1、Leading perspectives to navigate the futureThe Future of the Monetary System2071.The checkered history of the USD-centric monetary systemSince its formal anointment as the worlds lead currency,dollar hegemony has frequently been in question,especially when US monetary policy was regarded as irrespon

2、sibly lax or too tight.Table of contents142.Macroeconomic imbalances and geopolitical conflictUS macro imbalances could once again undermine trust in the US dollar.Moreover,the Russia-Ukraine war and ongoing US-China tensions may lead some to question whether geopolitics might also weaken US dollar

3、dominance.04Editorial05IntroductionAbout the Credit Suisse Research Institute(CSRI)The Credit Suisse Research Institute(CSRI)is Credit Suisses in-house think tank.It was established in the aftermath of the 2008 financial crisis with the objective of studying long-term economic developments,which hav

4、e or promise to have a global impact within and beyond the financial services industry.The Institute builds on unique proprietary data and internal research expertise from across the bank and in collaboration with leading external specialists.Its flagship publications,such as the Global Wealth Repor

5、t,regularly attract more than 100,000 readers online,generating high press coverage and over three million impressions on social media.Further information about the Credit Suisse Research Institute can be found at www.credit- Future of the Monetary System213.Rethinking foreign currency reservesOne o

6、f the most direct measures of its dominance remains the weight of the US dollar in global foreign exchange reserves.Although it has indeed diminished in trend,evidence of a major reallocation to other currencies remains limited.284.How the monetary system could evolve For the foreseeable future,ther

7、e are no candidates to replace the US dollar as lead currency,and the creation of a global currency remains illusory.The monetary system is,however,gradually becoming more multipolar.37Panel of expertsEditorial deadline:12 January 2023Cover photo by Bill Oxford,Getty ImagesFor more information,conta

8、ct:Nannette Hechler-FaydherbeChief Investment Officer for the EMEA region and Global Head Economics&Research of Credit Suisse nannette.hechler-faydherbecredit-Richard KersleyExecutive Director of EMEA Securities Research and Head of Global Product Management,Credit Suisserichard.kersleycredit-Editor

9、:Oliver Adler39General disclaimer/important information355.Conclusion:What(else)will countAuthors:Zoltan PozsarOliver AdlerMaxime Botteron Nannette Hechler-Faydherbe4EditorialAs our in-house think tank,the Credit Suisse Research Institute(CSRI)studies long-term economic and financial developments wi

10、th a global impact.In this report,we pull together facts and thoughts by our leading internal experts as well as external thought leaders about key developments in the international monetary system.This analysis draws on our CSRI Fall Conference 2022 on the same topic.It discusses how macroeconomic

11、imbalances and geopolitics can catalyze change in the current largely USD-based monetary system,how central bank reserves have evolved so far and may be re-assessed going forward,and sketches out a vision for a gradually more multi-polar monetary system.While declaring the demise of US dollar hegemo

12、ny and dominance is premature,its fate as a backbone of the international monetary system depends on a number of factors,with the degree to which US policy makers would be able to maintain macroeconomic stability and trust relative to other countries of supreme importance.Understanding monetary deve

13、lopments and functioning is key to a global bank like Credit Suisse and to the broader financial sector,which plays a role in monetary transmission.We hope this report and the insights shared by our authors and guest speakers at the CSRI Fall Conference 2022 make a valuable contribution to current m

14、acroeconomic thinking.Axel P.LehmannChairman of the Board of DirectorsCredit Suisse Group AG5The Future of the Monetary SystemIntroductionThe past three years have seen abrupt changes in the global economy,economic policy responses and the realm of geopolitics the latter,in fact,date further back.No

15、t surprisingly,these changes have triggered hefty reactions in financial markets,including money,bond and foreign exchange markets.As in past periods of economic and geopolitical turbulence,they have also raised the question as to whether the international monetary system may be subject to more long

16、-term and fundamental changes.To discuss this question,the Credit Suisse Research Institute held a conference in November 2022,at which a number of academic experts and practitioners presented their perspectives on broader political and economic matters as well as more technical issues related to th

17、e evolution of the monetary system.This report presents some of the main areas of debate as well as insights from the conference.Chapter 1 of the report provides a historical perspective on the evolution of the current,primarily dollar-based monetary system,drawing attention to the series of crises

18、it has endured.Of particular relevance for our discussion are periods in which major shifts in US monetary policy generated stresses outside the United States and which,in turn,led to calls for reforms of the system or even its replacement.Chapter 2 lays out the current geopolitical and economic con

19、text in greater detail.The geopolitical tensions between China and the West,which have been building over the past several years,and the Russia-Ukraine war potentially increase the risk of a rupture and potential realignment of the monetary system.Meanwhile,doubts as to whether US monetary and fisca

20、l stability will be restored,together with significant imbalances in global capital flows,increase the potential for stresses in the US dollar-centric monetary system.Conversely,improved macro management in key emerging markets has arguably helped limit such stresses.Chapter 3 analyzes to what exten

21、t changes in the composition of foreign reserves at the major central banks might be pointing to a longer-term diminution in the role of the US dollar.Chapter 4 describes the concrete efforts that have been underway,especially since the financial crisis of 2008,to increase the robustness of the mone

22、tary system and,in particular,to better protect emerging markets from the stresses that emanate from the US dollar-centric system.It also points to the role that central bank digital currencies could play in such an enhanced insurance setup.Chapter 5 provides a checklist with which to assess potenti

23、al changes in the monetary system and concludes with a key message:when assessing the likely evolution of the monetary system and the role the US dollar(or for that matter any other currency)will play in it,the focus should not only be on central banks.At least as important is whether the dynamism o

24、f the US economy will suffice to continue to attract large pools of private and institutional investment capital from around the world.6Photo by Tanarch,Getty Images 7The Future of the Monetary System1.The checkered history of the USD-centric monetary system The goal of the Credit Suisse Research In

25、stitute Fall Conference held in November 2022,and which this publication draws on,was to discuss the future of the global monetary system.The term“system”might suggest that we are referring to a well-defined and,in some sense,rather mechanical set of economic relationships.Nothing could be further f

26、rom reality.While the USD-centric system launched at the United Nations Monetary and Financial Conference at Bretton Woods in July 1944(hence“the Bretton Woods system”)was indeed conceived as a strict set of rules under which countries exchange rate policies would operate,the system has undergone fr

27、equent and often profound change,typically in response to“systemic”crises.In the process,it has become more flexible,which has allowed the system to survive,but is no longer rule-driven.Moreover,many argue that the system remains crisis-prone,which has frequently produced calls for reform.Whether a

28、truly new system might emerge,or whether the current system will continue to adapt and,if so,in which directions,are the key questions this report addresses.Reviewing the checkered history of the USD-centric system provides some insights into the weaknesses of the current system,especially its asymm

29、etric impacts on third countries.Since its launch at Bretton Woods in 1944,the USD-centric monetary system has undergone profound change,typically in response to“systemic”crises.High US inflation in the 1970s undermined trust in the US dollar,but the Federal Reserve under Chairman Volcker re-establi

30、shed credibility.However,shifts in US monetary policy continue to amplify business cycles or even trigger crises in other countries.While the Fed and other central banks have developed tools to limit the fallout,calls for systemic change persist.The Bretton Woods system as devised in 1944 was regard

31、ed as a response and solution to the chaotic monetary relations that reigned in the inter-war years.Many countries,notably Britain,had gone off the gold standard at the start of World War I in order to gain leeway for the monetary financing of war expenditures.Subsequently,high inflation in the post

32、-World War I period,most dramatically in Germany,led countries to temporarily return to the gold standard in the mid-1920s,only to once again abandon that system in the early 1930s in order to escape its deflationary impact.This period of severe monetary system instability stands in marked contrast

33、to the pre-World War I century of“Pax Britannica,”in which the British pound was effectively the dominant global reserve and anchor currency(see Figure 1),with others,such as the French franc,German Reichsmark and US dollar playing far lesser roles.Crises and evolution of the USD-centric systemAs no

34、ted,the monetary history that formed the mental background for the participants at the 1944 Bretton Woods conference was the severe monetary instability of the inter-war period.On the“real”side of the economy,the key concern was to prevent renewed setbacks to world trade 8Figure 1:From Pax Britannic

35、a to Pax AmericanaGBP/USD exchange rate;a decline implies a weakening of GBP vs.USDSource:Craighead(2010),Federal Reserve Board and ONS,Refinitiv Datastreamsuch as those of the inter-war period in which the imposition of tariffs had exacerbated the Great Depression(in that period,the imposition of t

36、ariffs was also a response to competitive devaluations of currencies by trading partners).In addition,the destruction caused by World War II called for a system that would not only ease trade,but also provide international capital to support reconstruction.Given the rise of the United States and the

37、 US dollar as the dominant economic and geopolitical power as well as currency,the Bretton Woods conference settled on the US dollar gold exchange standard(Bretton Woods I,or BWI).In the eyes of John Maynard Keynes,who was a central figure at Bretton Woods and the preeminent economist of the time,th

38、is was a suboptimal solution.He recognized early on that monetary hegemony by a single country could lead to severe imbalances and stresses.His idea was to establish a globally accepted monetary instrument(“Bancor”)and an International Clearing Union(ICU)that would manage the system and ensure that

39、international trade would proceed smoothly;capital mobility between countries was not foreseen at the time as the norm.Keyness idea was,however,swept aside at the conference,and the US dollar became the worlds reserve currency.The value of the US dollar was pegged to gold at USD 35 per ounce and the

40、 exchange rate of other currencies was pegged to the US dollar.The International Monetary Fund(IMF)was established to address shorter-term liquidity problems of countries if their currencies came under undue pressure,while the International Bank for Reconstruction and Development(todays World Bank)w

41、as established to provide long-term capital for countries in need of aid.The first major shock to the system:Breaking the gold pegThe first major shock to BWI was the abandonment of US dollar gold convertibility by US President Richard Nixon in 1971.As Perry Mehrling,Professor of International Polit

42、ical Economy at Boston University,pointed out at the CSRI Fall Conference,Nixons decision was effectively an effort to end US responsibility for global monetary affairs and to provide the US Federal Reserve(Fed)with the freedom to fully focus on the domestic economy.Under BWI,the United States had e

43、merged as an international financial intermediary,borrowing short term and lending long term like a bank.Convertibility of those short-term liabilities into gold,however,meant that the“bank”was vulnerable to a run in case of loss of confidence.Nixons decision in 1971 to close the gold window led to

