Source: Digital Fiat Currency Research Society

Preface

This article is the preface written by Lu Lei, Vice President of the People's Bank of China, in the 'Monetary Theory'.

The motivation for writing "Monetary Theory" came from a trip back to my hometown. As an economics teacher with a research instinct, I am unwilling to miss any theoretical thinking based on real situations. One afternoon in late August 2020, I sat on the Beijing-Shanghai GT "Fuxing" train with my wife and daughter. While my daughter listened to her favorite songs and solved quadratic function problems, I opened the randomly brought Handbook of Monetary Economics, edited by Friedman and Woodford (2011), which I used half for review and half for hypnotizing. I was quickly attracted to a chapter in the New Monetarist Economics by Williamson and Wright (2011). The reason for the attraction is that both authors have dual identities as central bank officials and university professors, which resonated with my own experience. However, as my gaze fell on the pages, my thoughts followed the roaring train. Why has the US implemented unprecedented unlimited quantitative easing monetary policy for months, and why did the stock market experience several circuit breakers during the worsening of the global COVID-19 pandemic, followed by reaching new historical highs, but there are no apparent signs of improvement in the real economy? In April, CME crude oil futures prices even turned negative, but gold and digital money prices continued to rise. So, will there be changes in the world monetary system? Obviously, these seemingly simple real questions, which can be answered with 15 minutes of thinking or even mocking the market's irrationality, were enough to turn me to more valuable readings. However, these simple questions accompanied me for a full 5-hour journey. This is because these seemingly simple questions cannot find answers that can completely convince me in the thick manual.

In the sunset, when the three of us were on the platform of a small station in Jiangnan, dragging long shadows and walking towards the exit, I looked at the train roaring and accelerating towards Shanghai, and said to my wife, 'Perhaps there are some fundamental bugs in the monetary economics I have taught, and what I have observed, the work I have done, and the courses I have taught are completely different'.

My wife, who has always been willing to encourage me and has also been engaged in teaching finance for a long time, eagerly said to me, "Then you rewrite monetary economics as you think."

"Okay, but I'm not necessarily right." I nodded solemnly.

"That's not necessarily wrong, give it a try, it can't hurt!" Our daughter chimed in mischievously when she overheard our conversation.

Worth a try. However, at that time, I didn't seriously consider the feasibility of this matter. Systematic work requires systematic time support. It seems that I can only use fragmented time to piece together my thoughts. Fortunately, I can have fragmented exchanges of ideas with my student, Dr. Liu, and refine different (although not necessarily comprehensive) perspectives from each other's sharpening, and extract truly valuable (although not necessarily correct) viewpoints.

At least in the field of economics – I don't know how other disciplines – intuition is a very important thing on the basis of systematic training. There's a very artistic film, A Beautiful Mind, based on the mathematician John Nash, which I understand from a non-artistic point of view, which illustrates the importance of intuition. In my 30-year career, I have spent 15 years teaching Monetary Finance (using the editions of Da Huang, Shengye Zhou, and Kanglin Zeng, Mishkin, and Xuebin Chen), Microeconomics (using the editions of Ping Xinqiao, Varian, and Mas-Colell, Whinston, and Green for PhD students), and Macroeconomics (using Mankiw, Romer, and Ljungqvist with selected chapters). and Sargent version), "Mathematical Economics" (using the Takayama version), "Monetary Economics" (using the Walsh version) and other theoretical courses, "Commercial Bank Management" (using my own lecture notes based on my work experience in commercial banks, referring to the Zeng Kanglin version), "Credit Risk Management" (using the Colquitt version) and other practical courses, and another 15 years in central banks, forex management departments, Commercial banks and capital market institutions are engaged in policy formulation and management. A lingering intuitive feeling is that there is always an insurmountable gap between the teaching of monetary economics and the practice of monetary and financial policy. Of course, when I teach, I teach students according to the textbook; When conducting research on monetary policy and financial stability, as well as providing advice on policy implementation, he makes operational recommendations based on the experience of policy rules. However, on that evening in August 2020, I resolved to dedicate perhaps 10 years to bridging the gap between theory and reality.

