“For example, EMEs’ share of global activity is now 60%, but their share of global financial assets lags behind at around one-third. And half of international trade is currently invoiced in US dollars, even though the US has a much lower 10% share of international trade. As the world re-orders, this disconnect between the real and financial is likely to reduce, and in the process other reserve currencies may emerge. In the first instance, I would expect these will be existing national currencies, such as the RMB. However, history suggests these transitions will not happen overnight. The US economy overtook Britain’s in the second half of the 19th century, but it took until the 1920s before it became a dominant currency in international trade.”
USAGOLD note: Remarkably candid and detailed assessment from the Governor of the Bank of England throughout this Q&A with the public. He covers a wide-range of topics and states what he has to say without the usual central bank-speak we get as a matter of course. His comments on China’s yuan though will take many by surprise. He does not see much of future for cryptocurrencies, at one point stating that they “currently are not promising even as a form of money let alone as a global currency.” In response to a question about banking the IMF’s SDR with gold, he makes the following comment:
“It would be undesirable to base the value of a global currency on gold. Under the Bretton Woods system – the international system of linking exchange rates to the US dollar which was pegged to gold existing from 1944 to 1971 – there was a fundamental tension in that the global supply of gold did not grow in line with the global demand for money. This tension peaked in the early 1970s and the system collapsed. Since then, major economies have moved towards a system of floating exchange rates, and the basis for the SDR’s valuation has also been switched from gold to the more stable arrangement of valuation based on a basket of currencies.”
Such thinking underscores the flaw in the SDR as a store of value, and why it will never replace gold as the primary asset of last resort on central bank balance sheets. The great mistake made by the Bank of England, or better put the British government, was to encourage and sponsor the sale of a good portion of UK’s gold reserve at the turn of the century. In the throes of Brexit, there are many within Britain, no doubt, who would rather see that gold sitting on the BoE’s balance sheet rather than someone else’s.