Episode 320

Monetary Systems in an International Context

With global commerce and finance continuing to digitize, the world’s borders are seemingly becoming more fluid, even as physical walls are built. How does this globalization affect the sovereignty of nation-states and their ability to democratically direct their own economic future?

In a panel moderated by Epicenter host, Sunny Aggarwal, we explore the interpretation of monetary policy from a global context, discuss the morality of impacting other nations, and the potential for new technologies to offer alternatives in a dollar-dominated world. The conversation includes Jae Kwon, CEO of Tendermint; John P Conley, Professor at Vanderbilt University; Steve Randy Waldman, Author of Interfluidity, and Baek Kim, Senior Associate at Hashed.

Topics discussed in the episode

  • A moral perspective on making monetary policy that is beneficial to one nation, and detrimental to another
  • Who matters when determining externalities in governmental policies
  • The possibility of a fiscal union without a monetary one
  • USD stablecoins promoting the notion that the US should control the world’s monetary policy
  • Comparing the Libra to the Euro

(5:02) Introductions

(9:47) About Rodrik’s Trilemma, the Gold Standard, Bancor Plan, and Bretton Woods

(12:09) Designing systems based on the fact that we are in a global environment, local changes affect all of us

(13:05) The challenge of centralized power focusing on its preservation, and hope in crypto

(14:17) Local concerns vs global impact

(17:10) Stablecoins promoting USD financial dominance vs IMG’s SDR

(18:11) More on Rodrik’s trilemma

(21:47) Libertarianism as a disease of youth, and impossibility theorems

(22:50) Voluntary association and the freedom to compete w fiat

(24:16) Hayekian Denationalization of Money

(26:59) The idea of building democratic tools to make global governance possible

(29:58) Nomadic communities and voluntary nationalism

 

 

Sunny: So yeah, the goal of this panel is we’re heavily going to explore a lot of monetary policy, was what we’ve been talking about thus far. But then what happens when you put it in an international context? And so yeah, for those who don’t know me, my name is Sunny. I was one of the organizers for this event, and I’m one of the researchers at Cosmos. And I’ve been really been deep diving into the monetary theory lately. I took a course on Coursera called economics of money in banking, which I heavily recommend everyone take and it basically just made me rethink everything I’ve been doing for the last three years, which inspired me to do this event helped me learn more. Zaki couldn’t make it to this panel today. He was on the panel earlier, this one So instead we have Jae and I’ll let him introduce himself.

Jae: Thanks Sunny, my name is Jae Kwan, I invented Tendermint, co founded Tendermint the company and worked on Cosmos as well. All of that started in 2014. And since then I’ve become more aware of what’s happening to the environment, and how there needs to be a global coordinated effort to combat it, I think, or at least first consensus that it is a problem. And I realized, especially after Libra came out, when Libra came out, came clear that we’re at an inflection point where cryptocurrencies will become this, it will become the new money, and it got me worried because a consortium of for-profit companies should not be dominating our monetary system. And I think we need to really ask a question. What monetary system do we need in order to promote better balance with the environment and promote our communities? That’s on here. Thank you.

John: I’m John Connelly. My specialties are game theory, theoretical economics, operations, research, axiomatic things like that. I’ve been interested in ICT economics since about 2009, looking at cloud computing, initially, and then on the internet and so on, spent a sabbatical year at Microsoft Research in 2016-17. And got interested in cryptography, biometrics systems, design, networks, and so on. And I really happy with these consensus protocols that I observed. And so that led me to use the skills I had in game theory to try to develop a new one. And that’s, that’s the geeq project that was mentioned here. And it’s a consensus protocol called Proof of Honesty. Yeah. And now I’m here

Steve: I am Steve Waldman. Sometimes an economics writer. I write the blog at Interfluidity. Yeah, I’m sometimes an Ethereum developer. I think, similarly to my co panelists, I got interested in this stuff, because, you know, the world is going to share a lot of ways, so many dimensions. And I think that we need a lot of institutional innovation. And mostly what interests me about blockchains is that they’re superficially technical systems, but they’re really fundamentally social institutions reified in a technical way that make a lot of things that are tacit or opaque, very visible and auditable. And so that’s the optimistic case for these things. But there are a lot of pessimistic pieces. So take months discussion of Libra these technical architectures don’t carry social virtue with them or we have to build things that are good. And I think it’s a very open question whether what we are currently in the middle of doing will result in good things or not. Let’s try to make that happen.

