Connect with us

Central Banks

The Petrostate Hex: How Plunging Oil Prices Affect Currencies

Published

on

The Petrostate Hex: How Plunging Oil Prices Affect Currencies

The Petrostate Hex: How Plunging Oil Prices Affect Currencies

Every day, the world consumes 93 million barrels of oil, which is worth $4.2 billion.

Oil is one of the world’s most basic necessities. At least for now, all modern countries rely on oil and its derivatives as the backbone of their economies. However, the price of oil can have significant swings. These changes in price can have profound implications depending on whether an economy is a net importer or net exporter of crude.

Net exporters, countries that sell more oil abroad than they bring in, feel the sting when prices plunge. Less revenue gets generated, and this can impact everything from balancing the budget to the value of their currency in the world market.

Net importers, on the other hand, benefit from lower prices as it decreases input costs for production. For example, a country like Japan only meets 15% of its energy needs domestically, and must import 3.5 million barrels of oil each day. A lower oil price significantly decreases these costs.

Currency Swings

For many major net exporters of oil, changes in oil prices are highly correlated with their currencies. With oil prices crashing over the last year, currencies such as the Canadian dollar and Russian ruble have been highly impacted in terms of USD.

For example, the ruble is down over 40% since the price of oil began to crash in 2014. With a breakeven cost of $105/bbl, the dropping price of crude as well as dwindling ruble have sent ripples through the Russian economy.

Central Bank Policy

The impact of oil on currency depends on how central banks approach policy:

Floating exchange rate: The exchange rate is determined by supply and demand.

Fixed exchange rate: Countries with fixed exchange rates continuously arrange intervention to keep the rate the same.

Managed float: The central bank occasionally intervenes to “smooth out” the exchange rate.

Currency Correlations

The price of oil typically has the largest effect on countries with floating exchange rates such as Canada, Norway, or Mexico. Over the last 15 years, the loonie (-0.42), krone (-0.46), and peso (-0.31) have all had large negative correlations in exchange rates (paired with USD) against the price of oil.

Meanwhile, countries that have pegged their rate tend to feel the impact of oil price swings elsewhere in their economy. This is because such countries have to buy or sell currencies on the open market to maintain the currency peg. Another method that can be used is to enforce a particular exchange rate by making it illegal to trade currencies at other rates, but this can often create a black market.

As a result, countries with fixed-rate policies such as Venezuela, Saudi Arabia, and Qatar have little to no correlation in their exchange rates (paired with USD) against the price of oil.

Continue Reading
Comments

Bitcoin

Decentralized Finance: An Emerging Alternative to the Global Financial System

What is decentralized finance? Learn how technology is changing the rules of the game, creating the potential for a new financial system to emerge.

Published

on

Decentralized Finance: An Emerging Alternative

The global financial system has created massive wealth, but its centralized nature means the spoils have gone to the people who are best connected to the financial centers of the world.

As global inequality continues to rise, how can wealth building tools become more accessible to the rest of the global population?

Luckily, technological developments and their rapid adoption make this the right time for a new decentralized financial system to emerge:

  • The Internet: 3.9 billion users by the end of 2018
  • The proliferation of smartphones: Two-thirds of the unbanked have mobile phones
  • Digital banking: over 2 billion users by end of 2018
  • Bitcoin and Blockchain: the emergence of new public blockchains

Today’s infographic comes to us from investment app Abra, and it highlights how public blockchains could help to enable a decentralized finance system.

What is Decentralized Finance?

Decentralized finance describes a new decentralized financial system that is built on public blockchains like Bitcoin and Ethereum. After all, Bitcoin and Ethereum aren’t just digital currencies — they’re foundational open source networks that could be used to change how the global economy works.

There are six primary features that differentiate public blockchains from the private networks used by governments and traditional financial institutions:

  • Permissionless: Anyone in the world can connect to the network
  • Decentralized: Records are kept simultaneously across thousands of computers
  • Trustless: A central party isn’t required to ensure transactions are valid
  • Transparent: All transactions are publicly auditable
  • Censorship Resistant: A central party cannot invalidate user transactions
  • Programmable: Developers can program business logic into low-cost financial services

In such a financial system, users will have access to apps that use public blockchains to participate in new open global markets – but how would this shape the global financial system for the better?

The Potential Impact of Decentralized Finance

Here are five ways that decentralized finance will have an impact on the world:

1. Wider Global Access to Financial Services

With decentralized finance, anyone with an internet connection and a smartphone could access financial services. There are a variety of barriers that prevent access in the current system:

  • Status: Lack of citizenship, documentation, credentials, etc.
  • Wealth: High entry-level funds required to access financial services
  • Location: Vast distance from functioning economies and financial service providers

In a decentralized financial system, a top trader at a financial firm would have the same level of access as a farmer in a remote region of India.

2. Affordable Cross-Border Payments

Decentralized finance removes costly intermediaries to make remittance services more affordable for the global population.

In the current system, it’s prohibitively expensive for people to send money across borders: the average global remittance fee is 7%. Through decentralized financial services, remittance fees could be below 3%.

3. Improved Privacy and Security

In decentralized finance, users have custody of their wealth and can transact securely without validation from a central party. Meanwhile, in the current system, custodial institutions put people’s wealth and information at risk if they fail to secure it.