It takes courage to make this decision. On the one hand, the opposition to the theoretical research involving framework reconstruction is not just one or two individuals, but several generations or even dozens of generations of scholars in my respected "Monetary Economics Handbook" that I have been closely associated with in Beijing, Shenzhen, Chengdu, and Guangzhou. This makes me doubt whether I really have the real conditions to seek the truth of the monetary world. On the other hand, the most opportunistic approach in scientific thinking is to "give a counterexample" to overturn existing theorems, but it is much more difficult to create a new framework of understanding. This is why I have a high respect for Wray's "Modern Money Theory" (MMT) in 2012. Just as Keynes said in 1936, "The thoughts of economists or political philosophers, whether right or wrong, are more powerful than people usually believe." Therefore, the critique of monetary economics that I adhere to should actually be a creation of a framework, rather than a sentence that negates a framework.

The question that arises is, if there is a real gap between theory and reality, is it the theory wrong, or is our understanding of reality wrong? This involves a discussion at the epistemological level. On the one hand, rightly or wrongly, I have always believed that theory can only be a subjective understanding of reality. In other words, there is no question of right or wrong in reality, only objective facts. Therefore, if a theory does not reflect the facts, then it is only the theory that needs to be amended. On the other hand, rightly or wrongly, I have always believed that the explanatory power of theories is limited in time and space. For example, the study of seigniorage is only because in the era of metal money, the production function of money was almost completely different from that of other sectors of the national economy, so in the sense of property rights, any additional issuance of money means that the government increases the purchasing power out of thin air, which also dilutes the purchasing power of the money in circulation, thus forming a de facto "tax". However, under the current "central bank-commercial bank" monetary issuance system, monetary issuance is actually a subsidy to the financial institution and the borrower, and as long as the government is not the debtor, it will not receive any tax revenue in the process. I use this example because, as a faculty member, I've found that quite a few of the theoretical arguments from money, money demand, money supply, monetary policy, and world money are actually stuck in the metal money period that we humans have experienced—including the well-known theory of "The Impossible Trinity" or Mundellian Trilemma.

The monetary economy we are in is growing, and any rigid thinking like looking for a sword at the place the boat was docked will hit a wall in the face of rapid changes in reality. It's like my daughter, who is now in the prime of her youth, compared to the emotional and obedient little girl of 10 years ago, she has irreversible and disruptive changes in growth - although still gentle and unrestrained, but since she started studying, she has added the quality of rational and independent thinking. My sigh is that I can no longer understand and interact with her in the same way as before. Similarly, perhaps we can no longer fully understand and participate in or influence the current monetary economy with the same model.

Despite, in name, she is still her; in definition, currency is still currency.

The theories in the past were not wrong in the historical context of the past, what we need is a mindset of continuously iterating theories with the changes of the times.

"Monetary Theory: monetary policy and central banks (Volume 2)"

Generally speaking, the thinking process is from the surface to the inside; the presentation of ideas is from the inside out.

I think this is the usual method for all theoretical research. Specifically, we are often motivated to conduct research by specific events, but when writing papers, we often first describe general theories and then use specific events as empirical evidence. My research with Dr. Liu Xue is no exception. In most cases, we always discuss and even argue around interesting facts rather than dry mathematical research. Of course, as a teacher, I inevitably end the argument in a high-pressure manner. However, in the presentation of the three volumes of 'The Theory of Money,' what readers see is model derivation and a series of theorem systems. Here, we apologize deeply. Mathematics may not necessarily be the best form of expressing viewpoints, but at least for now, language still has a relatively large space for free interpretation and taking what is needed. Mathematics is the best means to avoid ambiguity and maintain logical consistency.

