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From Brad Setser: Financial de-globalization, illustrated
Judging from the data on net flows, Bretton Woods II has in some sense come to an end. The world’s central banks are no longer building up reserves and thus are no longer a net source of financing to the US.
Via MoA, from Reuters on March 19: China backs talks on dollar as reserve -Russian source
Russia has proposed the creation of a new reserve currency, to be issued by international financial institutions, among other measures in the text of its proposals to the April G20 summit published last Monday.
Calls for a rethink of the dollar’s status as world’s sole benchmark currency come amid concerns about its long-term value as the U.S. Federal Reserve moved to pump more than a trillion dollars of new cash into the ailing economy late Wednesday.
Russia met representatives of China, India and Brazil ahead of the G20 finance ministers meeting last week, as the big emerging powers seek to up their influence on decisionmaking globally. Their first ever joint communique did not mention a new currency but the source said the issue was discussed.
"They (China) did not formally put forward their position for the G20 summit but unofficially they had distributed their paper regarding the same ideas (the need for the new currency)," the source told Reuters, speaking on condition of anonymity.
From The Commission of Experts of the President of the UN General Assembly on Reforms of the International Monetary and Financial System draft recommendations (March 20):
A New Global Reserve System
The global imbalances which played an important role in this crisis can only be addressed if there is a better way of dealing with international economic risks facing countries than the current system of accumulating international reserves. Indeed, the magnitude of this crisis and the inadequacy of international responses may motivate even further accumulations. Inappropriate responses by some international economic institutions in previous economic crises have contributed to the problem, making reforms of the kind described here all the more essential. To resolve this problem a new Global Reserve System—what may be viewed as a greatly expanded SDR, with regular or cyclically adjusted emissions calibrated to the size of reserve accumulations—could contribute to global stability, economic strength, and global equity. Currently, poor countries are lending to the rich reserve countries at low interest rates. The dangers of a single-country reserve system have long been recognized, as the accumulation of debt undermines confidence and stability. But a two (or three) country reserve system, to which the world seems to be moving, may be equally unstable. The new Global Reserve System is feasible, non-inflationary, and could be easily implemented, including in ways which mitigate the difficulties caused by asymmetric adjustment between surplus and deficit countries.
The draft recommendations are being presented to the UN General Assembly this week (I think). There are lots of other important recommendations, but reserve currency is a very big deal.
Today, via Calculated Risk, this report from the Financial Times: China calls for new reserve currency
China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.
In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said the goal would be to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies”.
Also via Calculated Risk, a link to the speech (english translation): Reform the International Monetary System:
The outbreak of the crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system.
Issuing countries of reserve currencies are constantly confronted with the dilemma between achieving their domestic monetary policy goals and meeting other countries’ demand for reserve currencies. On the one hand – the monetary authorities can not simply focus on domestic goals without carrying out their international responsibilities – on the other hand – they cannot pursue different domestic and international objectives at the same time. They may either fail to adequately meet the demand of a growing global economy for liquidity as they tries to ease inflation pressures at home, or create excess liquidity in the global markets by overly stimulating domestic demand. The Triffin Dilemma, i.e., the issuing countries of reserve currencies can not maintain the value of the reserve currencies while providing liquidity to the world, still exists.
When a national currency is used in pricing primary commodities, trade settlements and is adopted as a reserve currency globally, efforts of the monetary authority issuing such a currency to address its economic imbalances by adjusting exchange rate would be made in vain, as its currency serves as a benchmark for many other currencies. While benefiting from a widely accepted reserve currency, the globalization also suffers from the flaws of such a system. The frequency and increasing intensity of financial crises following the collapse of the Bretton Woods system suggests the costs of such a system to the world may have exceeded its benefits. The price is becoming increasingly higher, not only for the users, but also for the issuers of the reserve currencies. Although crisis may not necessarily be an intended result of the issuing authorities, it is an inevitable outcome of the institutional flaws.
The desirable goal of reforming the international monetary system, therefore, is to create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies.
It should be a gradual process that yields win-win results for all
The reestablishment of a new and widely accepted reserve currency with a stable valuation benchmark may take a long time. The creation of an international currency unit, based on the Keynesian proposal, is a bold initiative that requires extraordinary political vision and courage. In the short run, the international community, particularly the IMF, should at least recognize and face up to the risks resulting from the existing system, conduct regular monitoring and assessment and issue timely early warnings.
From bernhard at MoA: The U.S. Is Losing Its Reserve Currency Privilege
It will take a few years until a full fledged SDR based system will become functional. The U.S. and the UK will likely fight against this. The Euro based countries will mostly be indifferent. For China this is now a major official policy goal. With BRIC pressing for a new reserve system and support from others medium weight countries like South Korea and South Africa the new initiative has a lot of momentum.
So far the U.S. could borrow cheaply and pay back less in real value than the original loan. That privilege is now going away. The trillions the U.S. currently needs to borrow from abroad will have to be payed back in full. That is a major change in its global power status and will seriously decrease its influence in international policy questions.
I leave interpretation of these events and comments to the reader. The G20 is meeting April 2, we should know more soon
10 Comments
DIGG IS OPEN – - and recommended
I read last week that China had cautioned the U.S. about taking actions that would devalue the dollar. Now they move to replace the dollar as the benchmark for world currency.
Speaks rather loudly as to what they think of the Geithner/Paulson plan, IMHO.
if Obama does not broaden his scope to allow input from economists of the practical school of thought, IMO the disaster he will bring down upon us will make his problems of today look small.
Actually, it is Helicopter Ben Bernanke and his infamous printing press that they worry about.
