The current economic crisis and the ultra-loose monetary policy of central banks raise many questions. Structural change seems unstoppable. What role will digitalization, block-chain technology, digital currencies and assets play?
Dr. Cyrus de la Rubia, Chief Economist of Hamburg Commercial Bank, answers these and other questions. De la Rubia has 25 years of financial market experience and is a sought-after speaker at renowned conferences as an expert on digital central bank money and block-chain-based private currencies.
CVJ.CH: At the moment there are a number of issues that are keeping the economy and the financial world on its toes. How do you assess the massive intervention in the market by central banks, especially the Fed?
Dr. Cyrus de la Rubia: We are dealing with one of the worst crises of the post-war period and the central banks have learned from the experience of the 1930s. At that time, they did not intervene and allowed a deflationary downward spiral to develop. The interest rate cuts and especially the bond purchases are there to prevent the markets from freezing and companies from sliding into bankruptcy by the dozen due to lack of liquidity. In all this, however, it will be a challenge for a central bank to withdraw from the market at some point without the markets falling back into turmoil. This will require a great deal of communicative sensitivity and the courage to withstand setbacks on the part of the central banks.
What effects will the current monetary policy of the central banks have on the global economy in the medium term?
We will initially have an extremely loose monetary policy for a relatively long time. Key interest rates will remain at extremely low levels, perhaps even lowered. Long-term yields are unlikely to rise much over the next 18 to 24 months. This environment will initially help to ensure the survival of many production capacities that would otherwise disappear.
In some cases, this monetary policy may also help to preserve certain economic structures that would not be viable under normal financing conditions. Overall, however, the emerging structural change, which is being accelerated by the recession and the corona pandemic, is unlikely to be halted in a decisive way. The key words here are consolidation, automation and digitalisation.
What consequences does US trade policy and the trade war with China have for the dynamics of world trade?
Ever since the financial market crisis of 2008/2009, it has been observed that international trade is expanding at a slower pace than during the period of hyperglobalization we experienced in the 1990s and especially the 2000s. The decidedly protectionist US trade policy has exacerbated this trend. Perhaps the most serious effect has been the corona crisis, which has made many companies aware of how vulnerable global value chains are. Apart from the double-digit slump in world trade triggered by the corona crisis, a stronger re-regionalisation of trade is to be expected. However, the international division of labour will by no means be abandoned; instead, greater resilience in production will be sought through greater diversification of supply chains and supply routes as well as higher stock levels. On balance, international trade will expand in the long term at a lower rate than was previously the case.
Will the introduction of the digital yuan fuel the trade war, or will it endanger the US dollar as the reserve currency?
We do not yet know when and in what form the digital yuan will be introduced. If it is simply introduced in the form of central bank accounts for everyone, perhaps not much will change. It might be different for a block-chain-based currency, because in that case the currency could probably be made more easily interoperable with major trading partners. Here, China could demand cooperation from other emerging markets.
But there is more to a global reserve currency. The US dollar is not only globally recognised because it is the currency with which a large part of international trade is conducted. Rather, it is primarily the fact that the US is integrated into the international capital market and that American shares, bonds and other securities can be traded around the globe. This makes it attractive, for example for central banks, to hold the US dollar as a reserve currency. This is different with the Yuan, and the digitalization of the Yuan will basically not change this. China’s international capital movements are strictly regulated and it is not easy for investors outside China to buy or sell Chinese shares on a large scale.
What are the primary reasons why central banks are dealing with CBDCs and what role will “private” Stablecoins like Facebook’s Libra Project play in the future?
In a survey conducted by the Bank for International Cooperation, it was found that around 20% of all central banks surveyed now consider it relatively likely that they will issue a digital central bank currency in the next one to six years. There has been real momentum here, and that has to do with Libra, among other things. Many central banks see themselves in competition with a possible private competitor in this area. And I assume that the launch of the Libra project will give a further boost to many central banks and could once again speed up the introduction of a digital currency, even if its introduction is by no means trivial, both technically and legally.