The presentation of the problem is always from the outside to the inside, such as the famous apple on the surface, while the internal essence is the universal gravitation. According to my original research, the impact of the apple in August 2020 was only a 'significant point of issuance of currency, in fact, countries are doing so. Moreover, currency point shaving has led to a bull market, and everyone is very happy.' For me, this is a frustrating thing: under the impact of the epidemic, trade, investment, and consumption have all shrunk, and the only bright spot in the world is the issuance of currency and the soaring asset prices! In any case, the above-mentioned significant impact is overturning the monetary economic principles I have believed in for many years. However, by studying the above-mentioned phenomena at a rational level, I quickly discovered three very specific theoretical problems: First, if we want to determine that currency will cause a bull market in the asset market, then we need to first clarify how currency enters the asset market, or in other words, why it is certain that currency lacks the initiative to enter the real economy. Second, if the increase in currency can drive and only drive the pump of asset prices, then it must be irrelevant to output and inflation. How should such a currency effect be defined? Whether the existing monetary policy rules are malfunctioning and how they should be corrected. Third, if the central bank can be bottomless, and currency issuance can be unlimited, then currency is likely to be replaced by other general equivalents - such as the current digital assets with fluctuating market caps and stable coins. Is this really the case? As someone who has been engaged in research at central banks for a long time, the intuitive idea that comes to mind is that the urgent problem facing major developed economies is to 'rescue central banks from the hands of central bankers.' Although this train of thought is by no means the current central bank digital money (CBDC), because I believe CBDC has no institutional significance in changing the currency increment, is there a form of digital money that can overcome various impacts of digital assets, achieve stable coin effects, and maintain the existence of sovereign currency (solving the problem of the currency unification of the euro but fiscal decentralization)?

So, the surface phenomena targeted by our three-volume 'Currency Theory' and the fundamental real problems explored thereby are actually the three phenomenal impacts mentioned above. This is also the reason why we conduct parallel studies in three volumes. The three volumes respectively address three basic issues - the first volume 'Currency and Currency Circulation' attempts to explain how currency circulates; the second volume 'monetary policy and central banks' attempts to explain how monetary policy works and how monetary policy rules should be revised; the third volume 'World Currency in the Digital Age' attempts to propose ideas for how sovereign currency should deal with the competition from non-sovereign digital assets and Super-sovereign Reserve Currency.

Monetary Theory: Money and Monetary Circulation (Volume 1)

The first question: Where does the currency ultimately flow? The explanation of this question determines how we truly understand the currency and the circulation of currency. Our discussion found that this is the most serious disconnect between currency theory and the real world.

The first manifestation is the superposition state of deviating from reality and going to the virtual. Almost all studies rashly define the service industry based on the financial market as "virtual", and define the primary industry, manufacturing industry, and other service industries as "real". In fact, any enterprise or individual may have a combination of virtual and real. For example, the balance sheet and income statement of a certain enterprise may simultaneously include the formation of own productive capital and investment in other non-productive related assets and their returns. For example, even if someone purchases a house for self-occupation, he indeed gains or loses floating profits or losses caused by the rise and fall of real estate market cap. For example, the value added of the financial services industry may come from both services and asset-liability matching, as well as arbitrage self-operated. Therefore, the essence of the problem lies not in the binary division of virtual and real, but in whether there is an arbitrage incentive in the monetary circulation of an economic entity.

The second manifestation is the superposition state of the currency increment. There is almost a partisan debate on whether the rise in money only causes inflation, or whether it also drives economic growth while causing inflation, that is, how the nominal and actual effects of the rise in money are. This is a problem that both the classical school and actual policy operations have been facing - although all parties believe that the increase in money does not necessarily lead to a rise in output, in the real world, economic downturns are generally accompanied by the expansion of exogenous money. Therefore, the essence of the problem lies not in the neutrality of money and the non-neutral dichotomy, but in the time length of the monetary authorities' measurement of monetary effects and the time length at which the impact of the monetary increment is discounted - short-term non-neutrality and long-term superposition of neutrality.

The third manifestation is the role of Financial Intermediary in the supply and demand of money. Almost all textbooks on macroeconomics and monetary economics only use Financial Intermediary as a bridge between savings and investment, while cutting-edge research is based on microeconomics, focusing on the information symmetry, intertemporal pricing, and the game between borrowers and financial institutions to do extremely complex mathematical research. Implicit in these studies is the assumption that Financial Intermediary is irrelevant at the macro level – it is merely a bridge and a screening mechanism. The conclusion from this is that if the problem of information asymmetry in the digital age is fundamentally solved, then "saving-investment" can be automatically matched by big data (we can think of it as a computer host with supercomputing power), which can explain the rise of Internet finance in the world. The problem is that there is a fundamental flaw in the assumption that Financial Intermediary is backed not only by the public, but also by central banks, with pools of assets that can easily be subsidized across time and across asset classes. Therefore, Financial Intermediary is not a weighted average of the credit of socio-economic agents (if so, then Financial Intermediary is irrelevant, it is only engaged in technical activities such as matchmaking), but an independent industry with a higher credit level than socio-economic agents. The groundbreaking conclusion from this is that the Financial Intermediary is the demander of money, while the public is the regular money supplier, and the central bank is the backup money supplier.