Baek: I am Baek. I’m a robotics engineer by training, turn crypto investor. Hashed is a crypto native cross border ambassador. We back over 50 companies, including customers initially. And we invest, especially in the Asia side, international companies that are building blockchain protocols, some of them are public blockchains. And these are touching some of the regulators on some of their monetary policy and how they impact some of their e-commerce payments as well. Sunny reached out to me to share a little bit more on Libra’s impact on KRW. So Korean government has been paying strong attention into crypto ecosystem because of the high penetration rate of crypto. The survey shows that around a third of the white collar population has touched cryptocurrency at some point. And in Korean, about 90% of the payments are cashless. So it’s all electronic. So it’s a really easy environment for this product to widespread and take over, possibly, fiat. And KRW itself, you know, as a country where the neighbors have a strong economy such as Japanese yen, RMB and USD, it is highly impacted by some of their monetary policy changes. But if you look at Libra, and as Jay mentioned, if we can actually reach that inflection point, and reach the hope, the high potential, it could be the other biggest monetary system that KRW have to deal with. So that has been a big addition for the government and the ecosystem.

Sunny: I’d like to start by introducing one of the corner ideas that I’ve really been thinking about, especially when it comes to the international monetary systems and I’m sure a number of the people on the panel might be aware of this idea. But just to give some background to the audience, there’s this concept called Rodriks trilemma, or the trilemma of the political economy proposed by a professor at Harvard Dani Rodrik. And what he proposes is a trilemma, we’re very familiar with trilemmas here in the crypto space, but the one that he proposes is about economics and politics. And the three points of the system are he called, I’ll put in my terms of, I think some of his terminology is a bit odd, but I would say globalization, national sovereignty and democratic control over monetary policy, and he basically says you have to choose two of three.

We’ve seen different regimes that have tried all three of these. The gold standard is famously the one in which we choose national sovereignty, and globalization where we have these fixed exchange rates between countries have much national sovereignty, but now you don’t have any democratic control over decision making. Then we have, you could use globalization and democratic control, but you lose out on national sovereignty. And this is what Keynes proposed in his Bancor plan, and also what the Euro attempts to do. Not at the global scale, but maybe at the European scale. And then finally, we have what’s the Bretton Woods compromise? Or, you know, the post Bretton Woods says order where we have free floating exchange rates, we need capital controls in order to maintain a level of national sovereignty.

With that in mind, I guess my question is, start off is are we in the right point on this trade off point, because currently, the world that we live in is primarily focused on still in that Bretton Woods like system where we give up on a lot of the nationalism, the globalization, that is possible, and we have some pockets where we’re trying more large scale federalism. The European Union, when you see this is where we’re going to continuously we are going to see more pockets like the EU, how are we going to see things evolve like that?

Jae: I think we have to design a systems based on the facts and the facts of the environment is, the fact of the world is, we share this or we share the air. And if the environment goes to shit affects all of us, and many things affect all of us, like political turmoil causes refugees, so on… or collapses trade. There’s something about the global, I think, that needs to be taken into account in order for everyone who wants to participate voluntarily to globally enforce or incentivize certain things. But on the other hand, we don’t know what the best system is. We need decentralization experimentation. So we also need states or local localities to have their own policies too. So I think I think you can’t choose one or the other in terms of globalization, whether that means that nation states, I think you need a balance, because you need both.

John: I don’t like being told what to do. I prefer to do what I like to do. And the extent that I don’t cause harm to other people, that should probably be what I’m allowed to do. But there are externalities. You can you can pollute the air, you can mislabel food, who there’s all kinds of things that have enormous impacts on the rest of people, even on a global scale. The problem is that you can’t really necessarily trust the central authorities to internalize those externalities correctly. Soon as you focus power well then the power focuses on itself. So it’s not clear what the right thing to do is, I think,  what I would try to do is design things as much as possible so that individuals make decisions and don’t cause externalities and reserve the minimum possible for the higher authority. And that’s one reason I like crypto. That is I think the only technological thing that we have that’s big right now. That moves into the centralization AI machine learning big data, universal connectivity, IoT, all of these things are instruments of centralization control and network externalities. So I think if we have hope it’s somewhere in blockchain.