The overriding idea that guides many central banks is that people can be provided with a form of money that ultimately provides greater convenience and lower costs. There are obvious savings if the physical distribution of cash can be dispensed with and, in this context, there is no need for cash transporters and security services. Many central bankers also hope for more financial inclusion if a simple infrastructure, such as the smartphone, can be used to provide everyone with access to central bank money and the digital payment system via an app. In addition, I think the programmability of money also plays a role, which is possible in the case of a block-chain-based CBDC.
In Scandinavian countries, the trend is moving more and more towards cashless payments. What do you think about this trend and where could this development lead in the near future?
You can take whatever you want from this trend. The fact is that this trend exists in many countries. Many people simply find it more convenient to carry out transactions without cash and many shops are happy that they don’t have to make sure that there is enough change in the cash register every day. What many people probably overlook, however, is that without cash in today’s system they no longer have access to central bank money, they are at the mercy of the private banking and credit card system. The introduction of CBDC can remedy this.
Bitcoin, as a digital value, has been characterized by a high degree of volatility in recent years. How do you estimate the future development of the crypto-currency?
Bitcoin is still an extremely abstract concept for 99.9% of people. Most do not understand how the Bitcoin block chain works. Accordingly, many investors who have bought Bitcoin directly or indirectly via certificates are very uncertain about the fair value for this currency, which causes major fluctuations. And of course, liquidity in this market is still relatively limited. Bitcoin currently has a market capitalization of 170 billion US dollars. Apple’s market capitalization is ten times that. When an investor buys or sells a larger position, this is reflected in price fluctuations.
Bitcoin is still an extremely abstract concept for 99.9% of all people.
Most people do not understand how the Bitcoin block chain works. Accordingly, many investors who have bought Bitcoin directly or indirectly via certificates are very uncertain about the fair value for this currency, which causes major fluctuations. And of course, liquidity in this market is still relatively limited. Bitcoin currently has a market capitalization of 170 billion US dollars. Apple’s market capitalization is ten times that. When an investor buys or sells a larger position, this is reflected in price fluctuations.
Will digital currencies prevail as an asset class?
I think there are very few investment advisors today who are not asked by their clients how they can invest in crypto currencies. At the same time, there are now Bitcoin futures that allow institutional investors to hedge against price fluctuations or to invest in Bitcoin through futures contracts, similar to the way crude oil does. Many other crypto-currencies have not yet reached this point. In view of the relatively small market capitalization, crypto currencies will not be able to play a dominant role in the next few years. But it seems obvious to invest a small low single-digit percentage of one’s assets in Bitcoin as well.
How will block-chain technology and digital currencies affect our economy and our lives in the coming years?
I suspect that initially it will be mainly digital block-chain-based stablecoins, and in particular the Libra, that will change our lives. The degree to which they will be affected will vary. For example, guest workers who send money home could save a lot of money by transferring Libra in the future instead of going the expensive and lengthy way via the traditional banking system. For citizens of high-inflation countries who have so far exchanged their savings for dollars or euros to protect themselves against a loss of purchasing power, stablecoins may also offer a much cheaper alternative for storing assets.
In developed economies, these aspects do not play such a major role for most people. However, it is quite possible that international micro-transactions related to digital internet-based services will increase, as the associated transaction costs are likely to approach zero. This opens up new business models. Moreover, programmable money is likely to trigger a wave of new types of financial contracts, for example in the insurance sector.
As far as block chain technology in general is concerned, there may be an increased tokenisation of assets. In the real estate sector, there are already the first transactions in which tokens have been sold as an investment in real estate projects. It is also conceivable that the notary system will be revolutionized, for example, when block-chain-based land registers facilitate proof of ownership. It will probably be some time before greater progress is seen on these fronts, especially as legal issues and the protection of vested rights can prove to be stubborn obstacles.
*Originally published in German at CVJ.ch