4. Censorship-Resistant Transactions

In a decentralized financial system, transactions are immutable and blockchains can’t be shut off by central institutions like governments, central banks, or big corporations.

In places with poor governance and authoritarianism, users can divest to the decentralized financial system to protect their wealth. For example, Venezuelans are already adopting Bitcoin to protect their wealth from government manipulation and hyperinflation.

5. Simple Use

Plug and play apps will allow people to intuitively use decentralized financial services without the complexity of the centralized system.

With a decentralized system, a woman in the Philippines could receive a loan from the U.S., invest in a business in Colombia, and then pay off her debt and purchase a home – all through interoperable apps.

The Potential Blue Sky

Unless governments and central banks suddenly cease to exist, it’s difficult to imagine a world where decentralized finance completely replaces their centralized counterparts.

But what if they can co-exist?

Public blockchains can interact with the traditional financial system to create a new hybrid model:

  • Users could conduct economic activity on public blockchains and exchange their new wealth into the centralized system.
  • Users could hedge against systemic risk by diversifying their wealth holdings in both the central and decentralized system.

Like the internet with knowledge, decentralized finance could help democratize the financial system.

But will we allow it?

Subscribe to Visual Capitalist

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Continue Reading

Banks

The 7 Major Flaws of the Global Financial System

Since the invention of banking, the global financial system has increasingly become more centralized. Here are the big flaws it has, as a result.

Published

on

The 7 Major Flaws of the Global Financial System

Since the invention of banking, the global financial system has become increasingly centralized.

In the modern system, central banks now control everything from interest rates to the issuance of currency, while government regulators, corporations, and intergovernmental organizations wield unparalleled influence at the top of this crucial food chain.

There is no doubt that this centralization has led to the creation of massive amounts of wealth, especially to those properly connected to the financial system. However, the same centralization has also arguably contributed to many global challenges and risks we face today.

Flaws of the Global Financial System

Today’s infographic comes to us from investment app Abra, and it highlights the seven major flaws of the global financial system, ranging from the lack of basic access to financial services to growing inequality.

1. Billions of people globally remain unbanked
To participate in the global financial sector, whether it is to make a digital payment or manage one’s wealth, one must have access to a bank account. However, 1.7 billion adults worldwide remain unbanked, having zero access to an account with a financial institution or a mobile money provider.

2. Global financial literacy remains low
For people to successfully use financial services and markets, they must have some degree of financial literacy. According to a recent global survey, just 1-in-3 people show an understanding of basic financial concepts, with most of these people living in high income economies.

Without an understanding of key concepts in finance, it makes it difficult for the majority of the population to make the right decisions – and to build wealth.

3. High intermediary costs and slow transactions
Once a person has access to financial services, sending and storing money should be inexpensive and fast.

However, just the opposite is true. Around the globe, the average cost of a remittance is 7.01% in fees per transaction – and when using banks, that rises to 10.53%. Even worse, these transactions can take days at a time, which seems quite unnecessary in today’s digital era.

4. Low trust in financial institutions and governments
The financial sector is the least trusted business sector globally, with only a 57% level of trust according to Edelman. Meanwhile, trust in governments is even lower, with only 40% trusting the U.S. government, and the global country average sitting at 47%.

5. Rising global inequality
In a centralized system, financial markets tend to be dominated by those who are best connected to them.

These are people who have:

  • Access to many financial opportunities and asset classes
  • Capital to deploy
  • Informational advantages
  • Access to financial expertise

In fact, according to recent data on global wealth concentration, the top 1% own 47% of all household wealth, while the top 10% hold roughly 85%.

On the other end of the spectrum, the vast majority of people have little to no financial assets to even start building wealth. Not only are many people living paycheck to paycheck – but they also don’t have access to assets that can create wealth, like stocks, bonds, mutual funds, or ETFs.

6. Currency manipulation and censorship
In a centralized system, countries have the power to manipulate and devalue fiat currencies, and this can have a devastating effect on markets and the lives of citizens.

In Venezuela, for example, the government has continually devalued its currency, creating runaway hyperinflation as a result. The last major currency manipulation in 2018 increased the price of a cup of coffee by over 772,400% in six months.

Further, centralized power also gives governments and financial institutions the ability to financially censor citizens, by taking actions such as freezing accounts, denying access to payment systems, removing funds from accounts, and denying the retrieval of funds during bank runs.

7. The build-up of systemic risk
Finally, centralization creates one final and important drawback.

With financial power concentrated with just a select few institutions, such as central banks and “too big too fail” companies, it means that one abject failure can decimate an entire system.

This happened in 2008 as U.S. subprime mortgages turned out to be an Achilles Heel for bank balance sheets, creating a ripple effect throughout the globe. Centralization means all eggs in one basket – and if that basket breaks it can possibly lead to the destruction of wealth on a large scale.

The Future of the Global Financial System?

The risks and drawbacks of centralization to the global financial system are well known, however there has never been much of a real alternative – until now.

With the proliferation of mobile phones and internet access, as well as the development of decentralization technologies like the blockchain, it may be possible to build an entirely new financial system.

But is the world ready?

Subscribe to Visual Capitalist

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Continue Reading
HIVE Blockchain Technologies Company Spotlight

Subscribe

Join the 100,000+ subscribers who receive our daily email

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Popular