Category Archives: World Economy

Could Digital Currencies Make Hayek’s Denationalization of Money Dream Come True?

by Dr. Emanuele Canegrati (Italy)
Fellow Liechtenstein Academy

Could Digital Currencies Make Hayek’s Denationalization of Money Dream Come True? And can a basket of cryptocurrencies be the new world monetary basis? Perhaps it is too early to answer these questions, as the cryptocurrencies and the blockchain revolution is only at its very beginning and digital moneys such as Bitcoin or Litecoin are still considered by many famous economists and investors only as a big financial bubble ready to burst. But, left aside all the speculation-related issues, that certainly surround the current digital currencies market, one may be brave and answer in a positive way. In his best-seller book “The Denationalization of Money” (1976) Friedrich Hayek expressed his thoughts about the role of currencies, by advocating the establishment of competitively issued private moneys, against the public money issued by central banks. Those central banks that still have the decisional monopoly power on money today.

could digital currencies make hayeks denationalization of money dream come true
Could digital currencies make Hayek’s denationalization of money dream come true?

In 1978 Hayek published also a revised and enlarged edition of the book entitled “Denationalization of Money: The Argument Refined”, where he proposed a monetary system where, rather than entertaining an unmanageable number of currencies, markets would converge on one or only a limited number of monetary standards. According to Hayek’s idea, private business should be given the opportunity to issue their own private currencies, which, thanks to the free market mechanisms, would compete for acceptance. The acceptance of a currency is given by its reaching the stability in value, as competition tends to favor currencies with the greatest stability, since currency devaluation hurts creditors, while a revaluation hurts debtors. Therefore, stability emerges as a “spontaneous order” of the market, rather than through a political decision made by central bankers, through the “monetary policies”, for whatever they mean. Hence, customer-citizens would choose the monies which they expected to offer a mutually acceptable intersection between depreciation and appreciation. Hayek maintained also that institutions may find through experimentation that a basket of commodities forms the ideal monetary base. Institutions would issue and regulate their currency primarily through loan-making, and secondarily through currency buying and selling activities. It is postulated that the financial press would report daily information on whether institutions are managing their currencies within a previously-defined tolerance.

If we analyze now the market of cryptocurrencies, we can easily observe the presence of many elements characterizing the Hayekean monetary world. First of all, private issuing. Digital currencies are completely issued trough a private mechanism, linked to the computerized mining process, which is somehow comparable with the more classic gold mining. And, yes, Bitcoin has often been assimilated to gold. Of course, there is a huge difference between the precious metal and a digital currency, as the first is a metal, with specific features such as brilliance, durability, beauty and preservability over time, which of course a digital currency does not possess. Nevertheless, cryptocurrencies could have a common feature with gold, which makes them candidates for being the base of a monetary system: scaresness. According to Bitcoin creators, the most famous digital currency of the world should be issued in the limited quantity of 21 million. Not a bitcoin more. Once the total quantity would be achieved, the skyrocketing price should stabilize or change according to the demand/supply law. Gold, as well, is limited, although nobody can quantify its precise quantity. We only know that this quantity is finite.

The ability of digital currencies to be used as a medium of exchange, in finite quantities and in a decentralized issuance could make them suitable for being the base of a libertarian monetary system. Of course, they are not perfect monies, as one may argue that they can be stolen by hakers from savers’ digital wallets, their limit may be raised by miners’ decisions and so on. We are just at the very beginning of what could be a monetary revolution. Only time will demonstrate if these new currencies will be adopted as the new world monetary standard or they will disappear as fast as they has been introduced. And, yet, after having seen the disasters committed by central bankers through their “ultra-expansionary” monetary policies (read, print fiat money as much as you can) these new instruments deserve a chance.

