Like a pandemic, inflation has spread across the world, clouding the future with dark uncertainty.
Disagreement over how best to deal with rising prices in the UK almost caused the economy to collapse and later led to the resignation of Prime Minister Liz Truss after just 44 days in office. Currently, at least 10 emerging economies are hyperinflationary, and more are expected to follow. And the Federal Open Market Committee (FOMC), the arm of the US central bank responsible for keeping prices stable, has just announced higher rate hikes amid a return to positive gross domestic product – signaling continued inflationary problems ahead.
The worldwide struggle to reduce inflation is tangible proof that yesterday’s central banking tools are inadequate for today’s monetary problems. But the hope for a brighter, sustainable tomorrow can be found in a technology politicians least expect: blockchains.
As the world’s de facto reserve currency, all countries rely on US dollars for trade. When times are good, it seems to suit everyone just fine. But in times of high inflation, the dollar’s purchasing power falls sharply, forcing other countries to buy more dollars to maintain stability. And yet periods of high domestic inflation are exactly what forces the Fed to reduce dollar liquidity via interest rate hikes – effectively making international dollar purchases more difficult. This dilemma between easing domestic inflationary pressures while meeting the world’s liquidity needs is called the Triffin Dilemma, and it occurs whenever a credit-based national currency, such as the US dollar, is used as a global reserve.
Related: Jerome Powell prolongs our economic pain
In practical terms, Triffin-deteriorated monetary policy causes financial crises originating in advanced developed countries to rapidly spread throughout the world. (The Triffin Dilemma does not trigger high inflation in advanced economies; instead, it acts as an accelerator, like gasoline, spreading high inflation everywhere, quickly.) These crises disproportionately hurt the poor and dramatically erase much of the progress in equity, economic security and poverty alleviation undertaken in boom years, invariably causing global growth to end in global bust. This repeated boom-bust cycle, with big steps back after each leap forward, highlights the critical need to reform and modernize our international monetary system.
Interestingly, we have known how to solve Triffin-related inflationary contagion long before Robert Triffin first identified the phenomenon in the 1960s. At the Bretton Woods Conference after 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. Although Keynes’ proposal was never implemented, the idea was far ahead of its time.
As nearly eight decades have passed since Bretton Woods, let’s unpack what that means in 2022.
Back in 2009, in the midst of the last financial crisis, several countries called for Keynesian-style reforms, insisting on using the International Monetary Fund’s Special Drawing Rights – essentially units of account backed by a basket of currencies – to be used more broadly as a global reserve. Thirteen years later, we can safely say that these proposals went nowhere. We are still dependent on US dollars for international trade and there appears to be little political will to change the status quo. Effective reform of the financial system, it seems, may not be possible through existing political channels.
But something new and disruptive has been brewing over the past few years. The rise of blockchains has made the creation of 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 who are willing to experiment with privately issued digital currencies.
In response to the growing use of these alternative currencies, nearly all of the world’s central banks are exploring the issuance of central bank digital currencies, or CBDCs. These are public digital dollars and euros and yuan powered by blockchains, implemented with the intention of making privately issued cryptocurrencies obsolete.
But recent research by Linda Schilling and others revealed that CBDCs are likely to fail over time. Specifically, a CBDC trilemma exists where CBDCs cannot simultaneously be financially stable, price stable and efficient. In other words, CBDCs do not solve any of the problems we have with existing currencies, yet they create potentially catastrophic new problems under the guise of forward-looking innovation.
However, a real solution may be within sight. The collision of today’s extraordinary circumstances, of new technologies and crises and society, means that it has never been easier for a private party to issue a scalable, non-inflationary reserve currency to supplement the US dollar. Not an anti-dollar in itselfbut a value-stable cryptocurrency, tailored to reduce inflation and designed specifically for cross-border settlements – effectively solving the Triffin dilemma and easing inflationary pain for billions of people.
To be fair, some have already tried this. Ripple’s XRP (XRP) token was once touted as a possible global reserve, and some Bitcoin (BTC) enthusiasts support a total switch from fiat currencies to Bitcoin. But in a working paper from the Federal Reserve Bank of Philadelphia, researchers write showed that fiduciary cryptocurrencies – tokens backed solely by user trust – can be hyperinflationary over time if governments do not step in to limit the creation of competing cryptocurrencies. (The idea is that if people keep making cryptocurrencies, one day there will be so many cryptocurrencies in circulation that all cryptocurrencies will eventually become worthless.)
Related: Mass adoption will be terrible for crypto
A truly viable global reserve currency would likely have to break from this fiduciary tradition and be anchored to a stable value.
But none of these concerns seem to be keeping software developers from experimenting with DeFi. There are cryptocurrencies designed for a variety of user needs, from privacy-focused tokens used mainly for darknet market transactions to network-specific currencies used to power transaction verifications.
These types of limited practical use cases can be an important differentiator for a viable reserve cryptocurrency. The point is not to compete with the dollar, but to provide other nations with an alternative to the dollar during periods of increased volatility – essentially an anti-inflation cryptocurrency to help move the world away from endless boom-bust cycles and towards stable , sustainable global growth.
One day, many years from now, people will look back at what we did to prevent an impending global catastrophe. Were we content to tinker with interest rates as the world descended into chaos, or did we commit to bold modernization at a time of great uncertainty? Whatever history remembers of us, the question of our actions today will answer this: If we really live under a broken system where our best political tools cannot save us from impending economic failure, why don’t we try something new and different ?
It is time for us to take bold, decisive action and write a new Bretton Woods agreement to secure the future of the world – but this time in solidity.
James Song is a behavioral economist and software developer specializing in sustainable digital currencies. He completed his undergraduate career at Harvard University and received a master’s degree in neuroscience from University College London.
This article is for general information purposes and is not intended to be, and should not be construed as, legal or investment advice. The views, thoughts and opinions expressed herein are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.