Sunny: Which externalities are we measuring? Are we trying to, you know, aggregate the externalities of people within the United States? Or do we do it on a global scale? If we make monetary decisions that have externalities on the economy of Korea, for example, is that an acceptable moral? Or is it okay to make monetary decision of the state that has negative externalities on the economies of other countries?

John: What my government to do is take care of me. And at every level, I want my government to do that. I want my city government to take care of me as a city. I want my state government to take care of me as a state. I don’t really want my government thinking about Alabama or New York that much. Because that’s not their job. They’re looking after me. There’s a degree of benevolence, though. I mean, I would be upset if my government was doing really malicious, horrible things that would upset my sense of ethics and morality. But I think the first, the first responsibility of any hierarchical unit is to take care of the people that it’s over, you take care of your family, you know, it’s not the job of my boss to worry about other companies. He worries about his company.

Baek: So and you’re getting that point, I think it’s just a balance of power, right? Even in the fiat world, it doesn’t work like we described, that they take care of all the externalities, making sure all the parties involved okay. In the crypto landscape, I think many of the projects are doing this in a way that they can become bigger, too big to be shut down, rather than asking for some of the admission into this system or acceptance.

Regarding Libra, one thing that I thought was maybe the wrong position was that they didn’t even launch it, but they just proposed the idea. But they made it to public early, without becoming to be enough with strong incentive alignments with all these partners before making it that this interface all laid out in the system of their social graphs. And I think one of the good approaches that I like is Terra, a stable coin project starting in Korea, built on Tendermint. They abstract away the whole crypto component and make it just a good payment product. And now it’s doing 500k signed users within three months with around two to $3 million transactions per day. And government don’t really see it as a threat. If it reached the whole digital payment landscape, that I mentioned, which is 90% of the whole Korea. It could be too big for it to be shut down. I like this approach rather than thinking about all this intertwine power balance in the cryptocurrency.

Sunny: There’s many other stable coin for example, you know we have a presentation from Celo where they’re very stable coins are trying to make themselves stable against the US dollar and does end by promoting it as the currency for us all over the world are we essentially promoting this idea that the US should control the United States and control the monetary policy of economies throughout the world?

So what was your mission? What was going to be the reason you’re using choosing to use SDR.

Baek: I mean, had a researcher out there and he was right there. But one of the reasons the core reason was that you know, even USD is volatile. And as you see with the US and China attention, you know pegging to single dollar single monitor policy can be volatile for the whole crypto ecosystem and SDR is one of the most, I think, the most stable currency bucket right now within fiat. I think Libra is also backed to SDR.

Steve: I’d like to answer your original question about Dani Rodrik’s trilemma. I’m going to be the opposite of my neighbor a little bit, although very much share the inclination towards decentralization as a design goal. A little bit more pessimistic about the possibility that in the world that we live in externalities can be disentangled. So a libertarian universe looks very nice to the degree that we can localize the effect of our actions, we should have Liberty where we don’t hurt or adversely affect other people. And unfortunately, I think we are in a time of great crisis. And a significant part of that crisis is that libertarianism worked pretty well, especially in the United States, which was a big, not very dense country, when technology didn’t bring us all together as much When our economy was a little bit less developed when there was a stronger notion of the local.

I think that what we’re struggling for right now and crypto, it’s a part of this is that when there are externalities we need to be in franchise there’s going to have to be some a decision making system beyond we have the liberty to do what we want, and we need to be enfranchised in that system. And what Rodrik’s Trilemma points to is there’s a tremendous tension between from an economic development perspective you want a global system, for standard economic reasons, has a lot to offer, but from an enfranchisement perspective, you really want things to be local. And so the Bretton Woods compromise was after the experience of the wars that came from a similar period of globalization followed by backlash of people who felt like they no longer had communities or a say, or left out, and the retrenchment towards a much more national world and I think we’re reliving exactly the same struggle exactly the same events will need to have in the short term exactly the same set of outcomes, which is to say we’ve gone through a period of in Rodrik’s Trilemma to a neoliberal technocracy where we’re we’ve been part of a global economy from which we’ve been disenfranchised from which we haven’t had any meaningful democratic input. And we’ve rejected it, right.

