet is already underway.

Treasury Secretary Janet Yellen has previously called a meeting of regulators, including Securities and Exchange Commission Director Gary Gensler, to discuss stablecoins, in light of the rapid proliferation of digital assets and concerns about segments of the digital currency market.

Critics of stablecoins say they pose significant risks to financial stability, especially after it was revealed that some of these dollar-pegged tokens are not 100% backed by real US dollars, but a combination of riskier assets.

Kenneth Rogoff, professor of economics and public policy at Harvard University, told MarketWatch in a telephone interview that he could understand why the supply of stablecoins, in particular, has exploded.

Much of this is about the unease, not only of the Chinese but of the Europeans, with the United States controlling the rails of globalization. [monetary] system because the dollar is so dominant, Rogoff said.

That said, the former IMF chief economist from 2001 to 2003 said he believes there is still a long way to go before a CBDC meets requirements for use by central banks. Rogoff said CBDCs should have the same level of transparency, speed and ease of use that the US Federal Reserve currently enjoys with the existing system.

The game would change if CBDCs were interoperable, writes Barry Eichengreen, professor of economics at the University of California at Berkeley and former senior policy adviser at the International Monetary Fund, in a column for Project Syndicate published Tuesday.

For his part, Rogoff sees crypto more broadly as not a solution in search of a problem but a problem.

Ransomware, tax evasion, crime. It’s the Wild West, he said of digital assets.

What’s up on the bridge next week?

Following the S&P 500 SPX Index, + 0.16% and the Dow Jones Industrial Average DJIA, + 0.04% on Friday posted four record-breaking tandem close for the first time since 2017 (the Nasdaq Composite Index COMP finished at less than 0.5% from its record-breaking Aug. 5 close), investors will focus primarily on July retail sales at 8:30 a.m. ET Tuesday and the Federal Open Market Committee minutes expected at 2 p.m. Wednesday to glean d other indices on the health of the economy and central monetary banks. political plans.

Wednesday also brings reports on housing starts and building permits at 8:30 am which will likely be followed for information on the bubbling real estate market, which is showing signs of cooling.

Investors can also watch an August New York State area manufacturing reading, the Empire State Manufacturing Index at 8:30 a.m. Monday, a similar report for the Fed’s Philadelphia area on Thursday, as well. than the usual weekly report on unemployment benefit claims at 8:30 a.m.

Retail markets are heavy next week, with giants like Walmart Inc. WMT, + 0.32%, Home Depot Inc. HD, -0.81%, expected to report on Tuesday. Target Corp., home improvement company Lowes Cos. LOW, -0.78%, and TJ Maxx’s parent company, TJX Cos. TJX, -1.48%, is expected to report on Wednesday. Semiconductor company Nvidia NVDA also reported on Wednesday.

Coach Tapestry TPR’s parent, -1.05%, Estee Lauder Cos. EL, -0.06%, Ross Stores ROST, -0.61% and Macys Inc. M, -1.97% reported Thursday.

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