Saturday, April 24thpetergarnham | April 24, 2021
In this week’s Macro Briefing we focus on the increasing rush to launch central bank digital currencies (CBDCs). As RenMac explains not only are central banks stepping up so as not to open a void that could be filled by private issuers, it is also important for countries not to be outflanked in an e-currency war. To that end, Enodo Economics sets out why China’s plans for a CBDC could free up its capital account and make the RMB a true reserve currency, while Forest from the Trees notes the alarm in the US over the ramifications of China’s e-currency plans and outlines why only a move to substantially weaken the dollar can rein in Beijing’s increasing global economic influence. That is lucky for Washington policymakers, since, as MI2 Partners explain, the US may be on the verge of engineering a slide in the dollar not seen since the collapse of Bretton Woods. Elsewhere, we look at some longer-term risks that investors might be reluctant to place on their radars as most of the world begins to reopen after a painful 12-months. The Jefferies thematic research team warn that the next health crisis could revolve around antimicrobial resistance – and could make Covid look relatively benign.
bitcoin CBDC Renaissance Macro Research
1. Bitcoin to Britcoin – CBDC on the cusp
Covid 19 has brought into focus the costs of physical cash in a digital economy, and added urgency to central bank digital currency (CBDC) including e-cash that would be available to the public, writes Howard Mason at Renaissance Macro Research. He says it is important for countries like China and the US not to be outflanked in an e-currency war, while the tagging of the UK initiative as ‘Britcoin’ highlights how the debate on money is evolving from bitcoin, which is too volatile as a mainstream medium of exchange, to stable coins issued (like legacy cash) by a central bank. As a matter of monetary sovereignty, says Howard, central banks are stepping up so as not to leave open a void that could be filled by private issuers. But this is not without challenges for central banks, says Mason, and in this note he sets out the myriad of design considerations and second-order effects they will need to consider to avoid the dreaded unintended consequences.
CBDC China currencies Enodo Economics
2. China’s DCEP; the dull name masks big ambitions
Enodo Economics write that that the introduction of China’s new digital currency is a highly significant moment for China, and gives it first mover advantage in setting global fintech standards for the future. Crucially, say Enodo, a digital currency and the ensuing visibility over payments could reassure CCP over freer capital flows, attract a significant proportion of capital from the emerging markets and establish the RMB as a true reserve currency.
CBDC China currencies Reserve currencies Forest for the Trees
3. “Literally overnight” the amount of trade that settles in Chinese CBDC will be multiples of today
Luke Gromen at Forest For The Trees highlights comments from long-time China bear Kyle Bass, on the introduction of China’s central bank digital currency which he said could “literally overnight” see the amount of trade that settles in the currency be “multiples” of what it is today and vastly improve China’s influence in the world. Bass said China’s CBDC should be banned, and Gromen examines how things got to the point where the dollar’s global reserve status could be threatened “literally overnight”. For Gromen, US policymakers took their eye of the ball, forgetting that US power and finance dominance was a result of US trade dominance, not the other way around. He explains why short of sanctions or war, the only “politically palatable” way for the US to rein in China’s increasing power is to continue to aggressively buy Treasuries and dramatically undermine the value of the dollar.
currencies Inflation US dollar MI2 Partners
4. USD down – early birds looking for worms
The charts are clear and the longer-term dynamics behind the dollar are appalling, says Julien Brigden at MI2 Partners. Historically, however, he says the key to getting dollar weakness in the current environment of loose fiscal policy is a transition from tight monetary (rising real rates) to looser monetary as bonds lag the rise in CPI and real rates begin to fall again. Brigden says he had assumed that this would occur as a result of a crisis, which forced the Fed to accelerate intervention via increased QE or even YCC. He says, however, since the start of March, real 10yr yields have fallen 85bps to minus 1% and the main driver has been higher CPI. Indeed, Brigden says it is possible over the next few months, if CPI accelerates over 4%, as he expects, that even if nominal bond yields rise further, they just can’t keep pace with inflation and real yields will fall. That’s what happened in the late 1960’s and that ended with a precipitous dollar drop as Bretton Woods collapsed, he says. It is still early days, says Brigden, but the potential trade is so big that he would rather be early and start small to have a foot in the door as the dollar slides.
Covid healthcare pandemics Jefferies
5. Antimicrobial resistance – the next health crisis?
As markets look past the current pandemic, Simon Powell at Jefferies examines another looming health crisis, which could make Covid look relatively benign. Antimicrobial resistance, he says, has emerged as a significant global public health problem which threatens the practice of modern medicine, human health, and food security. Indeed, the emergence of pathogens that are resistant to antibiotics has the potential to become a leading cause of death globally, warns Powell, and could drag down global GDP growth by more than 3% annually from 2040 onwards.