The fourth manifestation is currency trading. Since Ricardo and Malthus, too many scholars have sought inspiration in the exchange between money and commodities. Since money is a special commodity, it should be included in utility functions, such as the model proposed by Sidrauski (1967). This chaotic cognition was only broken when geniuses like Debreu and Arrow discovered that money did not need to exist in an economy with a perfect futures trading market (see Chapter 1 of Volume 1 of the 'Handbook of Monetary Economics'). In the process of discussing with my doctoral students (mainly from central banks, banking regulatory authorities, and Financial Intermediary institutions), I made a bold conjecture - if we don't need to think about the problem so complicatedly, and simply treat money as an institutional reality, can we limit the truly meaningful currency transactions? In their puzzled expressions, I said, what if we try to define currency transactions as transactions between currencies? How would everything change? They immediately understood - currency trading is intertemporal transactions of the same currency, as well as spot transactions of different currencies. Everything falls into place, and monetary theory is bound to become more in line with the real world.

The second question: What role does monetary policy play? This question is based on Dr. Liu and my review of the policies of the Bank of Japan in the 1990s and the Federal Reserve and the European Central Bank after 2008. The issues discussed include, but are not limited to: in 1990, whether the policy of raising the rediscount rate implemented by the then-called "Heisei Devil" Koshi Miyano was correct; in 2008, whether Bernanke and Paulson’s decision not to rescue Lehman Brothers but to rescue AIG was optimal; in 2020, whether the actual effects of the Fed's average inflation target and unlimited quantitative easing policy on the economy have been evident. Our discussion can be said to be full of gunpowder - as a teacher, it was difficult for me to persuade my students as collaborators. This is because, once we entered the field of disruptive discussion, the argument between teacher and student was not so much about "common sense" of monetary economics as it was about the conflict between our inherent "common sense" and a series of "phenomena" that did not conform to common sense. Many times, I could only use my authority as a teacher to persuade my students. The sigh of relief is that we have reached Consensus on many issues.

The first Consensus is the monetary policy transmission mechanism. Our 'common sense' believes that the monetary policy transmission mechanism naturally operates in a 'top-down' state. Therefore, when we think the policy is correct, if the final effect deviates from the original intention of the policy, we often conclude that the monetary policy transmission mechanism is not smooth. In this regard, my question to the students is: Is the central bank primarily a direct participant in the Depth of the monetary economy, or a supervisor and corrector? Obviously, the main role played by the central bank is the latter. Therefore, the so-called monetary policy transmission mechanism must necessarily have a 'bottom-up' nature, that is, the main functions of currency transactions and currency creation rely on the credit creation of Financial Intermediaries. The central bank will only take action when it discovers obstacles in currency transactions (such as a money shortage or asset shortage). Therefore, the monetary policy transmission mechanism is mostly a combination of 'bottom-up' and occasionally 'top-down'.

The second Consensus is the super neutrality of monetary policy. Countries around the world are following the rise in currency and debt levels after the 2008 global financial crisis. If the main driving force behind the rise in currency is the central bank's basic currency issuance, can we logically consider the central bank as the initiator of asset bubble? Originally, our debate was about the binary classification of the neutrality and non-neutrality of monetary policy. When I repeatedly emphasized that 'any model deduction must conform to the real-world operation of money', we reached a consensus: in addition to the Neutrality of Money and the non-neutral superposition state, there is another form of monetary policy - the super neutrality of currency increment. That is, if the real economy has already achieved optimal currency allocation, any change in currency increment caused by monetary policy will neither cause output changes (i.e., no real effects) nor cause price changes (i.e., no nominal effects), but only cause asset price changes (due to lack of better definition, we can only give the concept of 'super neutrality').

