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Finance

FROM COVID TO CURRENCY CRISIS?

One hallmark of the United States’ superpower status is the primacy of the dollar. All regimes rise and fall. There are reasons to believe the US dollar is at risk of losing its status. How likely is this, why, and what might follow?

There are several ways to measure dollar primacy.

First, the US dollar accounts for 62 percent of global central bank reserves, according to the International Monetary Fund. The euro is about 20 percent, and the Chinese yuan 1.9 percent.

Second, in payments, the dollar accounts for 40 percent of cross-border transactions intermediated by SWIFT, a global messaging system for corresponding banking. The yuan: under 2 percent.

Third, in foreign-exchange markets, the dollar is on one side of about 90% of swaps.

And fourth, US Treasuries are considered the ultimate safe haven, which is why foreigners hold nearly $7 trillion of them.

Dollar primacy made sense in the 1940s when the Bretton Woods arrangement cemented its reserve status. The US economy accounted for more than 50 percent of global output, with Europe and Asia devastated by war.

Jame DiBiasio

Today the US accounts for around 15 percent of global GDP. China now accounts for around 18 percent, in purchasing-power parity terms (although the US economy is still larger in nominal terms). The vast discrepancy for the US and China between their economic positions and the influence of their currencies is stark.

Economic prowess is not the sole determinant of a currency’s power, although it suggests long-term directions. The US outpaced Britain as the world’s biggest economy in 1871 but it would take seventy years before the dollar displaced sterling as the leading currency.

Moreover, the tussle between the dollar and the pound was not straightforward. Late nineteenth century America was powered by its farms and factories, but financially it was immature, its banking system haphazard. American merchants had to conduct foreign trade in sterling, not dollars.

London had been the world’s financial center, with the pound at the heart of its money markets, since the founding of the Bank of England in 1694. Despite Britain’s relative economic decline, the gold-backed pound was a reliable, trusted system – an example of the network effect, made valuable by the sheer number of institutions using it.

The dollar only began to compete when the US established the Federal Reserve in 1913, bringing some stability to its banking system. In the 1920s the dollar became a reserve currency on par with sterling, but the Fed botched the 1929 Wall Street crash and the dollar slipped. Only after the devastation of World War II did the dollar triumph. Even then it remained tied to gold, until Richard Nixon floated the currency in 1971.

Since then we have lived in a world of fiat money, money that is based on the power and prestige of government rather than any intrinsic value.

That time also marks the appearance of electronic financial networks.

Techno-capitalism, cheered on by the Reagan-Thatcher model of government, has driven globalization and free capital flows. Since Nixon’s time, America has also supported the rise of China, as part of its overall promotion of free trade and open markets. This US support was initially to counter the Soviet Union but in the 1990s, buoyed by the end of the Cold War and US corporations’ eagerness to outsource labor to China, the pro-engagement argument took on a life of its own.

As America exported jobs it also exported dollars. It fended off challenges from the yen in the 1980s and the euro from 1998. And the US remained blind to the instability of laissez-faire capital flows because the growing list of crises – Latin America, Japan, East Asia, Russia – was “over there”. Domestic problems were viewed as scandals, the accounting frauds of a few bad apples, rather than symptoms of a broader problem.

The 2008 Global Financial Crisis, and its sequel in the eurozone, nearly destroyed the status quo. Even China had to respond to the economic fallout by pumping its economy with credit. But in the US, although the banking system was stabilized, the response was not the sort of austerity demanded of emerging markets. Instead the Fed slashed interest rates and began purchasing Treasuries and other securities, to bring even long-term rates as low as possible.

Japan had been doing this sort of thing for decades, and the eurozone followed suit. The developed world has abandoned laissez-faire in its capital markets, a trend exacerbated by reckless corporate tax cuts made by US Republicans in 2018.

By now, however, China had clocked three decades of heady growth. A cheap and skilled workforce combined with good infrastructure made China the workshop of the world. Its vast middle class hinted at a giant consumer economy in the making.