Trump is rejection of that Brexit is a rejection of that all the various anti liberal authoritarians, who rising up around the world are basically people trying to take back more organic communities from this neoliberal technocratic version of the world. But we can’t actually go back to local, to the part triangle that is where enfranchised in our nation state, but disentangled economically. We have the democracy in the markets, but not the globalism, because we’re a bunch too entangled. So crypto in my view, the reason one reason to be interested in it, it’s one way or another, we have to figure out democratic institutions that will get us to the global democracy side of the triangle. Where we do have a global economy because we can’t help it. But where we have a meaningful democracy that enfranchises all of us, that doesn’t have us feel like we’re falling behind that were left behind, oppressed or ignored. We have a limited time as a species to figure out how to organize a meaningful global system in which we feel enfranchised. The institutional development aspect of crypto, the idea of being able to build new kinds of institutions, new kinds of voting systems and organizations, I think optimistically, we might play a crucial part in that. In the meantime, until we get better institutions, we’re going to retrench into more national world because it’s the only way we don’t tear ourselves apart.

John: I used to be a libertarian, I got better. It’s a disease of youth. But no, I mean, I like your program. The concern I have is this that the more local you are, the smaller your group the bigger your say, and the more likely it is to reflect your preferences. So I’m not saying that you can reduce problems to your group, but I say to whatever extent you can, that’s the preferred option. Now the problem with global or even large kinds of voting is… so this is why economists have no friends. Because we know about impossibility theorems. There’s the Arrow Impossibility Theorem, there’s Satterthwaite, there’s impossibility preference aggregation. It just turns out that, as is even an abstract exercise, you really cannot, in any reasonable way that satisfies any reasonable set of conditions, let people express preferences in a way that doesn’t really come to disaster. It’s just not possible. I wish it was, I really do, and I would love to have a global government. That was good and nice and beneficence, but the theory says no, and I think the empirical evidence is not so strong.

Jae: I actually agree with everyone here. And I don’t think… When I say I want some global aspect of economy, I’m not saying I want a global government that we’re on bound to, I am only promoting voluntary associations. And I think basically by enabling people to create their own monetary systems and to have competition with fiat, we will be able to create a system that balances the needs of local and monetary needs as well as global coordination by having competition of many global models and allowing people to freely associate I think we will come up with the best set of balances. Just one more thing. The reason why I believe this so strongly, my dad lost his job, or the company that was working for folded because of the IMF crisis, due to the way that the interest rates were changed by them, and then the housing crisis affected my family the same. So at this point, I don’t want to be bound by any fiat currency. I would rather die, then be held to decree that says I have to use this money because I don’t support this money system. I don’t support the dollar. I don’t support the wars that we’re waging. I want to stop using it.

Sunny: Steve, I mean, a lot of your talk was about how the system… the slavery system that creates is somewhat beneficial, still running a well functioning society. So what would you say to Jae for example, about like, could we ever have… you know, one of the topics here is the Hayekian denationalization of money. Is that possible, in a world which currently exists, in which the government requires taxes in one currency?

Steve: Governments have a tremendous advantage at defining what gets to be the high network effect currency because they uniquely have the ability to have the capacity to create those obligations, ex nihilo, from nothing. So anything can be monetized We can coordinate on cigarettes or gold or whatever for a while. But the reason why states are really good at it is that they can make something desirable by Fiat by saying you have to pay taxes in it. You know, it’s a little bit like Facebook, I hate Facebook and want to see it erased from the earth, certainly make that plain. But it’s really hard to deal with because they have this tremendous network effect. And social networks really do have value associated with the network effect.

