Research on currency requires a structural perspective

Practice calls for new monetary theory

I don’t know when it started, the always mysterious and boring monetary issue (attention! Not a monetary policy issue) has become a hot topic of discussion in the financial world, and it has become a general public topic.

In retrospect, the last time the currency issue became the focus of discussion in the financial world was at the turn of the century, when the euro was launched. For this currency that “surpasses” the sovereignty of several European developed countries, the financial world is full of curiosity and expectation, but this curiosity and expectation are mainly concentrated on its relationship with the US dollar: most people are concerned about the exchange rate trend of the euro and the US dollar. , Is concerned about the wrestling between the two most developed economies for hegemony in the international financial field, and is concerned about whether the international monetary system will completely get rid of the “Bretton Woods System” and enter the “Warring States” period from then on. There are also a few scholars who are concerned about the issue of the euro as a “currency”. However, it is still the euro’s reserve assets, the euro’s issuance mechanism, and the details of various aspects of the euro area’s monetary policy that have entered people’s vision. As far as the theoretical methods involved are concerned, these discussions still do not go beyond the stereotypes of traditional monetary theory. Of course, the “super-sovereign” nature of the euro has brought new content to that discussion. However, due to the genius discussions surrounding the “Special Drawing Rights” (SDR) issue that began in the 1960s, In theory and methodology, the euro is at best the European version of SDR.

This time is different! The discussion on currency issues that began in 2008 was provoked by an “outsider”. This challenge is based on a computer science called applied cryptography; behind it, there are the scientific inventions and technological innovations of the past half century. As the author of this book said: “Satoshi Nakamoto published a paper on October 31, 2008, which changed the world of money forever.” This revolutionary change is concentrated in a shocking invention by Satoshi Nakamoto. This “pure peer-to-peer version of electronic cash will allow one party to directly make online payments to the other party without going through any financial institution.” It is shocking to the world because for the first time in the history of currency development, we have encountered a payment mechanism that is neither entity nor intermediary. This will subvert all the concepts, methods, and theories established around “currency” for thousands of years. Even common sense. What’s even more revolutionary is that since 2008, a series of inventions have followed one after another. Now, we not only have the controversial Bitcoin , Ethereum, etc., but also a wide variety of cryptocurrencies, as well as more and more Many stable currencies are used to ensure their currency attributes and remain associated with the traditional currency world. More importantly, based on this series of new inventions, in 2019, a high-profile cryptocurrency called Libra was launched, which shocked the world. When the monetary authorities of various countries have gone from waiting and watching to actively participating, and successively launching their own digital currencies and forming a trend, a new currency revolution has taken shape.

The new development of practice calls for theoretical innovation. It can be said that the renewed interest in monetary theory in the academic community in recent years is precisely a response to the development of practice. However, when we started to analyze the complex new currency phenomena and tried to come up with a certain logical idea, we regretted to find that using existing concepts and analysis tools, it is impossible to understand the ever-changing digital currency at all, let alone establishing an inclusive system. The “general” analytical framework for monetary phenomena is now.

It was at this time that the translation of the book “Currency Pyramid: From Gold, U.S. Dollars to Bitcoin and Central Bank Digital Currency” (hereinafter referred to as “Currency Pyramid”), curated by two senior experts, Wang Limin and Yun Wei of the Social Science Literature Publishing House The draft came to my hands. When you open the book, you will find the author’s self-report: ” Today, the international monetary system is facing a radical reform that is rare in history. At this crossroads, the future of currency is full of uncertainty. This book attempts to provide a picture. Understanding the world map of the currency world… This framework describes the ever-evolving currency system and can help readers understand the full picture of the currency world and understand the relationship between different forms of currency. “

As a researcher of currency issues, I know that it is not easy to establish a certain “general” analytical framework for the currency world and to look forward to the future. However, no matter how the author actually accomplishes it, he only points out the current situation. The main problem is the lack of financial theory, and it points out that the fundamental solution lies in theoretical innovation. As far as I am willing to introduce the author as a fellow, I have this commentary preface.