China’s monetary policy is however immature. It maintains a managed peg to the dollar, along with the rest of Asia (except Japan). China has been a huge importer of direct investment but not financial flows. On the contrary, China has been a vast exporter of capital – it’s a major buyer of US Treasuries – despite its hunger for financing its growth. China has preferred to finance this growth through forced savings among its financial institutions (and therefore its people).

Since the 2000s, Chinese leaders have attempted to rebalance the economy by reducing debt-funded infrastructure and real-estate spending (which support its exports) and growing a domestic consumer market. These attempts always crash into the Communist Party’s insistence on controlling all levers of power and bolstering the privileges of state-owned enterprises over the private sector.

Although both the US and China pursue flawed policies, the status quo might have continued for a long time, but the COVID-19 pandemic has accelerated their respective paths.

China responded with a brutal but effective lockdown. The West has unleashed record borrowing to try to salvage its economies. The Federal Reserve has expanded its securities purchases to levels that were unimaginable even during the scariest moments of the GFC.

This raises the question of the sustainability of the currency regime. China and other holders of US Treasuries are now earning almost zero yields. Given America’s future liabilities (pension and healthcare costs), its handling of the GFC shows that it is almost certain to continue to borrow rather than cut spending or raise taxes.

Such spending can be a net benefit if it supports economic growth. If the US invests in, say, its infrastructure and education system, it would be laying the groundwork for long-term prosperity. This may yet happen, but even so, Treasury holders are looking at a grim forecast.

Central banks and global investors will seek alternatives. The yuan is starting to look more attractive. China has its macro problems. But it is the only major economy running a conventional monetary policy, which is to say it is paying investors a yield. Chinese stocks and bonds are now part of global investment indexes. Even as the Trump administration attempts to freeze China out of the global economy, US money managers and banks are making a beeline to participate in China’s financial markets.

The network effect and the sheer weight of Wall Street will keep the dollar dominant for some time. China must still earn investors’ trust. Its introduction of a digital yuan, however, will make transacting the currency much easier. China is laying the groundwork for a new financial system, based on technologies such as blockchain, that may well come to challenge the status quo, starting in emerging markets.

Just as the US in the 1910s undertook the reforms to create a credible financial system, China is trying to do something similar today. It has a long way to go and it faces internal political contradictions (comparable to Japan’s challenges in the 1980s). The US could also reform its monetary and fiscal policies, breathing new life into the dollar regime.

We are probably entering a phase of competition between the dollar and the yuan, and there is no predetermined outcome. America may not get to enjoy the luxury of a gradual transition, though: just as the Suez Crisis of 1956 destroyed British pretensions about the pound, an escalation of the US-Sino conflict could have a similar effect.

The irony is that the biggest winners from a healthy rebalancing among currencies would be ordinary Americans. Dollar primacy benefits Washington, which increasingly relies on the world’s dependence on the dollar as a tool to impose punishments on its enemies. And it benefits Wall Street, the heart of the American dollar export machine. But this arrangement means more debt at home and more jobs sent abroad.

For America to invest in itself it must make it unattractive for its own companies and financiers to send dollars overseas. It can try to do so of its own volition – or risk being forced.

 

Cowries to Crypto: The History of Money, Currency and Wealth by Jame DiBiasio and illustrated by Harry Harrison is published by OANDA, a global leader in online multi-asset trading services. It will be available from 1 September on amazon.co.uk, priced at £19.99.

Finance

OPTIMISING YOUR FINANCE THROUGH TECHNOLOGY

Covid-19 restrictions and ongoing uncertainty have prompted a fundamental switch in mindset across a multitude of different sectors. Many organisations have begun to recognise that outsourcing their finance can make them more agile and give them the competitive edge they need to compete and scale effectively in today’s market.

Mark Pullen, CEO at Xledger  explains to what extent outsourcing can boost resilience for a lockdown recovery.

