Whether or not you think inflation could reach WWII levels, it’s clear that the global economy after COVID-19 looks uncertain. A gulf is growing between developed and developing markets, fueled by uneven vaccination rates and growth in gross domestic product. Central bank digital currencies (CBDCs) are expected to be a key factor that will accelerate the global economy fit for the digital age, ushering in a digitally connected economy like we have never seen before.
Although inflation is slowly rising, depressed economies like the United States are accelerating the adoption of new economic policies such as modern monetary theory (MMT), which, in a nutshell, allows governments to print money. at will. Basically, richer governments don’t have to depend on taxes or borrowing when it comes to spending because they are able to print money on demand. The meteoric rise of MMT, particularly advocated by an economy with as much impact as the United States, has ripple effects that affect not only the United States, but other economies as well. In Asia, governments – especially in medium and small economies – are realizing the potential power and influence of CBDCs with their latest understanding of MMT.
CBDCs derive their influence from bitcoin, and bitcoin itself has transformed the public’s perception of money and investments in alternative assets. In fact, many see it today as a hedge against inflation. Recently, crypto companies have come under increasing scrutiny, government action intensifies as public interest in crypto has given way to governments beginning to recognize the plurality of bitcoin’s coexistence with fiat money.
In fact, COVID-19 has accelerated the urgency to strike a balance on how this coexistence might look like. Governments are looking for ways to employ an effective monetary policy that gives them more rights, with less reliance on the dollar for trade. As CBDCs hold a 1: 1 value against fiat money, they not only enjoy the benefits of faster transactions, but also more secure through the use of blockchain technology. And for the general public, it is the ideal vehicle for boosting consumption and combating money laundering, while allowing a more efficient tax collection policy. China is leading this development with its digital renminbi (DCEP) and aims to improve financial inclusion and risk control.
In Southeast Asia, we are also witnessing the emergence of a similar stream of thought among governments. Cambodia’s Bakong, a blockchain payment system, is designed as its own CBDC with the aim of helping central bankers reduce the cost of international remittances. And this distributed technology ledger system is a model that Sopnendu Mohanty, even the director of financial technology at the Monetary Authority of Singapore (MAS), will also benefit international payment systems.
Put it this way: Monetary policy in most rich countries has remained accommodative with continued quantitative easing as a backdrop. And statistics have shown that the US Federal Reserve printed $ 2.3 trillion in 2020 to fight COVID-19. Certainly the stimulus was for a noble cause; it would keep families and communities afloat.
However, the way we define the success of this program is not black and white with unforeseen effects. According to a Pew Research Center poll, “About one in five (21%) say they will save the majority of the money, and 14% say they will use it to pay off debt. The remaining 10% say they will use it for something else. Flush the money, the stimulus money was hitting Wall Street near us with the hyper-enthusiasm of buying stocks like GameStop and altcoins like Dogecoin. This exposed the already fragile financial system and raised valid questions about the effectiveness of government assistance programs, as well as its impact on MMT over the long term.
Not to mention that US policy triggered an unintended ripple effect that had drastic consequences for emerging Asian markets – particularly Southeast Asia. With the stimulus fueling a strengthening of the dollar’s influence, emerging markets risk weakening currencies against the greenback and taking on more debt.
It is in situations like these that a CBDC can come into play. In the case of helping those in need with precision, CBDC-based stimulus measures can ensure that spending the money. of the recovery are aligned with its original objective, meaning that families and communities have access to basic necessities. And the progress of these programs can be measured in real time. In short, the CBDC can become a viable option for the government to subsidize an industry or community with more precision, transparency and efficiency.
With increasing scrutiny from the world, the perception that the United States is losing fiscal responsibility is growing, according to the Council on Foreign Relations. The Council argues that “investors could lose confidence in Washington’s ability to straighten its fiscal ship and become reluctant to finance US borrowing without much higher interest rates.” This perception puts global acceptance of the dollar at risk and, of course, means that self-sufficiency, especially in the developing world, is more important than ever.
So how did bitcoin come to play a role in all of this? In a more extreme, but seemingly realistic, alternate reality, given disastrous results like what we saw in Venezuela when its economy experienced hyperinflation in May 2019, bitcoin tends to become the de facto tool to counter risk. sovereign credit. And governments themselves recognize it. The Salvadoran government recognized bitcoin as legal tender in 2021. Other countries have of course adopted a more centralized strategy by deploying their own CBDCs. But regardless of the currency used, the motivations are the same. Whether it’s bitcoin or a government-backed digital currency, both provide tremendous value (albeit in different ways) to the digital economy, with other avenues to be discovered.
As signs of an economic recovery give way to inflation, we are moving ever closer to the edge and could slide into a global financial crisis. And I am not the only one concerned. MarketWatch’s Satyajit Das draws the poignant conclusion that “where supply constraints are met, excessive deficit-financed spending would lead to inflation, higher rates and a currency correction.” So all it takes is for the Federal Reserve to raise the interest rate. By then, the dominoes in Asia – not just the United States or the West – will inevitably crumble.
It is therefore not surprising that these developing countries are in the best position to lead the charge towards a new digital currency and offset the risk. Whether the solution is a national CBDC or the adoption of cryptocurrencies like bitcoin may be a regional decision, but what I’m sure is that the digital economy is inevitable. It’s just a matter of when.
This is a guest article by Flex Yang. The opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.