The main contribution of “Currency Pyramid”

The contribution of “Currency Pyramid” is mainly reflected in methodology. In the introduction, the author stated clearly: “Currency is a hierarchical system.” This judgment is an understanding that everyone feels more or less, but has never formed an analysis framework. If you read it carefully, you will find that the author takes a more tolerant stance on various self-proclaimed currencies. He admits that all currencies in circulation in the world (accepted as a means of circulation within a certain range) are “monetary”, but The “monetary nature” of these currencies is not the same, therefore, they can be arranged in a hierarchical manner. Such stacked currencies form a series, and as a whole, they are collectively referred to as currencies.

I believe that confirming the “identity” of currency in the broadest sense is a necessary prerequisite for understanding the complex phenomena in the current currency circulation field. In this regard, I would like to share with readers Hyman Minsky’s famous thesis: ” Everyone can create currency, but the question is whether it can be accepted. ” Here, whether it can be “accepted” becomes a judgmental one. The fundamental standard for whether various goods play the role of currency, based on this, currency is obviously complex and multi-level. There are many currencies in reality. Although most of these currencies are not “sovereign currencies”, and many of them are hard to be called tokens, they can perform currency functions within a certain range and to a certain extent, so they should all be Incorporate the perspective of monetary theory research.

This kind of thinking is highly consistent with the autonomous organization and autonomous governance theories that have developed rapidly in the past decade. After the emergence of the Internet, people discovered that autonomous governance, the “third order” between the market and the government, naturally exists in the Internet world: all kinds of “online communities” formed by relying on the Internet have autonomous organizations. The development of such as big data, block chain, artificial intelligence, algorithm, security technology, etc., provides increasingly perfect operating conditions and governance tools for autonomous governance.

It is in the process of surging development of autonomous organization and autonomous governance with the power of modern technology, especially the Internet, various “private currencies” as one of the creations of autonomous organizations and tools of autonomous governance come into play. These currencies are circulated in various autonomous organizations, some can also be exchanged with the currencies of other autonomous organizations, and some even have a stable exchange relationship with legal currencies. These currencies (or other titles) fully satisfy the necessary conditions of being “accepted by others”, and they all perform the functions of currency within a certain range and to a certain extent. In this sense, the coexistence of legal currency and various private currencies will be the situation we will face in the future.

In “Currency Pyramid”, the level of currency can be displayed in two ways. The first way is a geometric illustration: we can use a layered pyramid to show the layered currency system, in which the first layer of currency as the foundation is at the top, which supports the entire currency system and constitutes all lower layers of currency. The ultimate basis for acceptance. The second method is the balance sheet. In the balance sheet, the asset side is the assets that constitute the “preparation” for currency issuance; on the liability side, it is the currency that is actually used by the economy and society.

It should be said that although this classification and display are concise, they are not particularly novel in theory. It is worth noting that the author confirmed the principles and generation mechanism of each layer of currency, as well as the analysis of the relationship between each layer of currency. In “Currency Pyramid”, the first layer of currency is “no counterparty”. This is a very important generalization. “No counterparty” here refers to assets whose value is determined by itself and constitutes the final settlement method of all transactions, so there is no transaction risk or default risk. Other levels of currencies are the product of certain market transactions, and their essence is “IOU”, so it can and should be explained in the balance sheet. The main difference between them and the first-tier currencies is that they both have counterparty risks and default risks, and that their own value needs to be explained and quantified with the help of the first-tier currencies. Perhaps more importantly, given that currency circulation is essentially macroscopic, counterparty risks and default risks that occur at the micro-level, together may form macro-level inflation or deflation risks. When this happens, the entire currency circulation will fall into chaos.

In accordance with the sequence of historical development, “Money Pyramid” specifically analyzes four hierarchical currency systems.

The first type of layered currency system is the gold standard that we are familiar with. Under this system, the first layer of currency is gold and silver, and the second layer is the bills of exchange and other bills issued by commercial banks. In this system, different levels of currency play different roles: the first level of currency is the main form of long-term value storage, and constitutes a “discipline constraint” on other levels of currencies; the second level of currency is more suitable for trading, and their Use, improve the elasticity of money supply, speed up the circulation of money, and facilitate economic growth.

