Inflation has spread around the globe, much like a pandemic and is now obscuring the future.
After only 44 days, Prime Minister Liz Truss was forced to resign due to disagreements over how best to manage the soaring British prices. At the moment, hyperinflation is a problem in at least 10 emerging countries. More are expected. The Federal Open Market Committee (FOMC), which is the U.S Federal Reserve’s part responsible for maintaining prices stable, recently announced higher interest rates amid a return of positive gross domestic product — indicating that there will be continued inflation problems.
The global struggle to lower inflation is a clear sign that today’s central banks tools are not adequate for today’s monetary challenges. Blockchains may offer hope for a better, more sustainable future. This technology is not something policymakers expected.
All countries depend on the U.S. dollar for trade as it is the world’s reserve currency. This seems to work well for everyone when times are good. However, high inflation can cause the dollar’s purchasing power to plummet, causing other countries to purchase more dollars in order to maintain stability. But high levels of domestic inflation force the Fed to increase dollar liquidity by raising interest rates. This effectively makes it more difficult for other countries to buy dollars. The Triffin dilemma is a dilemma that combines domestic inflation relief with meeting the global liquidity needs. It occurs whenever a credit-based currency like the U.S. Dollar is used as a global reserve.
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Practically, Triffin-impaired Monetary Policy causes financial crises that originate in advanced countries to quickly spread around the globe. The Triffin Dilemma doesn’t cause high inflation in advanced countries; rather, it acts like gasoline and spreads high inflation all over the world, quickly. These crises adversely affect the poor and erase many of the gains in equity, economic security and poverty reduction that were made during boom years. This causes global growth to end with global bust. This cycle of boom-bust, in which great leaps forward are reversed, is a reminder that reforming and modernizing our international monetary system is crucial.
We have been able to prevent Triffin-related inflationary contagion since before Robert Triffin identified it in the 1960s. John Maynard Keynes, a Bretton Woods Conference participant after World War II, explained how global depression-era inflation could be managed by not using national currencies for international commerce and instead getting countries to agree to use a global reserve with a stable value. Although Keynes’ idea was not implemented, it was a great one.
Let’s look at what 2022 will look like, considering that Bretton Woods has been around for almost eight decades.
In 2009, during the financial crisis, many countries demanded Keynesian-like reforms. They insisted on the International Monetary Fund’s Special Drawing Rights. These are units of account that are backed by a variety of currencies. This would allow them to be used as a more general reserve. We can say with confidence that these proposals were not implemented thirteen years later. The U.S. dollar is still the currency of international trade and there seems to be very little political will to change that. It seems that reforming the financial system may not be possible using existing policy channels.
Consumer Price Index (CPI), 2002-2022. Source: Bureau of Labor Statistics
Over the past few years, however, something revolutionary has been happening. The advent of blockchains has made creating new, counterfeit-resistant digital currencies a straightforward task, and a growing movement in peer-driven, non-central-bank finance (decentralized finance, or DeFi) has given rise to a global community of people willing to experiment with privately issued digital currencies.
Nearly all the world’s central bank are looking into the possibility of issuing central bank digital currencies (or CBDCs) in response to growing demand for these alternative currencies. These digital currencies are public digital dollars, euro, and yuan that are powered by blockchains. They were created with the intent of making private-issued cryptocurrencies obsolete.
Recent research by Linda Schilling, and others has shown that CBDCs are likely to fail over time. There is a CBDC trilemma where CBDCs can’t be both efficient, financially stable, or price stable. In other words, CBDCs don’t solve the problems with existing currencies and they can create new, potentially disastrous problems by promising forward-thinking innovation.
However, a real solution may be in sight. It is possible for private parties to issue a non-inflationary, scalable reserve currency that can be used to supplement the U.S. dollars. This is due to today’s unique circumstances, including new technologies, crises, and communities. It is not an anti-dollar per-se but a stable cryptocurrency that can be used to reduce inflation and for cross-border settlements. This will solve the Triffin problem and ease inflation pain for billions.
This has been attempted by some, to be fair. Ripple’s XRP token was once viewed as a potential global reserve. Some Bitcoin ( Bitcoin) enthusiasts also support a complete transition from fiat currencies and Bitcoin. Researchers found that fiduciary cryptocurrency tokens, which are backed only by user trust, could become hyperinflationary over the course of time if governments don’t take action to stop the creation of other cryptocurrencies. The idea is that if enough people continue to create cryptocurrencies, eventually all cryptocurrencies will become worthless.
Related: Cryptocurrency will suffer mass adoption
To be truly global, a reserve currency that is viable will need to depart from the fiduciary tradition and be anchored at a stable value.
Software developers shouldn’t be discouraged from using DeFi. There are many cryptocurrencies available, with a range of uses: privacy-focused tokens that can be used for darknet transactions and network-specific currencies that can power transaction verifications.
This type of limited use case might be a key distinction for a viable reserve crypto. It is not intended to compete with the US dollar but to provide an alternative to it during times of high volatility. In essence, this cryptocurrency acts as an anti-inflation currency to shift the world away form endless boom-bust cycles towards sustainable, global growth.
People will one day look back many years later on the actions we took to avoid a global disaster. Did we choose to make bold modernization decisions in a time of uncertainty, or were we content to tinker with interest rates while the world fell into chaos? No matter what history says about us, our actions today will be remembered by the following question: If our current system is broken and our best policies cannot save us from economic disaster, then why not try something new?
We must take bold, decisive action to create a new Bretton Woods agreement to protect the world’s future. But this time, it will be in Solidity.
James Songis an behavioral economist and software developer who specializes in sustainable digital currencies. He received his undergraduate degree from Harvard University, and a master’s in neuroscience from University College London.
This article is intended for informational purposes only and is not meant to be or should be interpreted as investment or legal advice. These views, thoughts and opinions are solely the author’s and do not necessarily reflect the views or opinions of Cointelegraph.
