Like a pandemic, inflation has spread throughout the world, creating uncertainty in the future.
British Prime Minister Liz Truss resigned after nearly causing the country’s economy to collapse because of disagreements over how to best manage soaring prices. This dispute nearly caused the country to fall apart and forced the resignation of the Prime Minister. There are currently at least 10 emerging economies that are experiencing hyperinflation. This number is likely to grow in the future, as more economies experience high inflation rates. The Federal Open Market Committee (FOMC), part of the US Federal Reserve, just announced that they will be increasing interest rates in order to keep prices stable, in the midst of a return to positive GDP. This signals continuing inflation problems ahead.
The worldwide effort to reduce inflation is a clear indication that the traditional tools used by central banks are no longer effective in addressing today’s monetary problems. Blockchains are a distributed database that can record transactions between two or more parties efficiently and verifiably. This could be a powerful tool for managing resources more efficiently and ensuring that transactions are legitimate, as well as providing a secure way of exchanging information. A technology that is often overlooked by policymakers, but which could provide a brighter, more sustainable tomorrow, is blockchain.
As the world’s dominant economic and financial power, the United States relies on its own currency, the US dollar, to conduct international trade. This creates a strong demand for US dollars and makes them a valuable currency around the world. When things are going well, people often seem content with staying the way they are. In times of high inflation, the value of a dollar decreases, which causes other countries to need to buy more dollars in order to keep the economy stable. The Fed’s main reason for raising interest rates is to try to control inflation, but this can create problems because it makes it harder for foreigners to buy U.S. dollars. The Triffin dilemma is a dilemma that arises whenever a country uses a national currency as a global reserve. This dilemma arises because a country’s domestic inflation pressures can be eased, but this will also mean that the country’s liquidity needs are not met.
Triffin-impaired monetary policy creates financial crises in countries that are already prosperous, leading to instability and crises in countries that are less developed. The Triffin Dilemma is not a root cause of high inflation in developed economies; instead, it is a contributing factor that increases inflation throughout these economies. These crises disproportionately hurt the poor, leading to a significant loss of progress made in terms of equity, economic security, and poverty reduction during times of prosperity. This invariably leads to a global economic downturn. The recurring boom-bust cycle in international economic affairs highlights the need for reform of our monetary system. The recent steps backward after every leap forward indicate that our current system is not working well. This needs to be corrected in order to ensure a more sustainable future for all.
Before Robert Triffin identified the phenomenon of inflationary contagion in the 1960s, we knew how to solve it. Inflationary contagion occurs when prices in one economy increase, causing those in other economies to follow suit. This can lead to a cycle of inflation and economic instability. However, we have been able to solve this problem before by using policies such as raising interest rates to prevent inflation from happening. At the Bretton Woods Conference following World War II, John Maynard Keynes explained that Depression-era global inflation could be effectively managed by avoiding the use of national currencies for international trade and, instead, getting nations to agree to use a value-stable global reserve. Though Keynes’s proposal was never put into practice, the idea was far ahead of its time.
Since Bretton Woods, the world has experienced a number of economic and financial changes.
In 2022, we will continue to see similar changes, as the global economy remains unstable. The main problem is that there is no centralized authority or institution that can keep the global economy stable. This means that countries around the world are constantly competing for resources, and this can lead to large fluctuations in the prices of goods and services. In 2009, during the last financial crisis, several countries called for Keynesian-like reforms, insisting on the use of the International Monetary Fund’s Special Drawing Rights (SDRs) as a global reserve currency. Thirteen years later, we can confidently say these proposals didn’t go anywhere. We continue to use U.S. dollars for international trade, and there does not seem to be much political will to change this situation. It seems that effective reform of the financial system will not be possible through existing policy channels. This is because the current financial system is built on outdated and flawed concepts and is not functioning as it should.
CBDCs have been shown to have issues in the short term, but recent research suggests that they will likely not be successful in the long term. There are three possible configurations for a CBDC: it can be financially stable, price stable, or efficient. However, all three configurations are mutually exclusive. CBDCs are not solving any of the problems with existing currencies, yet they create new problems that could be catastrophic.
There is a potential solution to the problem, but it may not be as easy to implement as we initially thought. Today’s extraordinary conditions include new technologies and crises, which means it has never been easier for a private party to issue a currency that can scale without inflation. This is helpful in complementing the U.S. dollar. I’m not anti-dollar, but I think a value-stable cryptocurrency would be a great solution to reducing inflation and alleviating inflation pain for billions of people.
A reserve currency that can be used globally is likely to have to break from traditional fiduciary practices and be based on a stable value.
Despite the concerns, software developers are still experimenting with DeFi. Cryptocurrencies are designed for a variety of purposes, from private tokens used for darknet market transactions to currencies used for transaction verification.
These types of limited practical applications might be an important distinction for a viable reserve cryptocurrency. The point is not to try to compete with the dollar, but to provide an alternative to the dollar during periods of heightened volatility – in essence, a cryptocurrency to help shift the world away from endless boom-bust cycles and towards steady, sustainable global growth.
Many years from now, people will remember what we did to prevent an impending global catastrophe. Were we content to fiddle with interest rates as the world descended into chaos, or did we commit to bold modernization during a time of great uncertainty? What history will remember of us is the question our actions today will answer: If we are living under a broken system where our best policy tools cannot save us from imminent economic failure, why are we not trying something new and different?
It is time for us to take action and write a new Bretton Woods Agreement to safeguard the world’s future – but this time, in Solidity.