The third Consensus is the upper and lower limit of the central bank's balance sheet. After the 2008 financial crisis, the Federal Reserve and the European Central Bank successively implemented quantitative easing and unconventional monetary policies. Since 2020, central banks around the world have once again implemented balance sheet expansion. Our debate is: Is there a possibility of perpetual expansion of the central bank's balance sheet? Mr. Satoshi Nakamoto, the founder of the central bank, seems to have seized the soft spot of balance sheet expansion - someday, excessive issuance of currency will lead the central bank to its demise. It cannot be denied that this is a simple and consistent understanding of the law of supply and demand. My concern is whether there will be a situation where, on the one hand, currency-driven asset bubble formation will undermine the value of the currency itself, and on the other hand, the increasing cost of specific assets (such as digital assets) will lead them to their own opposite, lacking the liquidity that a general equivalent should have (that is, being hoarded rather than circulated, which is the fate of precious metals exiting the currency). So, returning to the fundamental question, can the central bank's balance sheet really expand indefinitely? Our answer is that the central bank's balance sheet has upper and lower limits. The lower limit is the capital stock change required by the gap between potential economic rise and actual rise, that is, the difference between residents' deposit currency and the credit increment required for capital formation. The upper limit is determined by the central bank's last lender rule and should be equal to the difference between bad debts of the Financial Intermediary system and bank capital.

The fourth consensus is that macroprudential management cannot be independent of monetary policy. Since Borio (2003) systematically put forward the basic idea of macro-prudential management, an important pillar of financial stability has been added in addition to monetary policy and micro-prudential supervision, which basically means that the central bank and financial regulators should implement special management of the pro-cyclical behavior of systemically important financial institutions and financial resource allocation. Since I have been almost obsessed with macroprudential management research for the past seven or eight years, and have been particularly convinced of the necessity of "too big to fail" regulations in the past 20 years because of my follow-up to the development of large banks and their crises in Japan and South Korea, at least two of my PhD students have used this as a thesis topic. However, in our discussion with Dr. Xue, we quickly reached a consensus on central bank practices from 2008 to 2020: in the 21st century, the main problem facing monetary authorities is no longer the "too big to fail" of institutions, but the "too high to fall" of deeper financial assets. The original concept of financial stability was based on the mutual asset-liability connection between financial institutions, so the liquidity problem of large institutions often has a fatal impact on the stability of the overall financial system. However, with the "simplification" and "homogenization" of the assets held by all financial institutions, such as bonds and real estate collateral, the impact of asset price fluctuation on all financial institutions is the same. Well, fundamental prices such as the Intrerest Rate and the Exchange Rate – or, ultimately, the Intrerest Rate, if the Intrerest Rate determines the Exchange Rate to a large extent, then it has a decisive impact on systemic risk. Therefore, in the end, all macro-prudential management cannot exist independently of monetary policy. In terms of macro-prudential management tools, the "loan-to-value (LTV"), which has been in the exploratory stage for many years, is likely to fall into the paradox of soft constraints, like the capital adequacy ratio of microprudential regulation: if asset prices are constantly pushed higher by money, loans can of course be higher; If the price of an asset is artificially capped, it will lead to the dilemma of lack of evidence for pricing. Similarly, a financial institution is likely to replenish its capital without reducing its assets during the asset inflation phase. As a result, two seemingly hard constraints can actually become boosters of bubbles and credit risk. In fact, the practice of various countries has fully proved that the above-mentioned phenomenon is not a subjective conjecture, but a fact that is happening. As we discussed this issue, Dr. Liu and I looked at each other with a wry smile – the theory of human financial stability may still be groping in the dark. The simple way to get back to basics, then, may only be that, at least for the foreseeable future, monetary policy will remain the only realistic remedy for financial stability.

The fifth Consensus is that the fiscal and monetary authorities act as special purpose vehicles (SPVs). Since the birth of MMT, the relationship between fiscal and monetary policies has once again become a hot topic. In this discussion, Dr. Liu and I have found that although it is difficult to abandon inherent ideas, we must first do one thing - a complete empirical rather than normative approach. So, the question evolves into - what is the actual relationship between central banks and fiscal authorities in the real world? Our Consensus is that both sides act as SPVs. On the one hand, fiscal policy treats the central bank as an SPV. Although the original buyers of government bonds and municipal bonds are financial intermediaries, the central bank, driven by liquidity management requirements, will conduct repurchase operations as high-grade government bonds, so in essence, the important partner or SPV of fiscal revenue and expenditure is the central bank. In the debate, we also formed a Consensus: in the modern economic system, money issuance no longer has the characteristics of seigniorage. This is because the production function of money issuance is completely different from the real production function possessed during the traditional metal currency era. The money in the traditional metal currency era is an asset, and once formed, it belongs to the government, thus forming the seigniorage of purchasing power. In the modern sovereign currency era, money issuance is likely to be a subsidy to asset holders, thus having a distinct transfer payment effect.