The second hierarchical monetary system studied in “Currency Pyramid” is related to the establishment of the central bank system. After the central bank appeared in the economic system as “issuing banks, government banks, and bank banks”, it monopolized the first layer of money; based on the central bank’s balance sheet, it also exclusively monopolized the second layer of money. Distribution rights. At this time, commercial banks and other financial institutions can only play a role in the third level of money supply. It should be noted that the loss of control over the first layer of currency does not mean that commercial banks are insignificant in the money supply of the whole society. On the contrary, it is precisely because of the division of functions that commercial banks are based on the partial preparation system, and the currency of the whole society The supply process played an absolute leading role, as the author pointed out: “The secret of bankers creating money is not through coining, but through the balance sheet.”

After the central bank entered the economy and society, the difference between the monetary system and the past lies in the fact that a new asset is listed as the first layer of currency, which is the national debt. The national debt itself, as a form of credit, is backed by the government’s assets and the power to tax citizens. Therefore, as long as the country does not go bankrupt, even if the government changes frequently, the national debt has no counterparty risk or default risk. Moreover, the national debt actually plays the role of the final settlement method. I think that the discussion here on the status of national debt in the monetary system is particularly worthy of the attention of Chinese researchers.

The third type of “Currency Pyramid” research is named after the U.S. dollar and expands its vision to the world. The reason for this is that it analyzes the Bretton Woods system. In this currency system, the first layer of currency is gold and US government bonds, the second layer of currency is the US dollar, and the third layer of currency is the currency of other countries such as the British pound and Swiss franc. Of course, under this currency structure, there should be a fourth-tier currency issued mainly by commercial banks in various countries, and so on.

It is worth noting that under this topic, the “Currency Pyramid” discusses the issue of currency’s transcending sovereignty. This theme is derived from the development of the Eurodollar market: “The Eurodollar market has evolved into the capital center of the world, separated from the United States in space and from Europe in currency… It is not a product of economists’ planning. It is the result of evolution. This shows that the power of world integration, the commodity market, or the human market, and the capital market are more powerful than dividing the country’s political borders.” For China, which is striving for the internationalization of the renminbi, The research in this area is very enlightening.

Under the title of “Money Renaissance”, the author began to study the fourth layered currency system. The emergence of this currency system originated from the emergence of a new “invader”-Bitcoin. After analyzing the revolutionary significance of Bitcoin in detail, the author constructed a new currency system for us. In this system, Bitcoin/USD is the first layer of currency and its function is similar to gold; central bank digital currency, Bitcoin deposits and stable coins constitute the second layer of currency; stable coins based on the atomic exchange mechanism are in the third layer. Of course, as technology is still deepening, this type of currency system is still changing. However, it is worth noting that, in the author’s view, Bitcoin’s role is equivalent to gold. It will form the underlying foundation of the future monetary system. This is because Bitcoin is a kind of New self-guaranteed assets are the reserve currency for banks to issue digital cash, so they have the qualifications to become the first-tier currency. Such views are worthy of careful study in the future.

Research on currency requires a structural perspectiveIs it possible for the private digital currency to truly become digital gold?

Currency Stratification in the Circulation Period of Mixed Currency

Before the central bank established and obtained its dominant currency circulation, human society implemented a mixed currency circulation system dominated by private currency; metal currency, credit currency, and (government-issued) paper currency were the most important forms of currency at that time. Among them, the metal currency is spontaneously formed by the commercial society, the credit currency is provided by various banking institutions through discounting, and the paper currency is issued by the government. At that time, despite the “Heroes in troubled times”, currencies were also stratified.

Fortunately, when the mixed currency circulation system dominates the economy, it is the golden age of Marx’s research. Therefore, Marx has a very precise research on this currency circulation system. We might as well use his research as the basis to explain the currency stratification problem before the establishment of the central bank system.

