Rachel Poole and Eleni Buss

Here is our take on the articles summarized below: 

As the global economy emerges from the Covid-19 pandemic, new technologies and innovation across sectors are driving growth and, potentially, ushering us into a new era of productivity growth. Digital currencies have created new dynamics to the international monetary system, increasing currency accessibility and flexibility but necessitating new forms of regulation. While there are new and exciting opportunities on the horizon, inflationary risks and a “Cold War” with China threaten to derail global economic progress. 

Four key questions central banks must answer about digital currencies 

Markus Brunnermeier, Financial Times 

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Before we know it, central banks will soon be issuing their own digital currencies, allowing us to instantly make purchases with digital cash and exchange currencies across the world from our mobile devices. To prepare for a world of new digital currencies, the author highlights four critical elements central bank policymakers should consider and openly debate: anonymity and privacy, financial intermediation, innovation, and currency internationalization. First, there is debate surrounding whether or not central banks should keep the same anonymity we have when spending cash (we can spend a certain amount of cash without anybody knowing) for central bank digital currencies (CBDCs). Second, private banks are at risk of losing their deposit base if central banks offer citizens easily accessible digital cash. There are concerns over how CBDCs would affect the competition between banks and digital platforms, but many of these issues can be addressed in the design of the CBDCs themselves. Third, there is a need to embrace innovation as our forms of money are changing. CBDCs will allow central banks to keep providing the economy with public money, but central banks will also have to ensure that new forms of private money are trustworthy. CBDCs will bring with them the need for new regulations, but it is important that these regulations do not prevent innovation in payments. Finally, CBDCs will increase currency competition between countries, perhaps leading to the creation of “digital currency areas” where the use of a currency is associated with a specific digital network instead of a specific country. While digital currencies are a new and exciting concept, there are many governments and central bank policymakers will have to consider.The choices made surrounding the accessibility and flexibility of CBDCs will have a profound impact on the structure and functioning of the monetary policy system.

A Better Boom

James Manyika and Michael Spence,Foreign Affairs

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As it emerges from the Covid-19 crisis, the global economy finds itself on the cusp of a period of rapid productivity growth. The last time we saw a major boom in productivity was between 1995 and 2005 when we witnessed the revolution of information and communication technologies. During this decade, productivity in the US grew a full percentage point faster than the previous 15 years, accelerating at a rate of 2.5%. However, the boom didn’t last and productivity in the US fell to 1% between 2005 and 2019 as the gap between digital leaders and digital laggards widened while consumer demand fell, largely due to the financial crisis. A “virtuous” cycle of productivity growth is underpinned by three major factors. First, there must be widespread adoption of technological innovations. Second, this adoption must be followed by managerial innovation and the reorganization of business functions. Third, this adoption and reorganization must be driven by sector-wide competition which incentivizes companies to innovate. Also critical is how the productivity growth is achieved, whether it is by increasing the value of outputs for a given number of hours worked, or by reducing the number of hours worked for a given output. A virtuous cycle is created by the former, generating growth in employment and wages, while a vicious cycle occurs when firms reduce labor costs faster than they increase the value of their outputs, putting pressure on employment and incomes.

While the pandemic brought most sectors of the global economy to a grinding halt, it also accelerated plans for technological and organizational innovation as companies had to adopt new digital technologies and strategies to continue business. The stage is set for a new period of productivity growth. Whether a new era of productivity gains and prosperity occurs in the post-Covid-19 era will depend on governments and businesses creating conditions to sustain a virtuous, not a vicious, cycle of growth.

China’s Attacks on Tech are a Losing Strategy in Cold War II

Niall Ferguson, Bloomberg 

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The idea of “Chimerica” – the symbiotic economic relationship between the US and China – is dead and Cold War II is afoot. Everything that China does should be reviewed with doubt. By the end of 2018, the US and China were continuously arguing over so many issues that a cold war seemed like a good outcome, especially as an alternative to a “hot war”. China is checking all of the boxes including ideological division, economic competition, a technological race, geopolitical rivalry, rewriting history, espionage, and propaganda. Despite China not holding favorable public sentiment in the US, an influx of American money has continued to pour into China through public and private corporate deals, and purchases of Chinese onshore bonds and equities, among other avenues. However, Chinese regulators have recently launched a series of investigations into US-listed Chinese companies, including DiDi Global Inc., regarding the violation of laws and regulations pertaining to personal information. The investigations triggered a selloff in Chinese tech stocks. Just days later, Senator Hagerty called the SEC to investigate whether US investors were misled prior to the IPO of Chinese company DiDi. All of this activity will likely cause increased pressure on all US-listed Chinese tech companies and potential delistings in the long term.

China’s economic recovery is questionable, manufacturing is struggling and new weaknesses are arising, including increased debt, which could hinder growth in coming years. There are three Chinas: the “New New China” of the technology sector, the “New Old China” of the profitable state-owned enterprises, and the “Old Old China” of the heavy industrial state-owned enterprises. The “New New China” seems to be coming out on top as tech companies are growing to become a political threat, but this has upset the Communist Party elite in the “New Old China”. It can be misconceived that the Chinese Communist Party has the goal of world domination but their top priority is domestic: to preserve their own power. It didn’t plan to be so powerful in regards to the tech industry but their new data security laws give the government back power. These new laws allow the government to get private-sector firms to share data collected from social media and other sources by declaring them national assets. On the other hand, it stifles innovation of the country’s most dynamic industry. China’s crackdown on private tech firms to preserve its own domestic power is a “losing strategy” in Cold War II.

The inherent instability of the Goldilocks market consensus

Mohamed El-Erian, Financial Times

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There seems to be a consensus view that markets are operating under a “Goldilocks-like” scenario where conditions are not-too-hot and not-too-cold. Three primary assumptions are upholding this consensus: durable high global growth, transitory inflation, and friendly central bank policies. While growth prospects for the world’s largest economic regions – China, the EU, and US – are promising, and central banks plan on maintaining ultra-loose monetary policies, of most concern is the assumption that the current rise in inflation will be transitory. The author points us to two historical dynamics of inflation that are important to take into consideration are 1) one-off increases in prices cascade through the system, and 2) rises in inflation are persistent.A rise in prices can start with commodities but will eventually trickle down to consumer prices and wages. Another concern highlighted by the author is that the Federal Reserve has shifted from its traditional forecast-approach on monetary policy to basing policy moves on economic data, which could lead to a very late strategy adjustment if in fact, inflation proves not to be transitory. As the author puts it, “A late slamming of the brakes, rather than an earlier easing off the accelerator, would significantly increase the risk of an unnecessary economic recession.”