44、a period of international instability,in which exchange rates between the US dollar and other major currencies floated,with some countries limiting fluctuations more than others;some countries maintained a fixed exchange rate to the US dollar or even instituted currency boards(e.g.Hong Kong in 1983)

45、.In retrospect,this period of instability can be understood as the birthing pains of a new Eurodollar system,in which international financial 024681012141800 1811 1823 1835 1846 1858 1870 1881 1893 1905 1916 1928 1940 1951 1963 1975 1986 1998 2010 2021US Civil WarInterwarturbulenceBretton WoodsConfe

46、rence9The Future of the Monetary Systemintermediation in dollars took place much more offshore,supported by central bank cooperation rather than the Fed acting on its own.Nixons decision to abandon the peg to gold had been preceded by years of increasingly expansionary US fiscal policy under Preside

47、nts Kennedy and Johnson to finance the Vietnam War and Johnsons“War on Poverty.”The Fed had largely accommodated that policy by keeping interest rates below what was needed to avoid economic overheating and rising inflation.Indeed,the ending of the peg to gold was one of triggers for an inflationary

48、 dynamic in the United States,while the OPEC price shock that followed shortly after fully unleashed inflation in the United States and the rest of the world,and ushered in a period of general“economic malaise.”The OPEC(Organization of Petroleum Exporting Countries)price shock also led to a large ac

49、cumulation of petrodollars and the recycling of those petrodollars into US Treasuries,which made OPEC the first set of captive buyers for Treasuries(see Chapter 3).Volckers re-establishment of dollar dominanceNot surprisingly,the abandonment of the dollars gold peg and the period of high US inflatio

50、n during the 1970 also triggered a marked weakening of the US dollar(see Figure 2),which naturally raised doubts about the sustainability of the dollar as the worlds reserve currency.As William L.Silber recounts in“Volcker:The Triumph of Persistence,”the legendary Fed Chairman attended a lunch meeti

51、ng in October 1979 with German Chancellor Helmut Schmidt in Hamburg en route to the fall meetings of the IMF in Belgrade,Yugoslavia;with the dollar trading at 1.75 deutschmarks,the German Chancellor said“the world needs stability much more than anything else”a message Volcker had already heard from

52、him six years earlier in 1973,when the dollar was still worth three marks.Now Schmidt expressed a more modest objective,one that reflected the dollars weakened status:“I would like to get back to a world in which the dollar would be two marks and stable.”A joint press release after the meeting noted

53、 that“exchange rate stability and a strong dollar are in the interest of both countries.”Perceptions of the rest of the world may well have influenced Volckers decision to dramatically tighten monetary policy.Indeed,strengthening the dollar against the mark and other currencies required some radical

54、 monetary actions.While formally switching to a monetary growth target,the Fed raised its lending rate sharply,with the Fed funds rate reaching an unprecedented 20%in 1980.The actions worked:inflation peaked in the early 1980s and the dollar rallied.hurts many emerging marketsThe combination of stil

55、l-tight Fed policy with President Ronald Reagans tax cuts(i.e.fiscal easing)kept real interest rates high into the mid-1980s.Now,the worlds problem was no Figure 2:USD setbacks limited after mid-1980sUSD exchange rates versus other major currencies;index(Jan.1970=100)Source:Haver Analytics,Credit Su

56、isse02040608097505201020152020EUR(DEM)JPYCHFUSD depeggedfrom goldPaul Volcker appointedFed ChairmanPlaza AccordGlobal Financial CrisisEuro crisisAsian crisisPandemicIT bubble bursts/9/1110longer lax US monetary policy and a weak dollar,but rather an excessively stron

57、g US dollar.This caused unease in advanced countries and led to the Plaza Accord of September 1984,in which the United States,France,(West)Germany,the United Kingdom and Japan agreed to jointly weaken the US dollar.Although concrete actions were limited,the declaration achieved its goals and the US

58、dollar began to retrench.Meanwhile,the strong US dollar and high real interest rates in the early 1980s triggered outright crises in Latin American emerging markets(Mexico,Brazil and Chile).In the period of low real interest rates and a weak dollar of the 1970s,Latin American governments and banks h

59、ad borrowed heavily in US dollars,in part from cash-rich oil exporters.With oil prices dropping after 1979 and the US economy going into recession in 1981/82,Latin American exports collapsed and foreign exchange reserves came under pressure as capital fled the countries.With real interest rates stub

60、bornly high,debt could no longer be serviced.It took many years of negotiation and piecemeal interventions by the IMF until debt was finally rescheduled in the late 1980s and early 1990s under the so-called Brady and later Baker plans(named after the two US Treasury Secretaries).The“lost decade”of L

61、atin America attests to the fact that it is not just periods of US dollar weakness(and lax US monetary policy)that can cause problems in the rest of the world,but that periods of tight Fed policy and a strong dollar can be even more disruptive.Fairly smooth sailing during the 1990s and early 2000sIn

62、 fact,the experience of Latin America was largely repeated in Asia in the mid-1990s.With the purge of inflation by the Volcker Fed,interest rates declined in the second half of the 1980s and early 1990s,while US and global economic growth began to pick up.In the United States,the Savings&Loan crisis

63、(also a partial result of high interest rates in the early 1980s)had gradually been resolved.Meanwhile,the fall of the Berlin Wall in 1989 and,above all,the entry of China into the worlds trading system ushered in an era of rapid growth in global trade,with many other Asian countries(the Asian“Tiger

64、s”)benefiting strongly.The combination of strong global growth and low US interest rates induced countries such as South Korea and Thailand to borrow heavily while adhering to a fixed exchange rate with the US dollar,with the intention to stabilize their exports.As the Fed under Chairman Greenspan b

65、egan to raise interest rates in 1994,and with the US dollar once again appreciating,Asian currencies came under pressure and foreign exchange reserves dwindled rapidly.The choice was to either impose capital controls(a choice made by,for example,Malaysia in the face of heavy criticism from the IMF)o

66、r to abandon the currency peg(Thailands and South Koreas choice).With currencies sharply lower,but debt denominated in a strong US dollar,these countries came close to defaulting.In contrast to the Latin American experience,defaults were nevertheless avoided.Instead,the IMF provided substantial fina

67、ncing,albeit under strict conditionality,to Asian countries.While the adjustments were painful for these countries,the turnaround nevertheless occurred much faster than in Latin America.The“lost decade”of Latin America attests to the fact that it is not just periods of US dollar weakness(and lax US

68、monetary policy)that can cause problems in the rest of the world,but that periods of tight Fed policy and a strong dollar can be even more disruptiveThis was also due to the fact that,in contrast to the 1970s,the period of US monetary tightening in the 1990s was mild and short-lived.Chinas rise as t

69、he“factory of the world,”a widespread trend to liberalize markets for goods,services and labor as well as well-anchored inflation expectations prevented inflation from rising anywhere near as much as in the 1970s.As a result,interest rates remained subdued.The extensive accumulation of US Treasuries

70、 by China in an effort to prevent yuan appreciation,combined with a significant improvement in the US fiscal position under President Bill Clinton contributed to the persistence of low interest rates.Alan Greenspan referred to this as a“conundrum,”while his successor Ben Bernanke ascribed this pheno

71、menon to a“global savings glut.”11The Future of the Monetary SystemIndeed,when the US Fed once again began to tighten policy in mid-2004 in order to slow the US housing boom,it turned out that the preceding prolonged period of low long-term interest rates had led to a huge build-up of risk in US and

72、 European banks.While the leverage had supposedly been offloaded onto the“shadow banking”system,these exposures were revealed as effectively still being on the banks balance sheets(see Pozsar,2010).1 What was initially regarded as a limited problem of subprime mortgages thus evolved into a full-blow

73、n global financial crisis(GFC).Meanwhile,emerging markets,which had“learned their lesson”in the 1980s and 1990s,largely avoided being caught in the crisis.Significant expansion of Fed toolkit after the GFCThe Latin American and Asian debt crises did not lead to significant adjustments in the toolkit

74、 of the Fed,the“manager”of the USD-centric monetary system.Instead,reforms were implemented in the emerging markets themselves:macro management improved,with central banks moving to inflation targeting,similar to the policy approach in advanced economies,and exchange rate flexibility was increased t

75、o soften the impact of external shocks,while currency reserve policies were reviewed(see Chapter 3.)In contrast,the GFC called for reforms in the advanced economies and it did engender changes in the Feds policy toolkit.The first lesson from the crisis,enshrined in Basel III,was that the banking sys

76、tem needed higher capital and liquidity reserves.These had clearly not been sufficient to maintain stability in the system,requiring the Fed to act as a lender of last resort to other central banks in order for them to be able to provide dollar liquidity to their commercial banks.The system of Fed s

77、wap lines was thus the key innovation in the USD-centric monetary system post-GFC(also see Chapter 4).But an even more important legacy of the global financial crisis was the“birth”of quantitative easing(QE)as a standard and everyday policy tool.It was applied because the Fed,in contrast to the Euro

78、pean Central Bank and other central banks in Europe,was not prepared to move interest rates into negative territory.It meant that the Feds balance sheet expanded massively,with the central bank advancing to a major holder of US Treasuries(see Figure 5 in Chapter 3).During the waves of money printing

79、 and zero interest rate policies that followed the GFC and the Eurozone debt crisis,the USD-centric monetary system had a relatively stable run.There were no meaningful financial crises and,until late in 2021,the key policy objective of 1.Pozsar et al.“Federal Reserve Bank of New York Staff Reports;

80、”https:/www.newyorkfed.org/medialibrary/media/research/staff_reports/sr458_July_2010_version.pdf.targeting inflation at around 2%was easily achieved.For more than a decade,the main policy concern was deflation(always feared,though never realized),which central banks in the West fought with low polic

81、y rates and QE.Financial market volatility was repressed during this period and asset prices experienced a spectacular rise.Financial market professionals dealt mostly with technical shocks.The source of these shocks was the roll-out of Basel III,which imposed balance sheet constraints on global ban

82、ks and dealers,other pieces of reform like money market fund reform,a shortage of collateral in Europe and Japan due to QE,and a shortage of reserves in the United States due to quantitative tightening(QT)during 201819.Rather than major crises,the main market events from 2015 onward were spread disl