Regarding the circulation of metal currency, Marx emphasized three main points. First, the circulation of metal currency is essentially the circulation of commodities, because metal currency has its own value. This is the main feature different from the circulation of paper money and the circulation of credit money. Second, the storage of precious metals has the function of a reservoir, which can automatically adjust the amount of currency in circulation. Third, the circulation of metal currency is a very decentralized movement. It starts from countless different points and returns to countless different points. The so-called starting from countless different points means that people’s acquisition of monetary materials is not an organized social activity. Therefore, the entry of gold and silver into circulation as currency is a completely unorganized process. Similarly, after the transaction is over, gold and silver can be returned to countless different points, and its owner can either choose to continue putting it into circulation as currency, or hoard it and withdraw it from circulation. Therefore, the circulation of metal currency is not subject to any social forces (especially the government).

As a creation of commercial banks, credit currency is put into circulation (issuance) and contains conditions for withdrawal. Therefore, it forms a radiation and reflection movement centered on the bank and the world of commodities as the circle. The issuance of credit currency mainly takes the form of discount or mortgage. Therefore, the circulation of credit currency has a double guarantee; first, it has real economic activities and real items as the basis of the entire currency issuance, which is its credit guarantee; Second, the bank issuing credit currency promises at the same time that holding the coupon or currency can go to the bank to ask for gold exchange at any time, and the bank cannot refuse to redeem it. This is the so-called metal guarantee.

The circulation of banknotes is more unique.

First, from the origin, the circulation of paper money is an act of compulsory possession of social wealth by the state. Unlike metal currency, paper currency does not undergo a commodity transaction when it is put into circulation. It is a process without counterparties.

Second, the circulation of banknotes is an infinitely dispersed movement. Once the paper money leaves its original point (government), it will immediately spread out and enter various circulation areas.

Third, paper money will lose value if it leaves circulation. Therefore, once banknotes enter circulation, they cannot be thrown out.

Fourth, the circulation of banknotes tends to be inflationary. This is because, throughout the ages, governments have been unable to resist the temptation to create money for themselves unfettered.

The currency circulation in reality is so complicated, how to grasp their relationship? Marx provided a clear method, which in fact is the currency stratification method. First of all, he emphasized that the reason why people have so many misunderstandings and even misunderstandings about currency and its circulation is because they fail to recognize that currency is actually stratified. It is easy to confuse the circulation law of one currency with the circulation law of another currency if it is not clear about the level of currency. Secondly, since currency is stratified, the functions of currencies at various levels are also different: in the period of mixed circulation, metal currency plays more of a role as value storage; whether it is personal value storage, bank issuance preparations, or national wealth , Gold is the only choice. Credit currency is more a means of payment, and banknotes are a means of circulation. Finally, in the stage of normal economic development, people do not feel the level of currency. On the contrary, using credit currency or paper currency to engage in economic activities gives people the illusion that they have unlimited ability to create currency. However, once a crisis occurs, everything will come to light: People no longer welcome paper money, credit currency is widely rejected, and the entire economy and even the entire society will go crazy in pursuit of golden gold. People only then realized that only gold is. currency.

It can be said that Marx’s research on currency issues in the mixed circulation period has long pointed out the nature of currency as a stratified system.

Latest development: tiered claims

The stratification of currencies is everywhere. The central bank’s money supply statistics, which are arranged in the order of M0, M1, M2… that are familiar to ordinary people, are regularly published, and this is a currency stratification arranged on the basis of liquidity differences.

Before the 1990s, money supply statistics were a very important macro indicator, and thus were also a key variable for central banks to regulate and control. Since Greenspan gave a testimony on the US Senate Banking Committee entitled “The relationship between currency and economic operations is getting estranged”, the importance of macro analysis of the money supply has declined.

In the financial market, especially in the currency market, the importance of these indicators is also decreasing. Due to the continuous changes in trading methods and trading mechanisms, for market participants, these monetary aggregate statistical calibers obviously cannot accurately reflect the true situation of market liquidity. The deepening of the market gave birth to the concept of money claims, which is another manifestation of currency stratification.

