JACKSON HOLE, WYOMING – Bank of England Gov. Mark Carney took aim at the dollar’s “destabilizing” role in the global economy on Friday and said central banks might need to join together to create their own replacement reserve currency.
The dollar’s dominance of the global financial system increases the risks of a liquidity trap of ultra-low interest rates and weak growth, Carney told central bankers from around the world at a symposium in Jackson Hole, Wyoming.
“While the world economy is being reordered, the U.S. dollar remains as important as when Bretton Woods collapsed,” Carney said, referring to the end of the dollar’s peg to gold in the early 1970s.
Emerging economies have increased their share of global activity to 60 percent from around 45 percent before the global financial crisis a decade ago, Carney said.
But the dollar is still used for at least half of international trade invoices — five times more than the United States’ share of world goods imports — fueling demand for U.S. assets and exposing many countries to damaging spillovers from swings in the U.S. economy.
Carney, who was considered a candidate to be next head of the International Monetary Fund but failed to secure backing from Europe’s governments, said the problems in the financial system were encouraging protectionist and populist policies.
Earlier on Friday, U.S. President Donald Trump said he was ordering U.S. companies to look at ways to close their operations in China, the latest escalation of mounting trade tensions between Washington and Beijing.
Carney warned that very low equilibrium interest rates had in the past coincided with wars, financial crises and abrupt changes in the banking system.
As a first step to reorder the world’s financial system, countries could triple the resources of the IMF to $3 trillion as a better alternative to countries protecting themselves by racking up enormous piles of dollar-denominated debt.
“While such concerted efforts can improve the functioning of the current system, ultimately a multipolar global economy requires a new IMFS (international monetary and financial system) to realize its full potential,” Carney said.
China’s yuan represents the most likely candidate to become a reserve currency to match the dollar, but it still has a long way to go.
The best solution would be a diversified multipolar financial system, something that could be provided by technology, Carney said.
Facebook’s Libra is the most high-profile proposed digital currency to date, but it faces a host of fundamental issues.
“As a consequence, it is an open question whether such a new ‘synthetic hegemonic currency’ would be best provided by the public sector, perhaps through a network of central bank digital currencies,” Carney said.
Such a system could dampen the “domineering influence” of the dollar on global trade.
“Even a passing acquaintance with monetary history suggests that this center won’t hold,” Carney said. “We need to recognize the short-, medium- and long-term challenges this system creates for the institutional frameworks and conduct of monetary policy across the world.”