Fiat currencies or currencies in general, have a tremendous network effect. There’s a tremendous benefit to having one that everybody uses. So given that governments have this capacity to make the thing that they issue, to give an advantage to the thing that the issue is a currency become a court of currency coordination point, they have tremendous advantage and those things want to be big. I don’t really see a role as a general purpose currency for lots of little things, interacting with one another. I want to caveat that on the institutional side. I don’t actually disagree all that much with my neighbor. I think it’s critically important as much as possible to create notions of locality for ourselves because our larger affiliations, we’re always going to be unhappy with them to some degree. Within smaller communities, one way that you can bind together and give sinews and blood to a smaller community is by having the community describe patterns of how economic value flows, and those can be expressed as something like a complementary currency. So I can see a world in which there are lots of “de nationalized money” the scripts or tokens of local or small, not necessarily very small, but small relative to the nation state communities, but I don’t think we’re going to get to a world of competing monies for general purpose commerce.

Sunny: Okay. So you did mention earlier about that, you know, maybe we can build the democratic tools to, like make a global governance possible to an extent. You know, I think the best example case we have today is the Eurozone. They successfully create a monetary union, but they have been unable to create a fiscal union, and what makes us think that we can do that in a global sense if we can’t even do it in the European sense. When it comes to Libra, for example, we can’t even get European countries that share like a European Union, to pool risk and issue common bonds, how can we get these multinational companies with competing interests to do so?

John: I think we probably shouldn’t. I mean, the reason that Greece and Germany don’t have a common term common fiscal policy is that Greeks are not Germans, and they have not only behave differently, they have different preferences, they wish to behave differently. And the policy that’s right for the Germans is not right for the Greeks. And so there’s a reason to have separation between the fiscal policies.

Sunny: If possible to create a long term sustainable monetary union, if you don’t think fiscal union?

John: Well, like I say, it’s always a balance, right? There’s the externality. There’s the network externality benefit of getting together, but then there’s the loss of personal preference and choice. If you do that, in the balance, you know, there’s not as there’s not a single right answer.

Jae: It’s my personal opinion, I’m still learning this, that that the EU should not have, have the Euro, that the benefit of a single currency is not you know, that great. You can construct other means on top of individual states currencies and make it all work. The reason why I think we need something global is primarily to do with things that are naturally global, such as dealing with the environment, you know, there should be a global system for incentivize incentivizing the planting of trees and carbon sequestration and I’m not suggesting that the system needs to be forced on everyone but states or towns, for example, and participate voluntarily if they so choose to, I think if we find the right model that has the right legitimacy with the right transparency and accountability that makes the right decisions, then I think people will choose to fund it and associated with stage to do this voluntarily.

Sunny: But when it comes to like environmental issues, what happens when those states that don’t want to participate, they don’t want to sacrifice economic productivity for the environment. In a large scale Prisoner’s Dilemma where we’re all going to doom, but no one wants to be the one that needs to do something about it. You need some type of enforcement.

John: Not so much enforcement from the top more like from the peers. So for example, you can have a union of peers that say, well, we’re going to not trade with this partner until they adopt something sensible, for example.

Baek: So as Steve said, I think fiat currency having the governance of the government, the nations forcing it as big power and keeping everything within the same network effect. But I also agree with Jae and also what Jae shared remind me of some idea, like just one idea that I was like coasting on with my friends around, you know, today super rich or even just like top maybe 1% are free from jurisdictions in terms of their financial wealth or their activities. And I think with the cryptocurrency, and we see a lot of crypto whales in a lot of conferences, they’re very global and they’re abstracted away from the nationalities and also the Fiat world. So in the future, like some people say that you know, this, the governance brings people from decentralized communities into more back to like nomadic communities. So maybe this you know, wealth accumulating up in the virtual like cryptocurrency side could lead to next generation of DAO that represent, you know, like, voluntary nationalities, that are in line within ones that share similar interests, and maybe the denationalization of money.

Jae: Some of us are starting a project called Virgo, and it is to create an association of technologists, but also economists and so on in order for us to not only decentralize our Social Media Communications, our financial systems and governance systems, but ultimately so we can answer questions like What should our monetary system be and solve for things like global warming? It’s not a tech centric, you know, we’re not we’re starting it as an as a people centric organization and project so please join at Virgo.org you’ll see a manifesto and links to a forum.

Sunny: All right, thank you guys so much.

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