 

Solving the pain points

Inefficient processes are prone to causing delays and errors which can have a huge impact on the bottom line when viewed at scale. They can also negatively impact the client experience, causing frustration with missed deadlines and mounting uncompleted tasks.

New finance technology is automating many of the daily, monotonous back office functions such as bank reconciliation and invoice entry, meaning that the nature of the work that a finance professional provides will change. This presents a huge opportunity as it gives these employees the opportunity to be involved in higher-level work. Technology can also provide a resource that gives real time insight, allowing for better strategic decision making, which is so key in the current climate.

 

Optimising your finance function

Outsourcing high-value services within the finance function can improve workflow by implementing a defined and transparent process which streamlines operations. For a finance department, this can speed up areas that require internal controls such as expense reporting and cash release, but it can also speed up the full lifecycle of a project; from time tracking and resource to accounting and billing.

There is also a cost efficiency benefit when outsourcing, as management bandwidth is effectively increased by eliminating the need to be involved in many of the day to day processes. Instead this time can be focused on other business priorities and planning for future growth.

Outsourcing accounting functions to bespoke and standardised technologies means using data led processes that can be measured, optimised and benchmarked against in-house requirements. These processes can also be undertaken remotely, boosting the resilience of your business in these uncertain times.

 

Case study box-out: RPC Tyche

RPC Tyche is a global insurance software supplier with offices in London, Paris, and the USA. Initially a division of award-winning law firm RPC, but now a stand-alone entity, RPC Tyche’s main software offerings support capital modelling, and pricing commercial insurance and reinsurance.

 

The challenge

As part of a restructuring process following the de-coupling with the law firm RPC, RPC Tyche had to separate its back-office processes. They remained under the umbrella of the law firm while the changes were taking place, so initially had some flexibility with the shared finance system, but time was running out to separate the two entities cleanly. As a stand-alone company, RPC Tyche now needed its own financial system; one that could align with its new business processes and that could be implemented quickly to deliver the organisation’s business objectives. Furthermore, they needed a new finance solution that could help them grow exponentially, facilitate a globally diverse group structure, and still maintain efficiency when operating as a small team.

Gavin Dilley, Chief Finance Officer for RPC Tyche commented, “Following an initial discussion with a third-party advisor regarding Xero and Quickbooks, we were recommended Xledger because we required a swift and scalable solution. After contacting Xledger, their tried and tested implementation methodology ultimately assured us that we would achieve the fast-paced implementation needed for our go-live objective. We also really liked that Xledger was a multi-tenanted, true cloud solution with its scalability setting it apart from the competitors.”

 

Implementation and training

Following conversations with Xledger, RPC Tyche created a project management team to keep everything on track on their side, an arrangement that Gavin emphasised “worked really well.” He said that “as a small project team, the flexibility to undergo substantial configuration during the training sessions with the Xledger consultants brought focus and enabled us to dedicate sufficient time to the system without distractions.”

Although the implementation was expected to take three months, RPC Tyche experienced hold-ups owing to the separating of back-office processes, so they were pleased when it was mutually agreed to facilitate a one-month delay.

 

Post-implementation results

“The implementation process was highly effective, and we’re very happy with the results,” said Gavin. “Since implementing the Xledger solution, we’ve been so pleased we haven’t had to dip back into the old system as the transfer of historic data has been particularly successful.” RPC Tyche had a large volume of historic data and transactions, including timesheets and work in progress reports that were all successfully migrated to Xledger during implementation. “We’re particularly happy with how easy it has been to onboard our new Finance Controller, due to flexible training and the system being so intuitive.”

Gavin added, “Since implementing Xledger, we have far greater reporting flexibility, better distribution of skills within the finance team and are naturally more self-sufficient because we can make amendments to the system without relying on the software provider.

The system is easy to use, and the purchase order functionalities, integrated workflows and automation of processes have enabled us to be highly efficient, even as a small finance team. Not to mention that the Xledger support team are incredibly responsive, so we can continually maintain productivity.”