83、ocations in US dollar funding markets involving Libor,cross-currency bases and repo rates,which the Fed managed to address by deploying new lending tools.The current monetary system has repeatedly been criticized by senior policy makers,both in advanced economies as well as emerging marketsThe key q

84、uestions going forward are whether recent geopolitical and economic dislocations are likely to usher in renewed major disruptions in the monetary system and whether the USD-centric system will be preserved via a continued adaptation of policy tools as has been the case so far,or whether a more funda

85、mental shift to a new system is on the horizon.On the one hand,this will depend on the geopolitical and economic 12fundamentals prevailing in the years to come,which we will discuss in the following chapter.It will also depend on whether true alternatives are already available or likely to emerge,a

86、question we will address in Chapter 4.What is clear is that the current monetary system has repeatedly been criticized by senior policy makers,both in advanced economies as well as emerging markets,for the stresses it tends to generate and which we have described above.Not surprisingly,these critici

87、sms have been especially fierce both in periods of excessive ease of US monetary policy(e.g.during the early and mid-1970s or immediately following the GFC)and in periods of strong policy tightening(e.g.the late 1970s and early 1980s,as well as in the mid-1990s)because the disruptions to other count

88、ries were then greatest.Prominent criticisms of USD-centric monetary systemFor example,during the onset of QE in 2009,Zhou Xiaochuan,then Governor of the Peoples Bank of China(PBoC),delivered a speech entitled“Reform the International Monetary System,”2 in which he argued that fundamental reforms in

89、 the international monetary system were necessary because“the frequency and increasing intensity of financial crises following the collapse of the Bretton Woods system suggests the costs of such a system to the world may have exceeded its benefits.”He called for“creative reform of the existing inter

90、national monetary system towards asuper-sovereign international reserve currency with a stable value,rule-based issuance and manageable supply that is disconnected from individual nations and can remain stable in the long run,thus removing the inherent deficiencies caused by using credit-based natio

91、nal currencies.”A decade later,former Bank of Canada and Bank of England governor Mark Carney also lamented“the deep flaws in the international monetary and financial system(“IMFS”)”and,in particular,that“growing dominant currency pricing(DCP)i.e.in US dollars was reducing the shock absorbing proper

92、ties of flexible exchange rates and altering the inflation-output volatility trade-off facing monetary policy makers,”and he suggested that a“new Synthetic Hegemonic Currency(SHC)possibly provided by the public sector,perhaps through a network of central bank digital currencies”might lead to better

93、outcomes.32.Zhou Xiaochuan,Governor of the Peoples Bank of China,Reform the international monetary system(essay published in BIS Review 41/2009,March 2009).3.Mark Carney,The Growing Challenges for Monetary Policy in the current International Monetary and Financial System(Speech given at the Jackson

94、Hole Symposium,23 August 2019).Figure 3:Key events during period of USD-centric monetary systemSource:Credit Suisse1944:US dollar formally anointed global reserve currency,replacing the British pound;US dollar pegged to gold,other currencies to US dollar.1971:US dollar peg to gold abandoned;flexible

95、 exchange rates.1979:Re-establishment of Fed credibility through massive policy tightening.1984:Plaza Accord,a joint effort of major economies to limit US dollar strength.1997:Most Asian“tigers”abandon US dollar peg,others accumulate Treasuries.2008:Fed provides massive US dollar liquidity to other

96、central banks and foreign banks via swap lines.2008:Birth of Quantitative Easing(QE)as primary policy tool of Fed and others.2015:Fed deploys new lending tools to address spread dislocations in US dollar funding markets involving Libor,cross-currency bases and repo rates.201517:Cautious Fed rate hik

97、es and start of Fed Quantitative Tightening(QT).2022:Sharp Fed rate hikes to fight post-pandemic inflation surge.13The Future of the Monetary SystemPhoto by pookpiik,Getty Images 142.Macroeconomic imbalances and geopolitical conflict As our first chapter showed,the dollar-centric monetary system has

98、 suffered considerable volatility over its almost 70 years of existence,but has adapted and so far survived.In fact,despite the significant liberalization,expansion and deepening of non-US financial markets,the US dollar has largely maintained its prominence over the past several decades.Relative to

99、 the size of the US economy and its role in global trade,the US dollar certainly plays a very outsized role(see Figure 1).That said,the share of US dollars in central bank reserves has declined over the past decades(Figure 2),a topic we will return to in the following chapter.What stands out in the

100、chart and is particularly relevant to the discussion in this chapter is that the US dollars position as a global reserve currency weakened sharply,albeit only temporarily,in the period following the abandonment of the dollars gold peg and the phase of US monetary instability that followed.Today,the

101、US dollar represents slightly less than 60%of global FX reserves at central banks,compared to more than 80%in the 1970s.Like other countries,the United States is battling a burst of inflation,while the economy slows.Meanwhile,fiscal and external imbalances have worsened substantially.This situation

102、is somewhat reminiscent of the 1970s,when trust in the US dollar was significantly undermined.In addition,geopolitical tensions have escalated substantially in recent years.This combination raises the specter of a potential major pivot away from the US dollar.On balance,we believe this remains a fai

103、rly unlikely case for now and that a gradual evolution to a more multi-polar monetary system is more likely.Figure 1:US dollar dominance well beyond the USAs economic size(in%)Source:BIS Quarterly Review,December 2022020406080100World tradeGlobal GDPCross-border loansInternational debt securitiesFX

104、transaction volumeOfficial FX reservesTrade invoicingSWIFT paymentsUS shareUS dollar share of the global marketsOf which:Offshore15The Future of the Monetary SystemFocus on potential macro instabilities in the United StatesWhen trying to assess the US dollars future role in the global monetary syste

105、m,close attention should be paid to potential macroeconomic instabilities in the United States.The picture in this regard is not particularly comforting.Inflation has increased markedly over the past 18 months,while economic growth has begun to slow.The US economy is thus suffering from stagflation,

106、albeit so far clearly in a much milder form than during the 1970s.A“redeeming”fact is that inflation in other industrial countries,not least Germany,is currently just as high,in contrast to the 1970s,when the United States was the negative outlier(Figure 3).Conversely,a number of emerging markets,in

107、cluding China and other countries in non-Japan Asia and the Gulf region,are faring significantly better in terms of price stability.How US(and global)inflation evolves over the medium-to longer-term will depend on the actions of central banks.So far,it appears to us that the Fed,at least,is intent o

108、n bringing inflation under control.Hikes in the federal funds rate have been sharper than ever before,albeit from an extremely low level,and market expectations for inflation have receded considerably from their peak in March 2022(Figure 4).Inflation has increased markedly over the past 18 months,wh

109、ile economic growth has begun to slowThat said,there may be structural factors that make it hard to vanquish inflation.These include structural shortages in labor due to demographic change and possibly shortages of certain commodities even if some of these shortages,such as disruptions in the supply

110、 of oil and gas,are due to the war in Ukraine and should eventually abate.Similarly,shortages of computer chips have resulted from the US-China trade war and pandemic-related Figure 2:Foreign currency reservesShare of various currencies in%of global foreign currency reserves*EUR:Includes DEM,FRF,NLG

111、 between Q1 1970 and Q4 1998,and ECU between Q1 1979 and Q4 1998.Source:Haver,IMF,Credit SuisseFigure 3:Inflation spike after many years of calmHeadline inflation rate(YoY%)Source:Haver,IMF,Credit SuisseFigure 4:US inflation expectations have remained anchoredBreakeven inflation,derived from TIPS(%Y

112、oY)Source:Refinitiv Datastream,Credit Suisse-50595686162021GermanyUSAChina-3-2-0001920225-year breakeven inflation10-year breakeven inflation0%10%20%30%40%50%60%70%80%90%100%0520002005201020

113、152020USDGBPEUR*RMBOther currencies16disruptions.All these factors have led to extreme volatility and an unusually high level of uncertainty regarding the price level,which has translated into high volatility for interest rates and currencies.The latest indications are that volatility is declining,b

114、ut it is probably premature to sound the all-clear as ongoing uncertainty over the evolution of price levels in major economies could harm the standing of the US dollar and other major currencies as stores of value(see Mehrling,2019).1Stagflationary forces could persistIn particular,if conflicts ove

115、r trade were to further escalate(see below)and,combined with supply chain disruptions,were to impair global trade,the stagflationary environment might persist.So far,however,and contrary to perceptions,we observe that global trade has largely returned to its pre-pandemic trajectory(Figure 5),even if

116、 the share of trade in global gross domestic product(GDP)has declined from its peak in 2010(Figure 6).The latter is most likely the result of slower growth in the worlds largest trading nation,China,as well as its turn toward domestic demand as a growth driver,and less because of international trade

117、 conflicts.Nevertheless,the data suggest that this measure of globalization has peaked.Fed tightening regardless of high government debt?Possibly of greatest concern is that central banks might be unable or unwilling to raise interest rates sufficiently due to the heavy burden of government debt.Ind

118、eed,while the interest burden has so far been moderate in most advanced countries as governments were able to refinance and raise new debt at very low rates in the post-GFC period(the US Treasurys interest expenses are currently running at around 3%of GDP versus 4.6%at the peak in 1991),deficits and

119、 debt are on an“uncomfortable”path(Figures 7 and 8).In the United States,the outsized fiscal expansions during the pandemic have caused massive deficits,although they have stabilized considerably in the meantime.In fact,the US deficit ratio is currently similar to Germanys and better than that of ot

120、her advanced economies.Meanwhile,the fiscal position of China(which is difficult to measure due to the unclear delineation of government entities)has deteriorated sharply and is worse than that of the United States.The picture of government debt is similar:the debt ratio has been on a rising trend i

121、n the United States since the global financial crisis(GFC)and has surged as a result of the deficits in 1.Routledge,2019.“The Vision of Hyman P.Minsky.”Journal of Economic Behavior and Organization 39 No.2(June 1999):129158.Figure 5:Trade has recovered from the pandemic setbackVolume index for world

122、 exports,Dec 2019=100Source:DataStream,CPB Netherlands Bureau for Economic Policy Analysis,Credit SuisseFigure 6:but the share of trade in global GDP (a measure of globalization)has peakedSum of exports and imports of goods and services,in%of GDPSource:Haver Analytics,Credit SuisseFigure 7:Budget de

123、ficits have risen sharply in advanced economies.Fiscal deficits in%of GDP,selected countriesSource:Haver,IMF,Credit Suisse20%25%30%35%40%45%50%55%60%65%1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020-16%-14%-12%-10%-8%-6%-4%-2%0%2%4%20004200520062007200820092001320142015

