Money is power, freedom, a cushion, the root of all evil, the sum of blessings, so said the American poet Carl Sandburg. Since the pseudonymous Satoshi Nakamoto created Bitcoin cyber-currency in 2009, techies today can create money, eroding the legal power of central banks to create fiat money. Few doubt that the mighty American empire is founded on the power of the United States dollar.

Not only is Uncle Sam able to create that currency, he has the unique power to sanction anyone using it, without the civil rule of law to appeal. Money is a tool of power, and creating it needs lots of energy, which is why mining cybercurrency is highly energy-intensive. The estimated power used to produce cyber-assets ranges from 0.4 to 0.9 per cent of annual global electricity generated. Total cyber currencies in the world are valued at between $2.6 to $3 trillion, not bad compared to roughly $8 trillion of official coin and currencies circulating around.

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Put in perspective, the size of the global financial system per the Financial Stability Board at end 2022 was $461 trillion, roughly 4.5 times world GDP, compared with about 100 per cent of GDP in 1980. Banks accounted for 39.7 per cent of total financial assets, non-bank financial intermediaries 47.2 per cent, central banks 8.5 per cent and public financial institutions 4.6 per cent. McKinsey Global Institute estimated that the global balance sheet got bloated because of asset price inflation from lower interest rates and credit expansion, as well as rise in equity prices.

Monetary expansion occurs either through fiscal deficits (increase in liability of governments), credit expansion by banks (debt creation) or central bank expansion of their balance sheets (quantitative easing). Financial derivatives are innovative expansion through leverage of underlying assets through new types of contracts. These used to scare financial regulators, as notional value (nominal value of gross contracts) are as large as $618 trillion or one third larger than global total financial assets. However, the gross market value of over-thecounter (OTC) derivatives, summing contracts with positive and negative values, was only $20.7 trillion at the end of 2022 (BIS data). So far, there have been no serious accidents from derivatives.

The scale of money is less important than who owns or owes it and controls it. Money, after all, is a human invention as representation of underlying assets, which governments discover can be their liabilities. Money is powerful because it can transform physical assets into liabilities that can be used as units of value, means of payment (token) and store of value. Money can buy assets and people, but it is also a drug; if over-used, it can corrupt and destroy. So why is money as debt or equity of interest to you and me? Technically, money is a legal contract or understanding between the holder and the issuer. Trust is critical because you will not hold money if you do not trust the issuer. The debt contract is one in which the money is returned after an agreed date at an agreed interest rate. An equity contract is ownership in the issuer.

The key difference between the two is that equity is “risk-sharing” and debt is “risk-transfer”. The investor shares the risk through equity in the company, which is fair. Banks basically transfer risks to the borrower through holding collateral or guarantees, which is why small borrowers always consider debt and usurious interest rates by powerful money-lenders unjust. Growth is all about how an institution (firm or state) is funded by debt or equity, namely its capital structure. Nobel Laureate economists Franco Modigliani and Merton Miller argued famously in 1955 that the value of a company is the same irrespective whether it is funded by debt or equity.

This holds true because of the assumptions of perfect information, zero transaction costs and no bankruptcies. In its revised form, the Modigliani-Miller theorem accepted that leverage matters – common sense tells us that the overleveraged borrower is more risky than a fully equityfunded company. The world is in a fascinating state because the United States is not just the most powerful financial empire, accounting for 40 per cent of global stock market capitalization and bond market value, even though it is only 5 per cent of world population and 26 per cent of world GDP. The US dollar is dominant not only as an invoicing currency for payment, but also as a store of value, since the return on investment (ROI) in US dollar is superior to investing in Euro, Sterling, Yen or RMB assets.

Using the normal 60:40 equity/debt portfolio allocation, the ROI in USD has outperformed in the last 40 years, because of the superior US stock market performance, since bond market and interest yields on debt are roughly the same across different markets. In other words, as long as the US corporate sector delivers value through superior marketing, branding and innovation, even though manufacturing is outsourced to China and other markets, the US dollar role will not be challenged. However, neither of the US Presidential candidates seem to be paying any attention to how US deficits and debt are growing to an unsustainable level, as Bloomberg recently argued.

The US owes gross sovereign debt of $34 trillion, of which $20 trillion is net foreign liability owing to foreigners. The higher the interest rate, the stronger the dollar, the tighter global liquidity (since foreigners find it expensive to borrow in US dollars), and the worse the US debt burden. We are all waiting for Donald Trump to cut interest rates, so much for Fed independence. In short, the US is the world’s largest too-big-to-fail borrower. Since the borrower is so large, none of the lenders or investor can afford the US to fail. In that sense, US debt is really equity (risk-shared with holders in US dollars). The US can also unilaterally liquidate its liability since it just prints more dollars to repay its dollar debts. It can also confiscate dollar assets by foreigners if war with the enemy occurs. Now we know – debt is equity, but not necessarily just. That is why dollar coins and notes say, “In God we Trust”.

(The writer, a former Central banker, comments on global affairs from an Asian perspective. )