Cul-de-currency | Pakistan Today


  • Just whose money runs the world?

The Pakistani rupee retraced an historic low this week, touching 138 against the US dollar. Given the International Monetary Fund’s conditions, the currency is expected to plummet to around 150 against the dollar over the next few months.

The Pakistani rupee, whose value was artificially kept around 100 to the dollar during the large chunk of the previous Pakistan Muslim League-Nawaz government, has now fallen over 30pc since December 2017.

While detailed analysis of the quagmire that the rupee has nosedived into will be done elsewhere, there are important pieces of literature that can be read to understand the dynamics and functioning of currencies, especially with respect to one another.

Among the more recent releases is How Global Currencies Work: Past, Present, and Future by Barry Eichengreen, Arnaud Mehl and Livia Chitu – a book which challenges the conventional belief that the currency of the global superpower dictates all things finance.

To do so, the trio of others have – as the title elucidates – discussed the history of the currencies that have enjoyed international status, given their interpretation of where the currency wars stand at this point in time, and therein extricated their predictions for the future.

The core argument of the book is that the evolution of global trade has now resulted in a framework where multiple currencies can enjoy global status. The authors underscore that such a scenario has existed in the past as well, albeit with significantly few variables in the equation.

These and many other questions are addressed in the book as it maintains that international currency monopoly is a myth. This, the authors argue, is despite the prevalent liquidity of local financial markets at any given point

Understandably the historical narrative depends on the American dollar and the British sterling, with the Chinese yuan and its increasing share of the pie being mulled for the present and indeed the future.

But why are certain currencies preferred over others for use beyond their country of origin, to deal with trading, bond finance and reserves? How do we determine the number of international currencies that wouldn’t be daunting for global trade balances? What would be the corollary of taking the currency war up a few notches? And also, why are the Pakistani rupee and Japanese similarly valued?

These and many other questions are addressed in the book as it maintains that international currency monopoly is a myth. This, the authors argue, is despite the prevalent liquidity of local financial markets at any given point, and the setting up of an inertial standard through trade finance and interest rates.

The book argues that multiple currencies can coexist and simultaneously fulfill international trading needs, suggesting that the adherence to a set standard is less unflinching as has been upheld in recent times. The authors’ view can be measured in accordance with the current global currency share where the US dollar holds around two-thirds of foreign reserves and euro has a fifth, with the Chinese yuan now gradually increasing its share.

‘Chinese policy makers could cautiously and deliberately implement, over an extended period, reforms that pave the way for a slow but sustained increase in the use of renminbi for cross-border transactions. There will then be no “big bang” like with dollar internationalisation between 1914 and 1924. But neither will the process of currency internationalization go into reverse, as happened with the yen between 1984 and 1994.’

The book does concede the obvious geostrategic and political factors that allow certain states to dictate their end of the transactions. After all, global economics doesn’t work in a vacuum and isn’t a function of solely the mathematics deriving it. However, the book still contends that these factors do not actually impact the global fiscal framework to a point, that other currencies are absolutely shunned.

How Global Currencies Work, as one would expect, is a completely data driven analysis, with the book’s sample size ranging over the past hundred years. A visible strength of the authors is producing concise derivatives from such a widely spread, often haphazard, pool of numbers.

One definitive result of this approach is the book substantiating its argument for international currency coexistence by citing the example of the interwar period where the US dollar and British pound sterling were used in similar volumes. This followed the dominance of the sterling, the French franc, and the German mark before World War I.

‘In an international monetary and financial system dominated by the dollar, the United States is essentially the sole supplier of the safe and liquid assets that central banks hold as reserves and commercial banks and corporations use as the risk-free bedrock of their portfolios. If emerging markets continue growing faster than the US market, as the logic of convergence suggests, then their demand for safe and liquid assets will rise faster than the capacity of the United States to supply them’

There are also case studies that address the fall of the British currency following World War II, and how the rise of the euro around the turn of the century impacted the global currency structures.

The book is the right combination of technicality and narrative, catering to a wider array of audience, among whom should be those clutching at straws in dealing with what can now officially be dubbed a rupee free fall.