124、200022GermanyJapanUSAChina020406080005207The Future of the Monetary Systemthe past two years,even though the latest data indicate some stabilization.The US debt position is clearly worse than Germanys.It is now of similar size to a number of other European

125、 countries such as the United Kingdom and France,but still significantly better than in Japan or Italy.Meanwhile,while Chinas public debt has been worsening faster than in the United States,even excluding the debt of the many semi-governmental entities,the situation is significantly better in many o

126、ther emerging markets.Many Asian as well as some Latin American governments have continued to run a disciplined fiscal policy,while oil exporters in the Gulf as well as Russia have very low public debt(see Figure 9).However,as Zoltan Poszar,Global Head of Money Market Analysis at Credit Suisse noted

127、 during the CSRI Fall Conference,in a world that is re-arming,the risk is that debts will rise in many countries just as a potential trend toward re-shoring as well as efforts to decarbonize might be adding to inflation pressures.The ultimate test:Willingness to finance the current account deficitA

128、further indication of US domestic economic imbalances(i.e.of excessive spending)is the countrys rising current account deficit(Figure 10).The deficit ratio is now close to the peak of pre-GFC imbalances.While reserve currency countries“need to”run structural current account deficits in order to sati

129、sfy the global demand for investable assets,excessively large deficits risk undermining the trust needed to preserve the status of reserve currency(this paradox was first noted by the US-Belgian economist Robert Triffin in the late 1950s,hence the“Triffin dilemma”).With surpluses declining sharply i

130、n Japan and the Eurozone,the US(and UK)current account deficits are now largely being financed by the surpluses in China and other Asian emerging markets as well as the Gulf States and Switzerland.Whether or not these countries will“willingly”finance the US deficit remains to be seen.Part of the ans

131、wer will be provided by non-US central banks and their decisions about foreign exchange reserve holdings,which we discuss in the next chapter,but also by other international investors.So far,there are few signs in financial markets,at least,that trust in the US dollar has been seriously undermined s

132、ince the onset of the COVID pandemic the US dollar has appreciated markedly against most major currencies(Figure 11),including the Chinese renminbi(RMB)(Figure 12),suggesting that its historical position as a safe-haven currency remains intact.Similarly,real yields on US Treasury bonds,another indic

133、ator of trust in USD-denominated assets,remain moderate despite the recent rise.Figure 8:.further boosting government debtGross government debt,in%of GDPSource:Haver,IMF,Credit SuisseFigure 9:Fiscal discipline better in many emerging marketsGross government debt in 2021,in%of GDPRefinitiv Datastream

134、,IMF,Credit SuisseFigure 10:US current account deficit close to pre-GFC peakCurrent account balances in%of GDPSource:Haver,Credit Suisse0%50%100%150%200%250%300%200042005200620072008200920000022USAGermanyJapanChina0100200300JapanGreeceSingaporeI

135、talyUnited StatesSpainFranceUnited KingdomBrazilIndiaChinaGermanyMalaysiaSouth AfricaColombiaThailandQatarMexicoKoreaSwitzerlandTurkeyIndonesiaUnited Arab EmiratesSaudi ArabiaRussian Federation-8.0-6.0-4.0-2.00.02.04.06.08.010.012.020004200520062007200820092000162017

136、200212022ChinaEurozoneUSAJapan18In sum,while macroeconomic imbalances in the United States the anchor currency of the dollar-centric system are indeed considerable,it remains to be seen to what extent this will seriously undermine trust in the reserve currency.Investors will need to monit

137、or whether US policy makers(both the Fed and the Congress)act to correct these imbalances,while analysts will want to monitor markets for signals that trust in the US dollar is being lost.One somewhat“redeeming”(albeit not particularly comforting)factor is that many other advanced economies are faci

138、ng similar structural issues,suggesting that the relative position of the US dollar in an international“beauty contest”of currencies is less negative than its absolute position.So far,there are few signs in financial markets,at least,that trust in the US dollar has been seriously underminedGeopoliti

139、cal conflict as a potential pivot point?Geopolitics has played a pivotal role for monetary systems in the past.World War II led to the emergence of the USD-based system.The creation of the euro,the most recent monetary experiment of scale,was also strongly influenced by geopolitical change,with the

140、fall of the Iron Curtain and the reunification of Germany playing a major role.The CSRI Fall Conference 2022 thus debated whether the current geopolitical context might also be a catalyst for changes in the monetary system.The end of cooperative multilateralismThe geopolitical environment has indeed

141、 changed substantially since 2016.The era of cooperative multilateralism and globalization that was initiated by the fall of the Berlin Wall and intensified significantly with Chinas reforms under Deng Xiaoping and Chinas ascent as the“factory of the world”to culminate when China joined the World Tr

142、ade Organization(WTO)in 2001 has given way to intense and sometimes aggressive rivalry between the two major powers.Since the Trump administration introduced tariffs on a broad range of Chinese products in 2016,US-China relations have entered a period of tension.In the economic field,the relationshi

143、p has also soured over issues such as the protection of intellectual property and US efforts to limit Chinese access to advanced IT capabilities as well as its investment in Western companies.In the sphere of geopolitics,tensions over Taiwan(Chinese Taipei),the South China Sea and other areas have a

144、t times flared up.Figure 11:The USD has remained a safe-haven currencyDXY currency indexSource:Bloomberg,Credit SuisseSource:Bloomberg,Credit SuisseFigure 12:while the RMB has lost some of its lusterUSD/RMB exchange rate66.577.588.520002002200420062008200022607080900

145、02005209The Future of the Monetary SystemMore recently,the Russia-Ukraine war has set Russia and the West on a conflictual path.At the CSRI Fall Conference,former US Presidential Advisor and independent economist,Dr.Pippa Malmgren,went further to suggest that we have already en

146、tered a“hot war in cold places”(the Arctic,space and on the high seas)and“cold war in hot places”(Africa,South Pacific Island chains,etc.)and suggests that“the trend of multiple countries towards re-arming,re-shoring,re-stocking and re-wiring(all comms and power grids)are all symptoms of reduced mut

147、ual geopolitical and economic trust.”Meanwhile,other large emerging market countries such as India,Indonesia and a number of Middle Eastern and Latin American countries are maintaining distance from these dominant geopolitical conflicts and trying to pursue their national interests in a non-aligned

148、manner.Russia-Ukraine war:Unprecedented conflict and unprecedented monetary sanctionsWith the freezing of Russias foreign exchange reserves by the G7 countries,the scale of the conflict in Ukraine has also triggered unprecedented Western sanctions against Russia;i.e.the conflict and its potential co

149、nsequences for monetary affairs set it apart from any previous post-World War II geopolitical conflict.The question arises whether the reserve freeze could induce other central banks to attempt to diversify out of the US dollar due to the potential threat of sanctions,more than they would do otherwi

150、se.If so,such actions would,at the margin,help undermine the dominant role of the US dollar.Conference participants generally agreed that the answer to the question would depend significantly on the outcome of the conflict and on the evolution of geopolitical alliances in the conflict,both of which

151、appear very difficult to predict.Somewhat greater clarity may exist in the other more long-lasting geopolitical conflict,i.e.between the United States and China.This conflict has been building over a number of years,with the imposition of significant tariffs by the United States on China in 2016 as

152、a first,very visible step.Since then,the conflict has shifted to the area of technology,with the United States as well as other Western countries trying to limit Chinas access to the means for producing high-tech goods,in particular advanced computer chips.As Dale Copeland,Professor of International

153、 Relations at the University of Virginia,pointed out during the Fall Conference,this conflict is highly sensitive because a severe cut-off of China from advanced technology would likely be seen by China as the crossing of a“red line”which might,in turn,increase the likelihood of China taking militar

154、y action against Taiwan.Will mutual interest in maintaining US-China trade prevail?That said,the interest of both sides in the conflict to maintain trade seems very high.In the West,reliance on Chinese consumer and investment goods is still significant,while Chinas growth continues to require Wester

155、n technology and still relies heavily on exports with the Chinese economy under pressure due to problems in the real estate sector and,more short-term,due to the fallout from severe COVID restrictions and their sudden partial relaxation,this dependency has even increased in recent quarters.Moreover,

156、there are indications that negotiations to resolve disputes over technology trade may be advancing.In sum,the base case is that a breakdown of relations between the two sides is unlikely,even if an intense geopolitical rivalry is most likely to remain in place for a long time.A trend toward a more m

157、ultipolar monetary system is indeed visibleThis rivalry is also likely to affect the monetary system to some extent.As we show in Chapter 4,China has been at the forefront of efforts to develop an alternative international payments system as well as schemes to enhance mutual support by central banks

158、 in emerging markets.Moreover,the potential for military escalation cannot be ruled out.This already seems to have had a certain impact on how China manages its currency reserves(see next chapter).However,this in itself is not likely to lead to a major shift out of the US dollar as the major reserve

159、 currency.What is clear at this point is that China is not capable or willing to establish its own currency,the renminbi,as a serious rival for the US dollar;nor are there any other candidates for that role so far.That does not mean,however,that the position of the US dollar will remain unchanged an

160、d unchallenged:as we discuss in Chapter 4,a trend toward a more multipolar monetary system is indeed visible.Moreover,at some point in the more distant future,the ascendance of a new anchor currency similar to the US dollar can obviously not be ruled out.20Photo by andreygonchar,Getty Images 21The F

161、uture of the Monetary System3.Rethinking foreign currency reserves In Chapter 2,we noted that foreign currency reserves denominated in US dollars and held by non-US central banks are clearly outsized relative to the size of the US economy and its role in international trade.That is,of course,typical

162、 for a global reserve currency.Figure 2 in Chapter 2 also shows,however,that the share of the US dollar in global currency reserves has declined over the past two decades,effectively extending the trend that had set in during the late 1970s after the de-pegging of the US dollar from gold and the per

163、iod of high macro instability in the United States.The figure also reveals three other trends.First,the share of euros jumps in 1999,although it does not increase noticeably thereafter.Second,the share of other(non-euro)currencies increases gradually,in particular after 2008(the global financial cri

164、sis).The third and final trend is the gradual increase in the share of Chinese renminbi since around 2015,although its share remains very low;in the context of its capital controls,the Peoples Bank of China(PBoC)limits the amount that foreign central banks can invest in Chinese bonds.That said,the d