 

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Finance

THE FUTURE OF FINANCE LIES IN THE CLOUD

Author: Chris Tredwell, Enterprise Business Development Manager,Aqilla

 

At the beginning of 2020, 87% of public sector organisations surveyed by UKCloud expressed a desire to move traditional IT environments into the cloud. But, as a result of the Covid-19 pandemic, the rate of cloud adoption in the UK has grown significantly, as many companies not already in the cloud were compelled to make the switch due to enforced remote work.

This is certainly indicative of many other industries, finance included. Pre-lockdown, the majority of finance and accounting teams still relied on on-premises software, but the move to remote-working meant many organisations had to quickly reconsider their technology needs and move some or all of their IT requirements to cloud-based platforms.

But, in a recent survey by GrowCFO – an independent portal for finance leaders to network, learn and collaborate – it was found that there is confusion around what actually equates to a true cloud finance platform. This was apparent given some respondents replied with ‘cloud’ to known on-premises solutions, suggesting the difference between cloud-based and ‘on-premises with remote access’ is not fully understood.

This is an important point because it has the potential to influence the technology choices made by organisations across the sector. In short, traditional on-premises financial software resides on IT systems owned by the user organisation, typically on hardware hosted within their building. After purchasing and installing the software, they maintain, secure, and manage it themselves (or with the help of a specialist third party IT support business). Many of these systems also offer the option of connecting remotely, with users accessing software and data via a connection to their office-based network.

Conversely, cloud software is almost entirely outsourced and delivered via a web browser or app as a service to each user, hence the description ‘Software-as-a-Service’ (SaaS). The software resides with the service provider who is also responsible for reliability, performance, the availability of enhancements and updates, as well as the security of their service or application. The location of the user is largely irrelevant – as long as they have a good, secure internet connection, a suitable laptop or tablet and a browser, they can access the service in exactly the same way as if they were in the office.

Chris Tredwell

One of the most immediate changes organisations notice when moving from on-premises technology to the cloud is it removes the need for in-house IT personnel or external specialists to manage and maintain the technology. For many smaller organisations, it liberates the individual who has been given the task of ‘looking after’ the on-premises tech, even though it usually isn’t their specialism or even in their job description.

But that’s just the start. The massive success of the cloud-based, ‘-as-a-Service’ technology industry is predicated on a range of key developments over traditional on-premises, or ‘legacy’ software.

 

A Formula for Finance

Often of particular interest to finance and accounting professionals are pricing and payment terms that accompany today’s cloud SaaS options. Cloud-based software typically offers the convenience of a monthly pay-as-you-go model, instead of investing significant up front sums in one-off software purchases. This also saves money on the server hardware that has previously sat in the office, which may no longer be needed at all. Also included in cloud pricing arrangements should be details which clearly set out the type of service and support included in the cost. Done well, cloud-based customer support and service can deliver an exceptional experience where the provider effectively works as an extension of their in-house team.

The best cloud software providers place huge emphasis on security, focusing on data protection, backup services and their ability to deal with common security issues, such as ransomware. This also extends to compliance, and in the finance context, specialised compliance capabilities offered by many cloud software providers can be of particular benefit. Even for the most niche requirements, there is often a software provider out there whose technology has been written to meet compliance rules, often saving users considerable time and effort.

And then there’s the key issue of functionality and performance. Today’s cloud-based finance software market offers a wide range of options from simple entry-level tools to powerful applications designed to meet the needs of even the biggest and most complex finance departments. For organisations considering cloud, it’s important to assess the options available and choose a provider that most closely matches their individual needs.

For many finance and accounting organisations and their teams, the requirements of lockdown and transition to home working were made possible by cloud-based software solutions. In doing so, they have gained valuable insight into the range of services available, their potential benefits and how technology can become much more than just a labour-saving tool, but also a means to enhance their all round business capabilities.

 

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