The sixth Consensus is the monetary policy rule. If, as we have argued, the monetary increment is both neutral and non-neutral, and under certain conditions, it is also super-neutral, then the ultimate goal, intermediate goal, and Money Supply rule of the monetary policy need to be revised. From the perspective of the ultimate goal, the monetary policy should focus on the value added excluding the financial sector. From the perspective of the intermediate goal, the monetary policy should focus on a basket of price stability, including the PPI (Producer Price Index), CPI (Consumer Price Index), and all financial assets with financial attributes. From the perspective of the monetary policy rule, we really need to reevaluate the effectiveness and limitations of the Friedman rule and Taylor rule, and perhaps also need to set new and simple Liquidity management rules - for example, the Broad Money growth rate = growth rate of value added excluding the financial sector + friction coefficient; the growth amount of base money = the increase in commercial bank credit loans - the increase in residents' savings deposits. We will use models to simulate the monetary policy choices before and after major crises in 1991, 1997, and 2008.

Third question: As countries gradually enter the digital economic era, what is the stability and evolution direction of the world currency coin? The difficulty in addressing this question far exceeds the previous two. This is because, for the first two questions, my debate with Dr. Liu is based on one consensus - what is the fact and whether our interpretation conforms to the real world? However, in this question, the element of speculation or even gambling has increased dramatically, so we need to be particularly careful in the analysis method, and any deductive reasoning instead of factual induction may be completely inconsistent with the future real world due to the omission of important independent variables. In the field of currency economics prediction and practice, there are two highly respected individuals - the recently deceased Robert Mundell and the mysterious Satoshi Nakamoto. The former insisted throughout his life that exchange is a redundant transaction cost concept, and experienced the practice of a single currency zone theory in the euro zone, but it is difficult to achieve dollarization utopia. The latter watched his own creation, BTC (Bitcoin), evolve into an extremely expensive digital asset. Currently, the energy consumed annually for mining the last 2 million coins is enough for hundreds of millions of people to use for more than a year. According to the marginal cost pricing method, the closer BTC is to an asset, the further away it is from widely circulating currency coins. So, what might the world currency coin (or world currency coin system) in the digital age look like? My students and I have made the following speculations.

Before forming a hypothesis, it is essential to emphasize a basic premise - the digital age. The digitization process systematically reduces the high Transaction Cost of the non-digital age, even dropping to zero. With this premise, many instantaneous transactions that were impossible to achieve in the era of manual calculation become possible. This is the basis of our hypothesis.

The first hypothesis is the non-existence of the 'Trilemma of the World Currency' as a sovereign currency acting as the world currency. Of course, the 'spillover effect' that follows will also cease to exist. This is because in the real world, the world currency definitely has a return investment market. In other words, all forex reserves and sovereign wealth fund holders' so-called forex book assets exist in the form of currency assets in the offshore market. In any form, in a fully arbitrage market, it will affect the supply of the currency or the interest rate. Therefore, the central bank of the currency issuing country actually faces global currency demand, not domestic currency demand. Hence, there is no conflict between the so-called monetary policy autonomy and the free flow of capital.

The second hypothesis is that the world's currency coin is a treaty of the sovereign currency coin authorities, or a Super-sovereign Reserve Currency. The core of Libra's concept is "Stable Coin". Therefore, the experiment with my students is based on free trade and investment agreements, designing a digital Stable Coin based on floating shares and calculated Exchange Rate between contracting countries using artificial intelligence (AI) Algorithm. Both sovereign currency coin and super-sovereign Stable Coin can be settled and cleared in the interbank market, central bank balance sheets, and retail transactions between household and corporate sectors. This is not a difficult problem in a technical sense. As early as 10 years ago, when I traveled abroad, I could choose to pay with my bank card in RMB, USD, or EUR. A Currency basket has smaller fluctuations compared to a single currency coin, which is advantageous for cross-border investment and trade. Of course, this Stable Coin mechanism is different from the Euro, as it does not eliminate the sovereign currency coins of each country, and therefore does not affect the autonomy of the currency coin policy. However, our Algorithm will automatically convert the issuance of any participating country's currency coin into a weight (theoretically, it can fluctuate between 0-100%, with 0 meaning automatic exclusion and 100% meaning that the participating country has actually implemented a currency coin system), so the currency coin basket weight is variable. This may also constitute a disciplinary constraint on the issuance of currency coins in various countries. From the current situation of free trade agreements, it is very likely that one or more Super-sovereign Reserve Currencies will emerge globally, and new currency coin basket combinations can be formed on the basis of Super-sovereign Reserve Currencies.