China’s Coming Debt Crisis

by Henrique Schneider* for

The problem of debt in China is not the bursting of a bubble. It is much worse. As the Middle Kingdom approaches the worldwide record of accumulated debt, productivity losses are becoming increasingly apparent. That is very bad news. Every economy relies of a certain amount of debt. That is an empirical fact. But China’s total debt—the sum of government, corporate and household borrowings—has soared since 2008, and is now almost 300 percent of the country’ gross domestic product GDP. This is far higher than any other emerging market and higher than stablished economies.  Total debt in Japan, the poster child for indebtedness, is 229 percent of GDP, the United States 104.17 percent.

China’s Coming Debt Crisis: Accumulated debt reaches a world record as productivity falls
China’s Coming Debt Crisis: Accumulated debt reaches a world record as productivity falls

In the year 2008, the Chinese government used a massive fiscal injection to insulate its economy against the worldwide crisis. Since then, at least three further stimulus-programs were put in place. Because of China’s policy architecture, these fiscal actions were always in synch with debt expansion.

As government paid for new roads in the provinces, it made provinces build additional public works and banks lend to provinces in order to facilitate these investments. As state-owned enterprises (SOEs) were expected to expand globally, banks were equally expected to render financial help. All these expectations – which still have an overly mandatory component – inflated the debt of all economic agents in the country.

The numbers speak for themselves. While total Chinese debt amounted less than RMB20 trillion in 2002, it passed the RMB160 trillion mark in 2016. By 2009, private household debt was around RMB6 trillion; in 2016 it reached RMB20 trillion. In the same seven years, private corporate debt climbed from RMB9 trillion to RMB30 trillion and government debt went from RMB15 trillion to RMB40 trillion. What about the SOEs? Their debt soared from RMB32 trillion to RMB76 trillion.

Through the relativity prism, all other sectors had much higher debt-growth than the SOEs, which just doubled their stock. But, in absolute terms, it is the SOEs that hold alone almost the half of all debt. And doubling an already high amount of loans and credit from 2009 to 2016 is impressive as such. To further put this into perspective. In the same time-frame, the debt-to-assets ratio of private enterprises decreased from 56 percent to 52 percent. In the SOEs, it spiked from 57 percent to 63 percent.

To complete this picture: The productivity of debt is plunging. In the year of 2008, for each renminbi in credit, an SEO could turn 0.7 RMB in productive work. Today, it is barely 0.25. Also, the overall productivity of labor is stagnating. In some sectors and in the lowest brackets of income, it is even falling.

Many economic scenarios about China are concerned with the bursting of the debt bubble. Since more than half of China’s debt is owned by SOEs and private property developers, as the economy slows and housing prices fall, many of these loans will prove unpayable. Banks report that bad loans are just 1 percent of their assets and their auditors insist that the banks are not lying, but investors price banks’ shares as if the true level is closer to 10 percent. With the failing of SEOs and property as collateral, many provinces will not be able to sustain their debt. The whole system implodes, so goes this version.

This picture, however, might be getting some things wrong. If companies and provinces fail, the Chinese command-and-control economy will have little trouble in saving and bailing-out institutions as well as rolling-over debt. If that does not work, it can redistribute this debt with a massive supertax on the citizens. These two instruments – which are also becoming increasingly acceptable to so-called western economies – should be enough to stop any bursting. But they are not enough to address the problem of productivity-loss. And this problem is not a future scenario. It is already real.

Economies relying on debt and artificially low interest-rates tend to report aggregate growth while stagnating or even shrinking on a microeconomic level. But without the microeconomic growth of labor and capital productivity, there is no wage growth, no expansion of the private capital base which invests in the future and no establishment of a solid middle class. In an emerging economy, as China is, this could even lead to a middle-income trap. If a crisis hits or a bubble bursts – two events that are possible but not probable for China in the next couple of years – without productivity growth to compensate, asset values deflate and the effects of debt become even more pressing. This is the real bad news behind the actual debt situation in China.

Read the original article at China’s Coming Dept Crisis

*Henrique Schneider is chief economist of the Swiss Federation of Small and Medium Enterprises.