165、ecline in the US dollars share has proceeded in a rather steady manner throughout the past two decades.In other words,the world The weight of the US dollar in foreign exchange reserves remains an indicator of USD“hegemony.”That said,floating exchange rates,better macro policies and the availability

166、of central bank swap lines reduce the need for such reserves.Conversely,high reserves have often resulted from central banks efforts to fight their currencies appreciation against the US dollar.In the meantime,however,there is some evidence that major central banks are diversifying away from the US

167、dollar,possibly to limit sanction risks.has gradually been moving toward a more multipolar currency system.The question is whether this process will continue in a fairly smooth manner,or whether we might see abrupt moves in one or the other direction,indicating that a structural break or pivot is un

168、derway.As we noted in Chapter 2,one of the factors that could lead to a further sharp move out of the US dollar would be a serious weakening of US economic stability relative to other major economies,implying a loss of trust in the US dollar,similar to the 1970s.A second reason for some central bank

169、s to try to rapidly shed US dollars from their portfolios might be the threat of further reserve freezes in the context of a significant deterioration in relations between the United States(or the West in general)and other countries.For the moment,this appears somewhat unlikely,in our view.We noted,

170、in fact,that efforts seem to be underway to somewhat calm the major geopolitical conflict,i.e.between the United States and China.Even in the absence of geopolitical and economic calamities,a further diminution of the role of the US dollar in global foreign exchange reserves is possible,and in fact

171、seems rather likely,in our view,for three reasons:first,because the need for foreign exchange reserves 22diminishes in a world of floating exchange rates as well as improving macro management;second,due to active diversification policies of central banks;and,third,because the increased use of swap l

172、ines between central banks diminishes the quantity of reserves required.A further diminution of the role of the US dollar in global foreign exchange reserves is possible,and in fact seems rather likely,in our viewTraditional reasons for holding reserves have diminished in a world of floating exchang

173、e ratesThe traditional role of foreign exchange reserves,namely to provide a buffer to finance a countrys imports,has become far less important over the past decades.Trade finance is now generally extended by global private sector banks in both importing and exporting countries,which can refinance t

174、hemselves in global money markets.This implies that central bank buffers are needed to a lesser extent,except in poorer developing countries.Therefore,traditional“rules”by which central banks were encouraged to hold a certain percentage of annual imports as foreign exchange reserves are far less rel

175、evant today.That said,because some commercial and central banks risk being cut off from the global(USD)money market in times of crisis,a considerable incentive remains to hold US dollar reserves,not least because the Feds swap lines are not available to all central banks.For central banks that are c

176、onfident they will be able to activate and draw on the swap lines in adequate amounts during times of crisis,the hoarding of foreign exchange reserves is less imperative;indeed,the global financial system has evolved such that many countries,instead of“pre-funding”with US dollars to deal with crises

177、,can just access US dollars“on tap”when needed.For countries where imports are sourced to a large extent from areas with currencies other than the US dollar,central banks may want to hold fewer US dollars and instead acquire currencies of their main trading partners.They will especially want to do s

178、o if those currencies are structurally strong and thus particularly expensive in periods of stress.Conversely,if the goods traded(especially commodities)are denominated in US dollars,the reserve currency of choice will remain the US dollar(see below).Second,and more fundamentally,in a world of(purel

179、y)floating exchange rates,the need for foreign exchange reserves to“defend”the home currency against depreciation pressures in principle no longer applies;countries can simply let their currencies depreciate until the market finds an equilibrium.The more credible economic policy making is,the more c

180、onfident policy makers can be that extreme depreciation pressures can be avoided.The recent experience in many leading emerging economies,both in Latin America and Asia,has been just that despite rapid policy tightening by the Fed,most emerging market currencies have remained far steadier than in pa

181、st episodes of Fed tightening.Nevertheless,many countries may not want to rely fully on the rationality of foreign exchange markets,and their central banks will thus want to hold meaningful amounts of foreign exchange reserves in order to smooth currency fluctuations by means of foreign exchange mar

182、ket intervention.Fighting appreciation pressure is a key reason for reserve accumulationOf course,if central banks deem it necessary to intervene in foreign exchange markets to prevent their currency from appreciating against the US dollar or another reserve currency,they will automatically accumula

183、te foreign exchange reserves.In fact,the most important reason that foreign exchange reserves have increased in many countries,notably in China in the period of rapid growth up to about 2010 or in Switzerland during the euro crisis,has been their central banks efforts to prevent the Chinese renminbi

184、(RMB)and Swiss franc(CHF)from appreciating against the US dollar and,in Switzerlands case,the euro.Conversely,when appreciation pressures diminish or even reverse,these central banks may want to,or have to,actively sell some of their foreign exchange reserves.We would venture to say that the decline

185、 in US dollar reserves at the Peoples Bank of China since 23The Future of the Monetary System2015(Figure 1)has to some extent been due to active selling of US dollars by the Chinese central bank in order to slow RMB depreciation.In sum,movements in foreign exchange reserves are often an endogenous r

186、esult of foreign exchange policy or,more broadly speaking,of efforts to protect the domestic economy from currency market gyrations.However,finally and importantly,foreign exchange reserves and their composition do indeed change because of deliberate investment decisions by central banks.While centr

187、al banks are far more constrained in their investment decisions than private sector investors because their asset allocation decisions must not undercut their monetary and exchange rate policies,they generally do have some leeway to reallocate reserves away from the US dollar,especially in periods i

188、n which their currencies are not under appreciation pressure,i.e.in periods when the US dollar is stable or strong their investment choices will be limited,however,by the liquidity of other reserve currencies and the quality of assets that are available for investment.Hence,with the RMB appreciation

189、 trend abating in the early 2010s,China ended its accumulation of US dollars and other G-7 reserve assets and shifted some of its existing stock of G-7 claims into gold.At the same time,the government also began funding newly established policy institutions like the BRICS Contingent Reserve Arrangem

190、ent(CRA)and New Development Bank(NDB,also see Chapter 4).China also encouraged local commercial banks to recycle some foreign exchange inflows via long-term loans to fund the Belt and Road Initiative(BRI).These moves can be interpreted as a combination of straightforward risk diversification in the

191、PBoCs asset portfolio,including a shift from nominal into real assets and an investment strategy intended to strengthen Chinas longer-term geopolitical and trade position.Other major emerging markets changed their reserve management practices as well,each for a variety of reasons.Russia shifted from

192、 Treasury securities into gold and divested due to the threat of sanctions,and it moved its reserves to the eurodollar market through foreign exchange swaps(see Figure 2).The latest G-7 sanctions have,however,led to a blockage of these funds as well.Saudi Arabia,the largest member of OPEC(The Organi

193、sation of Petroleum Exporting Countries)and the largest holder of petrodollar reserves,also stopped accumulating Treasuries.It has increasingly focused on real assets instead,as did Brazil and India.Conversely,the Swiss National Bank(SNB)partly diversified its portfolio into US dollars and away from

194、 euros,which it accumulated in the course of fighting CHF appreciation to protect sales into Figure 1:China buys(sells)dollars when the RMB becomes stronger(weaker)Chinas foreign exchange reserves and the USD/RMB exchange rateSource:Haver Analytics,Credit SuisseFigure 2:Russias reallocation of reser

195、ves has been the most markedIn USD bnSource:Haver Analytics,Credit Suisse0500300350400450500200320042005200620072008200920000022Russian Federation official reserves:foreign currency assetsRussian Federation official reserve assets:goldRussia:hol

196、dings of US Treasuries66.577.588.505001,0001,5002,0002,5003,0003,5004,0004,500200020042008201220162020China FX reserves(USD bn)USD/RMB(r.h.s.,inverted scale)24Switzerlands main export market,and it also increased its allocation to real assets global equities in its case(Figure 3).Putting it simply,c

197、entral banks that hold enormous foreign exchange reserves and therefore,whether implicitly or explicitly,also function as sovereign wealth funds,will want to optimize their portfolios to improve their long-term risk-return characteristics.In some cases,these institutions will no doubt also use inves

198、tment decisions to support the geopolitical goals of their governments.Central banks have some leeway to act as investment managersIn short,the patterns of reserve management practices have been changing for a while on the margin.Captive buyers of Treasuries have started to“rebel,”with their prefere

199、nces shifting to assets other than US Treasuries.Whether this trend gathers pace remains to be seen and,as noted in Chapter 2,will to a large extent depend on macro developments in the United States.It will also,of course,depend on the degree of risk that central banks,in their role as asset manager

200、s,are willing to engage in.With yields on US Treasuries now considerably higher than a year or two ago,the incentive to reduce the allocation to these investments has arguably diminished.That said,the key question for asset allocators will be how returns on US Treasuries are expected to evolve relat

201、ive to those of other comparable reserve assets;the claim that investing in US Treasuries has been a particularly“bad deal”is certainly not borne out by the data,at least over the past two decades(see Figure 4);total returns on US Treasuries(measured in USD)have been somewhat better than for governm

202、ent bonds in other advanced economies,although they have indeed underperformed Chinese and other emerging market bonds.Of course,central bank reserve managers will,in their role as investors,not only want to look at absolute returns,but also at risk-adjusted returns and,in particular,at the behavior

203、 of their reserve assets in times of crisis.In that regard,the US dollar has continued to act as a safe haven in periods of great uncertainty such as the current one.Meanwhile,second-tier reserve currencies,in particular the British pound,show significantly worse characteristics in crisis periods.Ev

204、en the yen and euro have not held up as well as the US dollar,although the current account balances of these regions remain markedly better than in the United States.Their fiscal imbalances are,however,similar to or worse than in the United States and their central banks have become at least as lax

205、with respect to inflation as the Fed.Figure 3:Swiss National Bank has shifted into the US dollar and real assetsAsset and currency allocation of the SNBs foreign currency reserves(incl.gold)in 2005 and 2021,in%of totalSource:Swiss National Bank,Credit SuisseFigure 4:US Treasuries have outperformed m

206、ost other advanced economy bondsTotal returns on government bonds in USD,indices,Jan.2004=100*JPMorgan Emerging Market Government Bond IndexSource:Bloomberg,Credit SuisseNote:Historical performance indications and financial market scenarios are not reliable indicators of current or future performanc

207、e.020406080100Q4 2005Q4 2021Q4 2005Q4 2021USDEURJPYGBPOthersGoldGovernment bondsOther bondsEquities500300350200020042008201220162020USDGBPEURJPYCHFEMBI*China25The Future of the Monetary SystemIf the current period of price instability were to persist,the yen,pound or euro could suffer rel