The third conjecture is the transformation of the Super-sovereign Reserve Currency on the financial market. If a Super-sovereign Reserve Currency in the form of a treaty, with freedom of entry and exit, transparent algorithms, and exchange rate calculations really emerges, then the financial markets across time zones can achieve infinite continuous trading of the same underlying asset based on the same stablecoin. At this time, a listed company or a bond issuer will have complete equivalence in financing in different markets. At that time, there will be no world currency competition between sovereign currencies, nor will there be erosion of the status of sovereign currencies by private digital money. The so-called forex reserves, in terms of currency, are a basket of sovereign currencies with floating weights.

Guesses are always guesses. However, there are instances in the history of human currency that have turned guesses into reality. The establishment of the Bretton Woods System and the International Monetary Fund is a result of such guesses. When we make guesses, I always remind myself and my students with Keynes' (1936) quote - 'Some wild guesses seem to be imaginative and divine. However, their core ideas are nothing more than the thoughts of an unknown economist hundreds of years ago.' Currently, digital assets are following the path of the gold standard, and the concept of stablecoins is nothing more than a practical expression of the optimal currency area theory in a 'soft version.' Our ideas may not be more brilliant than the White Plan of 1945, just because in the digital age, old wine has been given a new label.

I have to admit, many things have become different from the original idea as they are done, and many people have grown old while working. Our original intention of writing was only to discuss a certain stage of monetary policy and its subsequent effects, but it has evolved into a three-volume 'Monetary Theory'.

Our understanding of the currency cycle, monetary policy, and the evolution of world currencies deepens our understanding of the real-world monetary economy. The monetary economy has never reached a state of 'perfection', and general equilibrium remains only in our imagination or expectations. Every institutional evolution aimed at addressing 'imperfections' usually triggers new problems while solving existing ones, whether it's the collateral arrangements intended to enhance the safety of financial intermediaries, the macroprudential regulation intended to curb systemic risks, or the world currency system intended to reduce exchange costs. From a time series perspective, this is inevitable. As an optimist, neither I nor my students have any intention of denying any existing path of currency evolution. Our efforts aim to illustrate that any monetary theory and optimization thinking have flaws, and our ideas are no exception, and may become outdated in the future.

Two thousand years ago, the historian Sima Qian's "Letter to Ren Shaoqing" gave the highest realm of thought for thinkers—investigating the relationship between heaven and humanity, understanding the changes of the past and present, and forming a unified theory. My students and I aspire not to such lofty and distant ultimate ideals, but simply hope that "Currency Theory" can interpret the operation of real currency and serve as a handbook for senior undergraduate students majoring in economics and graduate students studying monetary economics. Therefore, these three volumes do not rely on a ready-made theory to explain the special currency phenomena brought about by a certain country or a specific currency tool. Instead, they present the external manifestations and internal logic that every economic entity facing the inevitable phenomenon of "currency" must confront. In these three volumes, readers will not find any specificity related to national conditions, indirect financing or dominant direct financing, developing countries or developed economies. What we present is simply a general theory. Obviously, this analytical framework may not necessarily conform to the history of currency evolution, may not satisfy all logical conditions, may not align with the future world of currency circulation, and certainly cannot be applied to extremely unique circumstances, but it should conform to the general state of real-world currency operation that I have observed in my thirty years of theoretical research and practical work in the field of money.

The inadequacy of theory prompts people to think. Borrowing the question posed by Kydland and Prescott (1996) as the motivation for the entire volume of writing: "The way to test a theory is to see if the model economy it constructs can simulate some aspects of the real world. Perhaps the greatest test for a theory is whether its predictions can be proven by reality - that is, when a certain policy is chosen, whether the real economy will behave as predicted in the model economy."

Economists without a historical perspective lack foresight, and theories without practical explanatory power lack vitality. That's all.