Minutes of Macro-Finance Salon (No. 14): Money, Internationalization and Yield Curve – Relevance to the RMB

2014-11-01 IMI

Speaker: Yüksel Görmez, Economic Counsellor, Central Bank of Turkey 1 November 2014, Beijing Money -Money in the fiat form is the most accepted agreement in the world. Money is what money is - under fiat standard, with functions such as legal tender; with intermediary requirements such as trust and credibility and with long debated issues such as senior versus seniorage. -The evolution history of money is extremely complicated. As a result, it may be recommended torenew and update the understanding and the knowledge of money and value. The mainstream future of fiat money may include electronic payments, and the financial universe may be dominated by electronic money, electronic banking and e-financial service provision. -Coins in Turkey and paper money in China are the beginning of invention of money. -Fiat money does not have a backing such as gold. In the future money is backed by profit generating productivity supported by entrepreneurial skills that pays taxes, which may fund the necessary structural issues for any given economy or sector or region. Backing is relative and strength of different money competes contemporaneously. -Conventional money maynot be as perfect as it is generally perceived because there are nano payments, which are payments less than one unit like Fen. Service trade needs more efficient and reliable payment system solutions especially for nano payments. Central banks should not be against electronic money innovations as we are not competent enough to execute nano payments Internationalization -According to the chart that shows the history of global reserve currencies since 1450, we can see clearly that Portugal gold once was the most held global currency for about 80 years, and the role of US dollars as predominant world currency still remained the same since 1921. After the collapse of Bretton Woods in 1972, fiat money became the mainstream inthe world. -In terms of RMB functions, RMB has no original sin as a unit of account because the Chinese government can borrow in their own currency and has no dollarization. -From the three perspectives - functions, institutions and supply - demand equilibrium of RMB, RMB may be taken as ready to internationalize. Yield Curve -The world is far from perfect. Mature developed markets with no QEs and/or forex interventions and emerging markets under heavy capital outflows can cause permanent liquidity deficit; while developed markets with quantitative easing and/or excessive reserves and emerging markets under heavy capital inflows cause permanent liquidity surplus. Also, most emerging countries should be blamed for volatile liquidity conditions. -In the long-run, yield curve effectiveness and efficiency is one the biggest challenges for central banking of China. Conclusions and Recommendations -RMB has already been taking part ina multiple reserve currency system. It is such important because RMB can support excessive liquidity creation through extreme reserve China, as a result, may play a partial creditor of last resort role. -China is the world factory, the biggest exporter, the biggest trader, the biggest expected importer, the constructor of global infrastructurewith a USD 4 trio reserve holder, the biggest economy of the world (with new PPP series) and having a global mind after 5 thousand years. As a result, one may conclude that internationalization of RMB might be inevitable from many perspectives. On the other hand, hegemony of the RMB will stay as an open question that we can find the answer only in the long run. For further details All developments regarding IMI can be followed at http://imi.org.cn/. For further information, contact via imi@ruc.edu.cn or on +86-10-62516755.

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Minutes of Macro-Finance Salon (No. 14): Money, Internationalization and Yield Curve – Relevance to the RMB

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