208、atively more over time than the US dollar.The fact that commodities are typically not denominated in these currencies is a further disadvantage.The only advanced economy currency that does significantly better than the US dollar on a total and risk-adjusted return basis and that also exhibits clear

209、safe-haven characteristics is the Swiss franc.However,the franc and its government bond market lack the depth to function as a substantial reserve currency.and are likely to focus on a broader range of real assetsWith the return to higher inflation being a potential new risk for investors,preserving

210、 the real value of assets has also become a concern for reserve managers and is likely to influence their asset-allocation decisions going forward.As noted above,some reallocation from nominal to real assets has already taken place and this trend may well intensify.Apart from equities(e.g.in the cas

211、e of the Swiss National Bank),these real assets may include a greater allocation to gold(or possibly other commodities)as well as investments in infrastructure,mining and industrial projects(e.g.in the case of Chinas investments in the BRI).As noted,the lines between some central banks and sovereign

212、 wealth funds will thus be blurred further.Geopolitics has brought the issue of security and access to funds to the foreFinally,the increased geopolitical tensions discussed above and the monetary sanctions imposed by the United States and other G-7 governments may influence reserve managers as well

213、.As Jack Lew,former US Treasury Secretary warned in 2016,“the more we condition the use of the dollar and our financial system on adherence to US foreign policy,the more the risk of migration to other currencies and other financial systems in the medium term grows.1”There could thus be more than mee

214、ts the eye with regard to the freezing of Russias foreign exchange reserves.Recognizing the growing risk of sanctions since it annexed Crimea in 2014,Russia sold all its US Treasury securities and moved its US dollars into the eurodollar market where it deployed them via foreign exchange swaps.The l

215、ogic was simple:US Treasuries are direct onshore links with the US government,where asset freezes would be easy.On the other hand,the eurodollar market is offshore and effectively“stateless.”1.US Treasury Secretary Jacob J.Lew on the Evolution of Sanctions and Lessons for the Future,speech at the Ca

216、rnegie Endowment for International Peace,March 30,2016After swapping out of US dollars,the Central Bank of Russia thus effectively deposited its euro,yen and pound sterling balances with the European Central Bank,the Bank of Japan and Bank of England.However,in 2022,the G-7 central banks in coordina

217、tion with the US Treasury froze the deposits of the Central Bank of Russia at other central banks as well,expanding the asset freeze and further reducing Russias access to its funds.The safety and accessibility of reserves has thus become a significant topic that may have ramifications for reserve p

218、olicy in the future.Preserving the real value of assets has also become a concern for reserve managersThe factors determining foreign exchange reserves going forwardTo sum up,we have identified the main factors that are likely to drive the evolution of foreign exchange reserves going forward:1.Reser

219、ve accumulation and decumulation will continue to be driven to a significant degree by efforts of central banks to limit both an excessive appreciation or depreciation of their home currencies against the lead currency(the US dollar)or the currencies of their countries main trading partners.2.Increa

220、sed investments in currencies of main trading partners will be a natural outcome,with currencies preferred that are strong and liquid and that offer ample high quality reserve assets as investments.3.Reserves will also be accumulated for countries to withstand external economic shocks and financial

221、crises,although the availability of swap lines reduces funding needs.In any case,the safe-haven characteristics of reserve assets will remain an important consideration.4.Insofar as central banks have leeway to make standard asset allocation decisions(so that they do not undercut their monetary and

222、currency policy goals),we expect to see more 26diversification across currencies and,more importantly,diversification into real assets ranging from equities to commodities and infrastructure.In this regard,the role of central banks and sovereign wealth funds might become even more blurred.In part,su

223、ch investments will also support the respective countrys geopolitical goals and ambitions.They will tend to be financed by shifts out of the dominant international reserve asset,US Treasuries.5.Maintaining access to and safety of reserve assets will also remain a key driver given that geopolitical t

224、ensions and the threat of sanctions are likely to persist.The key investors driving demand for US Treasuries remain US domestic investorsBase case:A gradual move out of USD reservesConsidering all these factors,we can assume that the trend of some of the major central banks in emerging markets to di

225、versify parts of their reserves out of the US dollar and,more specifically,out of US Treasuries will contribute to a further,albeit gradual,diminution of the US dollars role as the dominant reserve currency.That said,shifts would need to be significant for the US dollar to lose its position as the m

226、ain reserve currency,and that seems quite unlikely in the foreseeable future.A tail risk in this regard would be that such diversification efforts,combined with the Feds quantitative tightening(i.e.its own sales of US Treasuries)would undermine this asset class and thereby accelerate the decline of

227、the US dollar as a reserve currency.Figure 5:US domestic investors remain the dominant holders of TreasuriesOwnership of US Treasury bills and bonds(in USD trn)Source:Refinitiv Datastream,Credit SuisseHowever,the key investors driving demand for US Treasuries remain US domestic investors(Figure 5),a

228、bove all US pension funds,and risk-return considerations make it unlikely that these institutions will reduce their Treasury allocations in any meaningful way.In addition,private and institutional investors from around the world invest heavily in US Treasuries due to their liquidity and safe-haven n

229、ature.The role of foreign central banks in determining overall demand for US Treasuries and thereby the exchange rate of the US dollar is thus smaller than often assumed.Moreover,while the holdings of Treasuries by foreign central banks have flattened out since around 2014 and have dropped somewhat

230、over the past year,other foreign investors have more than compensated for that decline.In fact,these investors now hold almost as many Treasuries as foreign central banks.050032005200720092001720192021Foreign officialsForeign excl.officialsFedOther US residents27The Future of t

231、he Monetary SystemPhoto by Jose A.Bernat Bacete,Getty Images 284.How the monetary system could evolve In the preceding chapters,we first discussed the checkered history of the USD-centric monetary system and,more specifically,the type of macroeconomic situation that undermines trust in the“hegemonic

232、”or predominant currency on the one hand,and the problems that can arise for third countries and their financial stability when the dominant currency becomes“too strong”on the other.In Chapter 2,we focused on the current economic and geopolitical setting to try and assess the potential impacts on th

233、e dominance of the US dollar going forward.In Chapter 3,we focused more specifically on the reserve policies of non-US central banks and to what extent they might affect the USD-centric monetary system.Our overall conclusion from the three chapters was that a gradual evolution of a more multipolar m

234、onetary system seemed the most likely outcome,with a more extreme pivot away from the USD-centric system a much less likely risk case.The main question we address in this chapter is what the concrete features of a more multipolar monetary system might be.We also describe some of the efforts that hav

235、e already been undertaken to develop such a structure.In this context,a topic of interest is what role central bank digital currencies(CBDCs)might play in the future.Before discussing these concrete issues of“system design,”we will lay out why we For the foreseeable future,there are no clear candida

236、tes to replace the US dollar as lead currency.Meanwhile,the creation of a global currency remains illusory that would require an intensely cooperative geopolitical environment.However,capital market deepening and increased trade among major emerging markets is boosting the role of their currencies.M

237、oreover,mutual insurance schemes to protect against the fallout from US dollar gyrations and an alternative payments system point to a more multipolar currency world.believe that a more radical systemic shift,be it the creation of a truly new global currency,or the rise of an alternative“hegemonic”o

238、r anchor currency is,in our view,very unlikely in the foreseeable future.Two unlikely scenarios:A common global currency or a different currency hegemonAs we noted at the outset of this publication,John Maynard Keynes had argued in the 1940s that an optimal monetary system to avoid the asymmetric st

239、resses described above would be to create a joint global currency issued by a joint central bank.He termed this potential global currency“Bancor”(derived from the French words“banque”and“or”).In this system,the central bank would manage the quantity of a common and internationally accepted currency.

240、Countries with current account deficits would borrow from surplus countries via a central clearing bank up to prescribed limits,after which a devaluation would be possible or even necessary.Meanwhile,surplus countries would be disincentivized from lending too much to deficit countries by having to p

241、ay an interest rate on lending beyond an agreed threshold.Keynes argued that such a system would keep global imbalances in check.At the Bretton Woods 29The Future of the Monetary Systemconference,this idea was,not surprisingly,rejected by the United States,not least because the United States was at

242、the time the dominant surplus country.Instead,the United States pushed through the proposal of the Bretton Woods institutions in which the US dollar became the lead currency.By pegging the currency to gold,it was thought that excessive money printing would be prevented and discipline would be preser

243、ved,i.e.other countries would benefit from an anchor currency that was“as good as gold.”In addition,a multilateral institution,the International Monetary Fund(IMF),was set up to provide liquidity for temporary financing of current account deficits.The creation of a world currency remains illusory,SD

244、Rs are no such thingKeynes was not the only one to propose a global currency.Another prominent economist to do so(although much later)was the Nobel prize winning Canadian economist Robert Mundell.1 Some prominent policy makers,especially from emerging markets,have made similar proposals,including th

245、e head of the Peoples Bank of China(PBoC)in the speech cited in Chapter 1.In his speech,Governor Zhou Xiaochuan also discussed the potential role of SDRs(Special Drawing Rights)in a redesigned monetary system.Indeed,sometimes SDRs are thought of as the base of a new global money.However,the volume o

246、f SDRs is determined by the amount of capital paid in by individual countries to the IMF.The IMF does not have the power to create additional SDRs“out of thin air”as would need to be the case for an effective global central bank.It should not be surprising that proposals for a world currency have no

247、t come to fruition and,in the current fractious geopolitical setting,this is even less likely.Put simply,handing over the power to print money from ones own central bank to a supranational authority requires enormous mutual trust among countries.Such a handover is typically only likely when a politi

248、cal union is formed.It might in theory also be possible in a hypothetical world of many very small and weak countries that could find their interests best represented by an equilibrating supranational authority.The creation of the euro was a truly exceptional political decisionIn reality,the only gr

249、oup of countries to have voluntarily handed over the monetary reins to a common authority are members of the European Union(which,after all,is something close to a political union).Even in Europes case,the creation of a common currency is,in retrospect,quite an extraordinary event.After all,one of t

250、he 1.Robert A.Mundell,“A Reconsideration of the Twentieth Century,”Prize lecture,December 1999most powerful central banks in the world(and arguably the bank with the greatest credibility),the German Bundesbank,handed over the reins to an untested common central bank in which representatives from far

