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Making a virtue of necessity

Is Mark Carney, the Governor of the Bank of England (BoE), a conservative or a radical? It’s doubtful that Carney is a bomb-thrower, but maybe his grey suits are hiding a desperado who yearns to overturn the apple-cart.

One the boring side of the scales are: he’s Canadian; he spent 13 years at Goldman Sachs; is a former Governor of the Bank of Canada; and his wife, Diana Fox Carney, likes to rub shoulders with the great and good. In six years as the head of the BoE he has made few waves, apart from his gloomy (and incorrect) warning that the UK’s departure from the European Union would bring disaster to the UK economy. That has yet to happen – three years after he made his guess. Who knows? It may yet turn out to be correct. On the other hand Carney knows his time at the BoE is running out – he leaves in January 2020 – and maybe he wants to go out with a bang.

Evidence for this is the speech he gave at the Jackson Hole Symposium last week. It was a remarkable speech – even a daring speech, the dull-as-ditch water title of which (The Growing Challenges for Monetary Policy in the current International Monetary and Financial System) seemed deliberately designed to throw journalists off the scent of something very meaty indeed. For Carney did nothing less than trash the US dollar as the international reserve currency. He pointed out that some $16 trillion “of global debt is now trading at negative yields”, a fact that should send a shiver up the spine of anyone, central banker or otherwise.

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Carney spoke about the “international monetary and financial system” (IMFS), and said the consensus view that countries “can achieve price stability and minimise excessive output variability” through flexible inflation targeting and floating exchange rates was “increasingly untenable”. What do central bankers want? Stability of course and, if possible, growth. For Carney, the current IMFS is “not only making it harder to achieve” this stability but is also “encouraging protectionist and populist policies which are exacerbating the situation.” He told his audience that “in the new world order, a reliance on keeping one’s house in order is no longer sufficient. The neighbourhood too must change….We are all responsible for fixing the fault lines in the system.” In his view the “deficiencies of the international monetary and financial system have become increasingly potent…Even a passing acquaintance with monetary history suggests that this centre won’t hold.”

Parsing his central banker-speak, what Carney was saying is that the current international financial system is broken. The US dollar is losing its status as the world’s most sought-after reserve asset, while the Chinese currency, the renminbi, the leading candidate to replace the dollar, is not yet ready for the task. So, Carney reasoned, what the international financial system needs right now is “multiple reserve currencies.” He floated the idea of a “Synthetic Hegemonic Currency (SHC)” a kind of globally dominant public sector-managed digi-money, perhaps run by the International Monetary Fund, as an international reserve asset – although the IMF already has the SDR (Special Drawing Rights) as its unit of accounting.

Carney came up with the right diagnosis – the current international financial system is bust – but prescribed some very peculiar medicine, which was in any case undermined by his own analysis. For he mentioned the immense difficulty posed for the world by the shift away from sterling to the dollar in the early 20th century, driven by the First World War. Quite correctly he said that the “resulting world with two competing providers of reserve currencies [the UK and the US] served to destabilise the international monetary system” and “worsened the severity of the Great Depression.” If it was such an upheaval to swap one reserve currency for another, what might be the risks of letting several currencies compete for reserve status?

What to conclude from Mark Carney’s major farewell address? Several points emerge. We are living through a time when the house of cards – the world’s mammoth dollar indebtedness – could topple at any moment, or might just blithely carry on, for now. Central bankers are floundering when it comes to providing practical solutions, but then they are only human. Carney’s speech was the central banker’s equivalent of holding up a sign which says “your guess is as good as mine”.

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