Currency claims are layered for money market instruments from two dimensions-collateral attributes and put attributes. The first dimension considers the attributes of collateral. Assets as collateral will be ranked in different currency levels according to their public assets or private assets. The second dimension is the put dimension, which is equivalent to put protection in options. Puts can be divided into liquidity puts and credit puts. Liquidity puts refer to when financial institutions experience liquidity crises, third-party institutions provide liquidity support for them by means of asset purchases; credit puts refer to when financial institutions experience liquidity crises. Third-party institutions provide liquidity support for them by providing credit. Selling rights can come from public institutions (Ministry of Finance and Central Bank) or private institutions.

According to the different combinations of mortgage and put attributes, monetary claims can be divided into four levels.

The first layer is public currency claims , which mainly include cash, reserves deposited in the central bank and short-term government bonds. The basis of the issuance of US dollar banknotes is the national debt, and its collateral has a public attribute. At the same time, since the assets of the Ministry of Finance and the Federal Reserve are the assets of the highest security level, public currency claims are at the highest level of all security assets.

The second layer is private/public currency claims , which mainly refers to bank deposits covered by deposit insurance. Although the assets corresponding to these claims are private, they are sold by public liquidity and public credit to the lender of last resort and deposit insurance. Formal direct guarantee, and its security level is second only to public currency claims.

The third layer is public/private currency claims , which mainly include repurchases issued by dealers with government bonds as collateral, and the share of net asset value issued by government-type currency funds. This type of monetary debt is a private commitment to fully redeem it at maturity, which is secured by public assets, but it is not secured by any public right of put. Since this type of repurchased collateral assets has no credit risk and can be traded on the open market, it is considered to have indirect public liquidity puts and indirect public credit puts guarantees. This kind of currency claims is the business focus of the current shadow banking system, so it is also called “public shadow money.”

The fourth layer is private currency claims , which mainly include the repurchase of private assets (such as CD, CP) issued by dealers as collateral, and the share of net asset value issued by preferred currency funds. Private currency claims are private commitments to pay in full at maturity. Private assets are used as collateral. They are not covered by direct or indirect public selling rights, so they are called “private shadow currency.” In addition, there is another form of such currency claims, namely uninsured bank deposits, which is also worthy of attention. They are also typical private currency claims, but they are not classified under the concept of shadow banking.

Before the subprime mortgage crisis in 2007 and 2008, shadow banking had developed rapidly in the United States. However, in the context of financial liberalization, most of the currency claims circulating in the market are of a private nature. The repurchase of private securitized assets as collateral and the rapid expansion of priority money funds have caused the financial market to face substandard When the mortgage collapsed, there was little pardon. After the subprime mortgage crisis, shadow banks did not reduce a bit, but shifted the monetary level. They gradually withdrew from the lowest level, that is, the private currency debt market, and instead accumulated a large amount in the third level of currency debt, that is, the public/private currency debt field. This enhances the security level of the currency claims they operate, thereby enhancing the security of the liquidity market.

Research on currency requires a structural perspectiveThe four levels of currency claims

Monetary theory innovation is not yet complete

Point out the poverty of existing financial theory, try to provide a new analytical framework for the ever-changing monetary world from the perspective of monetary stratification, and based on this framework, smelt all the monetary systems so far in the same furnace, and extract some common characteristics. The success of “Currency Pyramid”. This article cites a section of “Das Kapital” and the latest developments in the current liquidity market, further confirming the methodological uniqueness of the layered study of currency.

However, due to the complexity of currency issues, the analysis of “Monetary Pyramid” inevitably has some omissions. At the same time, there is room for further discussion on the judgment of some phenomena. In my opinion, the obvious deficiencies are mainly manifested in two points. One is the lack of analysis of “fiat currency” under the currency stratification structure; the other is the lack of attention to the continuous abstraction of currency due to digital development, and more The tendency to fade away. On the arguable aspect, it is mainly about the prospect of Bitcoin. I agree that some form of digitization of currency is the future of currency development, but I don’t think Bitcoin can take on this important task.

Li Yang, chairman of the National Finance and Development Laboratory, former vice president of the Chinese Academy of Social Sciences


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