251、 less credible central banks have equal decision-making power.This“sacrifice”only came about due to very special geopolitical and regional circumstances.No other group of countries comes to mind that would,in the foreseeable future,agree on such a momentous step.It should not be surprising that prop

252、osals for a world currency have not come to fruitionFor the foreseeable future,neither the euro nor the renminbi qualify as alternative currency hegemonsThe follow-up question is then whether there might be a currency other than the US dollar to take on a similarly dominant role in the global moneta

253、ry system.Here the answer is also a clear“no,”at least for the foreseeable future.There are two regions that are similar in economic size to the United States,and which by their scale might in principle qualify:the Eurozone and China.While the euro by now accounts for around 20%of global foreign exc

254、hange reserves,the second largest share behind the US dollar(see Figure 2 in Chapter 2),and is also freely tradable across borders a key prerequisite for a lead currency Eurozone policy makers clearly do not strive for their currency to take on such a role.The focus of the European Central Bank(ECB)

255、is almost exclusively on the domestic economy.Moreover,the Eurozone is(at least so far)still quite far from being a fully fledged fiscal union and therefore lacks a region-wide safe asset like US Treasuries.This implies that there is no highly liquid and uniform asset that the rest of the world coul

256、d hold as reserves.The absence of an integrated capital market and banking union are further roadblocks.The lack of a banking union implies,in 30particular,that the ECB cannot trade directly with region-wide money center banks,which reduces the liquidity of the euro.In contrast,China is one fiscal e

257、ntity and its few large banks can be regarded as money center banks.However,the renminbi lacks the third key characteristic which would qualify it as a competitor to the US dollar:international capital mobility.For the foreseeable future,it seems most unlikely that China will fully liberalize and op

258、en its financial markets for cross-border transactions;such a step would likely be too destabilizing.This is the key reason why the share of renminbi in global FX reserves is still so small.Other features,such as an internationally recognized legal system,also argue against the renminbi as a serious

259、 contender as a lead currency.Because of limited capital mobility,the renminbi is also not suitable as a currency to which other countries might peg their own currencies.It is noteworthy that the key hub for Chinas access to global financial markets,Hong Kong SAR,continues to tie its currency to the

260、 US dollar.Base case:A gradual evolution of a more multipolar systemWhat might a future monetary system look like in the absence of either a new world currency or a full replacement of the US dollar as the lead currency?Essentially,we see a new or rather adapted more multipolar system resulting from

261、 three drivers:first,the trend increase in bilateral trade among many countries,which allows for returns to scale in the use of their respective currencies rather than the US dollar;second,the deepening of local capital markets in emerging markets;and,third,efforts(especially by leading emerging mar

262、kets)to develop mutual insurance schemes against shocks resulting from shifts in US monetary policy.Over the past few years,a number of major emerging markets have been developing such a scheme.More intra-emerging market trade one of the drivers of increased FX transactionsCurrently,a large share of

263、 international trade is transacted using US dollars.While this typically adds two“legs”in any transaction,i.e.from the buyers currency to the US dollar and then from the US dollar back into the sellers currency,the high degree of liquidity of the US dollar implies that overall transaction costs neve

264、rtheless remain limited.As bilateral trade among countries,both emerging and industrial,intensifies(Figure 1),the returns to scale in such transactions can lower the cost of directly transacting in the currency of the buyer or seller.An indirect confirmation of this trend is found in data on foreign

265、 exchange transactions published by the Bank for International Settlements(BIS).This data shows a continued increase in trading of emerging market currencies(Figure 2).As the authors point out,however,this increase is to a large extent also the result of significantly enhanced capital market transac

266、tions in emerging market assets.2 In any case,the increased share of global trade and capital market transactions involving emerging markets suggests that the dominance of the US dollar will further diminish,rendering the global 2.To quote the BIS:“Among the 39 currencies covered in the BIS Triennia

267、l Survey,the Chinese yuan(CNY)saw the fastest growth in FX trading between April 2019 and April 2022.CNY trading rose by over 70%after adjusting for exchange rate movements,to USD 526 billion per day.This rapid growth elevated the CNY to the fifth most traded currency in the world.Even so,CNY turnov

268、er remained low relative to the size of Chinas economy:3%of annual GDP,compared with 30%of GDP for USD and 6%for the median EME currency.”Figure 1:Trade among emerging markets risingSum of goods imports and exports,in%of GDPSource:Refinitiv Datastream,IMF,Credit SuisseFigure 2:Increased transactions

269、 in emerging market currenciesShare of global foreign exchange turnover,in%of totalSource:BIS Quarterly Review,December 2022,Credit Suisse050520002005201020152020Emerging market tradeDeveloped market trade05000192022RMBHKDSGDOther Asian EMEsLati

270、n AmericaOther EMEs31The Future of the Monetary Systemmonetary system more diverse and multipolar,with the currencies of major emerging markets gaining in importance.A shift away from the US dollar in energy trading seems unlikely for nowA major shift in this direction would occur if international t

271、rade in commodities,particularly energy,were to shift away from the US dollar.Based on our calculations,the share of trade in crude oil in overall international trade has ranged between approximately 5%and 9%over the past ten years,with the level of the oil price a major determinant of that share.So

272、 far,a significant trend away from US dollar pricing is not visible,as Ibrahim AlMuhanna,Vice Chairman of the Saudi Association for Energy Economics confirmed at the CSRI Fall Conference.The denomination of energy trade in US dollars also reinforces the currencys still dominant role in the foreign e

273、xchange reserves of oil exporters.That said,given the heavy weight of China as an energy importer,it is well possible that the renminbi will gain a greater share in energy trade.Moreover,if oil exporters were to increasingly accept the renminbi and if their access to Chinese assets were increased,th

274、is would in turn boost the role of the renminbi as a reserve currency.At the CSRI Fall Conference,Zongyuan Zoe Liu,a fellow for international political economy at the Council on Foreign Relations,pointed out that China has been developing a platform for trading commodities in renminbi that would sup

275、port such a trend.In this context,trading volumes on the Shanghai crude oil futures market advanced to third-highest globally in 2019,although they remain significantly lower than for the WTI and Brent contracts.Moreover,at the China-Gulf Cooperation Council(GCC)summit in late 2022,Chinese President

276、 Xi called for the joint use of the renminbi in oil and gas pricing,although no formal agreement was reached.However,with expanded energy cooperation between China,Saudi Arabia and other GCC members,a move toward the greater use of the renminbi in oil and gas pricing,trading,and settlement between C

277、hina and the region seems likely.Additional insurance against USD-induced shocksAs we have noted in preceding chapters,the key problem with the current USD-centric system(or any monopolistic monetary system for that matter)is that shifts in US monetary policy,US interest rates and the US dollar have

278、 outsized effects on other countries.According to Mark Carney,3 research by the Bank of England has shown that these effects have increased markedly3.Mark Carney,The Growing Challenges for Monetary Policy in the current International Monetary and Financial System(Jackson Hole Symposium,August 2019)o

279、ver past decades even though the share of the United States in the global economy has diminished.The reason for the increased impact is the heightened role of short-term capital flows that amplify shifts in monetary conditions in the United States in third countries.These effects can be further ampl

280、ified if commodity prices move in the“wrong”direction.For example,in 2022,the world witnessed a combination of rising US interest rates,a stronger US dollar and rising commodity prices.This amplified stress in countries reliant on international capital inflows and heavily dependent on commodity impo

281、rts.Shifts in US monetary policy,US interest rates and the US dollar have outsized effects on other countriesAdditional funds to protect against shocks,and more swap linesTo guard against such shocks,many countries,especially leading emerging markets,have improved their macroeconomic policies(self-i

282、nsurance).But such adjustments may not suffice,and additional shared insurance may be required;indeed,sharing or“pooling”insurance schemes is by nature more cost-effective than going it alone.The USD 100 billion“Contingent Reserve Arrangement”(CRA)that was established by the BRICS countries(Brazil,R

283、ussia,India,China and South Africa)in 2015 is one such scheme.Its purpose is to provide protection if member countries face external liquidity pressures.Interestingly,members are allowed to draw up to twice their paid-in capital in a situation of stress,with the exception of China,which can only dra

284、w half of its paid-in funds.In other words,China would act as a(partial)lender of last resort within the scheme.Even if the CRA is still limited in size relative to the lending power of the IMF,its establishment is an important step toward a more multipolar system.32A second,and arguably more flexib

285、le,system to provide insurance is the provision of swap lines between central banks.While the Fed remains the primary provider of swap lines to other central banks and increasingly to emerging market central banks,which can lend onward to their domestic banking system,the number and volume of bilate

286、ral swap lines between other central banks has increased substantially since the global financial crisis.Swap lines between Asian central banks have increased most markedly,with China playing the dominant role(see Figure 3).4An alternative global payments system?China has also been at the heart of e

287、fforts to develop an alternative international payments system.5 In the current hierarchical system Fedwire(for net settlement at the Fed),CHIPS(for netting between its current 47 commercial bank members)and SWIFT(for messaging)are the key institutions for international payments.This system has enor

288、mous scale,of course,and thereby contributes to lowering international transaction costs.At the same time,it reinforces the US dollar as the dominant currency:every bank that has a reserve account effectively banks with the Fed and,if one makes a payment to another,money never leaves the Feds balanc

289、e sheet.Money just moves between reserve accounts at the Fed.In geopolitical terms,the system can also be seen as bolstering the US strategic position.4.IMF Working Paper 21/210:Evolution of Bilateral Swap Lines(August 2021).The authors point out,however,that the number of swap lines established by

290、the PBoC stopped increasing after 2015.5.These and other efforts to develop an alternative monetary system are laid out in detail in Zongyuan Zoe Liu and Mihaela Papa,Can BRICS De-dollarize the Global Financial System?Cambridge University Press(2022)Figure 3:The number of swap lines has expanded sig

291、nificantlyNumber of bilateral swap lines among central banksSource:Perks,M.et al.(2021),Evolution of Bilateral Swap Lines,IMF Working PaperSimilarly,Chinas efforts to develop an alternative system can be seen in those geostrategic terms.The main feature of this alternative system is that it is more“

292、flat”than hierarchical(Figure 4)because it has many more bilateral swap lines and because it does not require correspondent banks.It also combines clearing,netting and messaging functions into one.The three layers of the new system are:(1)the PBoC,(2)central banks with renminbi swap lines,and(3)loca

