Generally, one of the things that politicians have to get right if they want to stay comfortable in power is to make sure that they avoid a currency collapse.
Just ask politicians in Zimbabwe and Venezuela if they sleep easy at night, or ask Theresa May and her Brexit team whether the path that the British pound has taken over the past year gives them any comfort.
Here at Davos 2017, for all Xi Jinping’s laudable rhetoric about commitment to globalisation, the one thing that China felt uncomfortable about was the renewed and sudden weakness in the Chinese yuan towards the end of 2016. Out came the new capital controls and the Yuan has promptly strengthened more than 2 percent since.
On the other end of the spectrum we had Donald Trump and his assistants recently talking down the US dollar, warning of the dangers of a currency which is too strong. Many now believe that we are on the brink of some sort of global currency war, as many countries experiencing stresses in their growth path gravitate towards some sort of export-led recovery on the back of a weaker currency. In South Africa, we know all too well that having a weak currency, though, doesn't always lead to an improving growth rate.
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Complicating matters entirely, global central banks trying hard to guide their currencies to some perceived optimal level are now faced with a new threat to their currency management plans: Digital currencies, which exist outside of the usual capital controls that central banks are able to enact.
JPMorgan chief executive Jamie Dimon famously said at Davos 2016: “No government will ever support a virtual currency that goes around borders and doesn’t have the same controls. It’s not going to happen.”
Well, Bitcoin dropped more than 17 percent against the US dollar after that in the space of over a month, so maybe he had some influence and insights? Hold your horses just checked price of Bitcoin again, one year later, it’s up 96 percent.
Hmmm.
Global inequality
This year, at Davos 2017, Nobel-laureate economist Joseph Stiglitz, one of the few economists who truly understands the prime issue of global inequality and the power of capital flows, has put it plainly:
“I believe very strongly that countries like the US could and should move to a digital currency, so that you would have the ability to trace (this kind of) corruption. There are important issues of privacy, cyber-security, but it would certainly have big advantages.”
Critics of digital currencies have pointed out that the lack of control over such currencies means they are open to being used for nefarious purposes. But then just ask Indian Prime Minister Narendra Modi why he removed 86percent of his country’s currency from circulation in a November 2016 surprise announcement. The reason? To tackle corruption, curb tax evasion, and shut down the shadow economy - the very things that digital currency critics point to.
Certainly, when one of the key benefits of a digital currency is the ability to do faster and much cheaper bank transfers - in essence by cutting out the middleman (who usually happen to be banks themselves) - it becomes obvious why banks, among others, are threatened by digital currencies.
Given the technologies available, international bank transfers are archaic. Digital currencies (and the block chain technology behind it) are the way of the future.
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In Africa, for example, we have seen the success of mobile technology in promoting commerce. It’s estimated that roughly 60% of Kenyan commerce takes place via M-Pesa, which is a form of mobile phone credits as a form of exchange. It works well - until you want to cash in your credits after which fees, like with banks, are very large. Again, digital currencies can be shown to provide a safe and cheap medium of exchange for the poor. In this way, digital currencies could help to expand access to financial markets at low cost.
The biggest obstacle perhaps then is that it seems that the status quo appears to suit the very 1 percent who are debating the topic at Davos on behalf of the 99 percent who need the solutions.
Arno Lawrenz is the head of fixed income portfolio management at Ashburton Investments.