293、l 0070802000200520020Non-AsiaAsiaFigure 4:Alternative monetary systemsSource:Credit SuisseFedSwap lineCentral banksGlobal banksCorrespondent banks CHIPS National banksPBOCNon-banks via CBDCsDollar-based hierarchyRenminbi-based hierarchyCIPSFedwireSWIFTSwap lineCentral banksNati

294、onal banks33The Future of the Monetary SystemThe pros and cons of a hegemonic currencyIn this publication,we have discussed the factors that might,or might not,undermine the current“hegemonic”position of the US dollar in the global monetary system.Here we provide a short overview of the benefits and

295、 costs of a hegemonic monetary system for both the emitter of the lead currency and the other users.Benefits for the emitting hegemon1.The most immediate benefit for the monetary hegemon is that its central bank earns more so-called“seigniorage”than other central banks.The reason is that foreigners

296、tend to hold substantial amounts of cash denominated in the lead currency cash and their banks hold substantial reserves at the Fed.Based on a paper by Cutsinger and Luther,1 we have calculated the nominal value of this measure of seigniorage.For the period from 1977 to 2021,seigniorage contributed

297、by foreigners averaged USD 5.9 billion per annum compared to USD 7.5 billion from domestic residents.That said,this measure varies strongly due to changes in interest rates.In recent years,seigniorage has been very low given extremely low interest rates.2 Even when interest rates are high,the overal

298、l contribution of seigniorage to the United States tax receipts is very limited.2.A looser measure of the main benefit that the monetary hegemon enjoys is the so-called“exorbitant privilege,”3 i.e.the unusually high degree of monetary and fiscal autonomy.This arises because the world“must”hold the h

299、egemonic currency.Hence the hegemon cannot go bankrupt.Moreover,in many cases,foreign central banks are“captive”buyers of the government bonds of the hegemon,as we have pointed out in the chapter on foreign exchange reserves,which eases the fiscal constraint of the hegemon.That said,if the hegemon w

300、ere to systematically abuse this exorbitant privilege and thereby continually debase its currency,trust in the reserve currency would vanish,as the 1.“Seigniorage Payments and the Federal Reserves New Operating Regime,”Bryan P.Cutsinger and William J.Luther;Free Market Institute Research Paper No.40

301、86897,April 2022.2.Cutsinger and Luther note there are three definitions of overall seigniorage:one is the net earnings of the central bank on the assets it holds.The dramatic expansion of the Fed and other central banks balance sheets has boosted this measure enormously in past years,although the p

302、ayment of interest by the Fed on reserves held by commercial banks has partly offset this.A second measure is simply the annual issuance of new high-powered money(cash and reserves held at central banks),which fluctuates considerably,depending on whether the central banks pursue expansionary or cont

303、ractionary policies.However,the economically most meaningful“true”measure of seigniorage is the opportunity cost incurred by holders of(non-interest-bearing)cash.3.The term was first used by Valry Giscard dEstaing in the 1960s when he was the French Minister of Finance.period of the 1970s showed in

304、the case of the US dollar.In reality,the exorbitant privilege is therefore limited.Costs for the hegemon1.If the hegemon is of a“benign”nature,it will also take on some responsibility for global stability.In this case,monetary policy may need to deviate from the pursuit of purely domestic goals,whic

305、h may have negative impacts on the domestic economy,e.g.if monetary policy is tightened or eased excessively in pursuit of global stability.If the hegemonic central bank extends extensive swap lines to other central banks,this may,for example,imply an excessively loose policy.2.The hegemons central

306、bank also faces the risk of other central banks defaulting on the loans that have been provided.In reality,this scenario is quite unlikely,however.In fact,the hegemons central bank extending swap lines is likely to make a positive return on those loans.Benefits for other countries1.The main benefit

307、of a hegemonic currency for third countries is that it is globally traded.Due to scale effects,transaction costs are likely to be lower than would be the case in a more fragmented foreign exchange market.2.In the case of a crisis,central banks may find it easier to coordinate their policies with one

308、 hegemonic central bank rather than with many central banks in a more fragmented system.3.A further benefit would arise if risk-adjusted returns on reserve assets(specifically US Treasuries)were higher than on alternative investments.As we have shown above,however,this is not systematically the case

309、.Costs for other countries 1.Prices of goods(especially commodities priced in US dollars)and services will be substantially affected by movements in the hegemonic currencys exchange rate;this can be especially costly for importers if the value of the currency is positively correlated with the prices

310、 of traded goods.2.More generally,the business cycle of other countries will be strongly influenced by gyrations of the hegemonic currency and its interest rates.Business-cycle fluctuations will thereby be amplified.The leeway for countries with weak macro fundamentals to offset such shocks is limit

311、ed.Especially in periods of monetary tightening by the hegemon,such countries will need to tighten their policy even more strongly to prevent capital outflows,which will exacerbate the economic downturn and cause a liquidity crunch or even a financial crisis(emerging market debt crises,etc.).banks w

312、ith accounts at correspondent central banks.The messaging,netting and clearing functions of this system run on Chinas Cross-Border Interbank Payments System(CIPS),which was launched by the PBoC to allow banks to clear cross-border renminbi transactions directly onshore instead of via clearing banks

313、in offshore renminbi hubs.This flatter system might also be more suitable for the implementation of one or more central bank digital currencies(CBDCs).Indeed,the PBoC is arguably the major central bank that is most advanced in the development of its digital currency although other central banks,incl

314、uding the Fed,are also considering the viability of launching CBDCs.If volumes transacted on this system were to increase substantially,the move to a more multipolar monetary system would naturally be reinforced.34Photo by Bulat Silvia,Getty Images 35The Future of the Monetary System5.Conclusion:Wha

315、t(else)will countOnly if stability is maintained will the US dollar retain its position as the safe-haven currency of choice.How foreign reserve managers in the major surplus countries deploy their(excess)FX reserves will also depend strongly on US macroeconomic stability.Table 1 provides a“checklis

316、t”of the main factors that we believe need to be monitored to assess the probability of a shift away from the current USD-centric system.Declaring the demise of US dollar hegemony may be prematureThis publication has examined various aspects of the global monetary system.The main question we tried t

317、o answer is whether a significant shift away from the US dollar as the dominant“hegemonic”currency is likely to occur in the foreseeable future,and in which direction the monetary system might develop.The key conclusion was that the fate of the US dollar as the currency hegemon depends on a number o

318、f factors,with the degree to which US policy makers would be able to maintain macroeconomic stability relative to other countries of supreme importance.Table 1:Assessing USD dominance a checklistGeopoliticsEvolution and solidity of“pro”or“anti”-US alliancesApplication of sanctions,reserve freezes an

319、d reactionsForeign aid policies of major powersMacro policies and stabilityInflation,budget deficits and government debtFed stability orientationCurrent account balancesLong-term economic performanceReal productivity and GDP growthOther measures of innovationInternational tradeEvolution of US vs.non

320、-US-related tradePricing of commodities in USD or other currenciesCapital market depth,opennessUS versus other marketsSpecifically:Chinas capital mobility policiesFX reserve trends and policiesShares in FX reserves:USD vs.other currenciesAsset allocation decisions(esp.vis-vis US Treasuries)Central b

321、ank cooperationSwap lines of Fed,other support measuresSwap lines between other central banks,other measuresInternational payments systemsDevelopment and use of Fed-based systemDevelopment and use of alternative China-based systemPrivate investor behaviorPrivate investment flows into US vs.other cou

322、ntriesMarket indicatorsFX trading volumes(USD vs.others)Safe-haven measures:behavior of USD&US yieldsSource:Credit Suisse36What is clear is that,in the long run,the overall geostrategic position of the United States relative to rising powers will ultimately be of key importance for the global moneta

323、ry system,as has been the case for former currency hegemons.While domestic US politics as well as the evolution of international alliances will be important determinants of the United States position in the geopolitical sphere,this will ultimately also depend on the overall economic success of the U

324、nited States.Put simply,the question is whether the US economy can retain its leadership position as the driver of innovation power.That will,in turn,determine whether private investors will continue to channel their savings into US enterprises.In that context it is notable that the share of the US

325、economy in the global economy(Figure 1)as well as the share of its stock market in the global market(Figure 2)have remained fairly stable over the past decade after a period of decline;the latter indicator is probably the best measure of private sector trust in the vitality of an economy.As always,p

326、ast performance is not a predictor of future success,but this data does suggest that declaring the demise of US dollar hegemony may be premature.Figure 1:The United States share of global GDP has stabilized after the global financial crisisIn%of global GDPSource:Refinitiv Datastream,IMF,Credit Suiss

327、eFigure 2:The US stock market retains its dominant positionSource:Haver Analytics,World Bank,Credit Suisse0%10%20%30%40%50%60%70%502005201020152020US market capitalization in%of total0554045002020US GDP in current USDUS GDP based on purchasing p

328、ower parity(PPP)37The Future of the Monetary SystemPanel of expertsThe Rt.Hon.Sir John Major KG CH,former Prime Minister of the United Kingdom and Senior Advisor of Credit Suisse,became involved in politics at the age of 16 and,in 1968,won his first Election to a local authority in Lambeth.He stood

329、for Parliament twice in the 1970s before securing election to Huntingdon in 1979.In Parliament,Sir John served in the Government for 16 years,joining the Cabinet in 1987 as Chief Secretary to the Treasury.In July 1989,he was appointed Secretary of State for Foreign and Commonwealth Affairs,a positio

330、n he held for 94 days before being appointed Chancellor of the Exchequer in October of that year.He became Prime Minister in November 1990 and led the Conservative Party to an unprecedented fourth term in Office at the General Election in April 1992.Sir John retired from the House of Commons at the

331、General Election in May 2001.Dale Copeland is Professor of International Relations at the University of Virginia,USA,with a focus on IR theory(security studies and international political economy).His research interests include the origins of economic interdependence between great powers;the logic o

332、f reputation-building;bargaining and coercion theory;the interconnection between trade,finance and militarized behavior;and the impact of the rise and decline of economic and military power on state behavior.His most recent book is“Economic Interdependence and War”(Princeton University Press,2015),w

333、hich was the winner of the International Studies Association Best Book Award for 2017.He has been the recipient of numerous awards,including MacArthur and Mellon Fellowships and a post-doctoral fellowship at the Belfer Center for Science and International Affairs at Harvard University.Dr.Ibrahim AlMuhanna is a member of the Board of Directors of the Arab Gulf States Institute in Washington and Vic