He made a famous speech on how to deal with inflation in 2002 in whch he said that the way to deal with inflation is to print money. Per the Wikipedia:
Bernanke printed a trillion dollars at the end of 2008 and the Senate, especially Bernie Sanders, is still trying to find out what he did with it. And, now he has, or is about to, print another trillion or so. Apparently, he doen’t need anyone’s permission to do such things.
There two big problems with this printing-press tactic. The first is that in times of deflation, money is gaining value relative to everything else, so it pays to sit on it if you can. So, unless that freshly printed money is given to people who can’t/won’t sit on it, it does no good in terms of fighting deflation. (That effect is called a “liquidity trap.”)
The second is that the moment the deflation ends, those who are sitting on money will put it into circulation, thereby, causing inflation, which is what the Chinese are worried about.
Seems clear to me that the diarists and commenters here understand that the term ‘Geithner/Paulson Plan’ is an umbrella which covers all the clones and their Wall Street controllers. (yes, including Bernanke).
equals
Thanks.
Dugg and recommended.
Thanks selise.
Through its wanton and cavalier treatment of other nations and peoples, the U.S. has long since forfeited any moral right to such influence. OTOH, I’m not naive enough to imagine that what will take its place will be a whole lot better.
“It will take a few years until a full fledged SDR based system will become functional. The U.S. and the UK will likely fight against this.”——fight though they might, they will fail because their ‘houses’ are built of straw(debt).
The U.S. is the WORLD’s LARGEST debtor nation and the actions of the Fed and Treasury have assured that status will remain.
Yes, we are headed for a period of rapid inflation OR a replay of the Volker years where interest rates killed the economy(my first house I bought was a VA backed loan at 15 per cent APR).
Unless a single payer healthcare system is put into place AND the ‘Defense Department (including the DHS budget)’ budget is pared back by over 50 per cent, the latter part of the 20th century will be viewed as the U.S.’s “golden years” with everything after that being a ratcheting down of ‘empire’.
I won’t be around to see it but I ‘know’ such will occur. Humans keep forgetting history.
Thanks Selise,recommended.
i agree completely about how we’ve treated others and i also agree that any change in the global reserve system is not necessarily an improvement. what i’m not so sure about is where this will go (is this the beginning of a real change or will it lead to nothing at all?).
we could be showing some responsible leadership in supporting a better system (i’m impressed by what has come out of the UN commission) instead of whatever people in our gov think will maximize global power. of course, that doesn’t mean their policies will succeed even on that basis (see iraq war).
For me, an international reserve currency other than the dollar would entail something like an international central bank to oversee and run it and I don’t see the IMF as up to this. More than that it would need agreements on how economic development would be parcelled out in the world and I see the world as too fractured politically to come together to deal with some of the implications of this. There are iron laws of population, standard of living, and resources that we are already hitting up against. How would these be handled? I just don’t see nation states as willingly giving up that kind of power. True, this happens now in a de facto fashion but for the states themselves to make it official policy. No.
My take is that unbalanced globalization created imbalances in payments. This is why the poor developing export oriented countries started building up reserves which could only be cycled through the developed countries. But there were two catches to this. First, it helped create the unstable paper economy that has exploded on us. Second, even if there had not been the fraud and abuse in our financial markets that we have seen, there still would have been only limited options with dealing with these imbalances. The most important of these is the erosion of reserves through inflation. Even so, to fix the problem, there would need to be changes in the system in which the imbalances occurred.
This is why I am so cynical about countries like China and Russia getting religion now. Basically, they built up reserves on the upside of an export bubble. Now that bubble has burst, they want to put in a system that would guarantee that their gains keep most of their value.
China kept the yuan undervalued. This allowed it to spur export oriented economic development and build up a lot of reserves. But if the yuan had been allowed to appreciate against the dollar that development and reserve accumulation would have been slower.
I guess the point that I am making here is that sure our financial system pursued unstable and unsustainable activities but so did countries like China. Its leaders knew, or should have, that this arrangement couldn’t last. There had to be a re-equilibration at some point. Now they are acting all virtuous and surprised and I don’t buy it.
i’m sorry i didn’t see your comment earlier. guess i’ll just take your points in order:
the UN recommendations covers much more than reserve currency (which is only a very small part of it) and includes a few suggestions for reform of the IMF and WB (not a lot though since this is not the major focus). by no means do i think it is a perfect document, and of course the devil is in the details, but it’s the most comprehensive and sane statement i’ve seen from any source. of course, to maximize the benefits of such a change in the reserve system, we need better institutions – but why would that be necessary for such a change to occur? i completely disagree that international organization is now “de facto” – the last twenty or so years have seen, for example, the creation of the EU and the WTO. china’s entry into the WTO in 2001 was a very big deal. and with regards to development, the Doha Development round is hosted by the WTO. the IMF and WB are older, but they have both been very active. so i see a set of institutions, but they have not been managed responsibly (at least since the end of the cold war).
i have no idea what you are talking about in your second paragraph. why don’t you think that poor developing countries built up their reserves in order to try to protect themselves from external financial instability and from having to borrow from the IMF (and be subject to the accompanying conditionalities)? that is the only explanation i have every seen (would very much appreciate some suggestions to supplement my reading if i’m missing something here). as for the imbalances, what we’re seeing now is not an orderly unwinding, but something that is teetering on the brink of chaos. are you saying that an orderly, or less unorderly, unwinding was impossible?
wrt china. first, the same could be said about us: our gov wasn’t complaining about the cheap imports (probably because it made walmart, etc happy). second, and more important i think, is again why do you disagree with stiglitz re the reason china, and indeed asian countries in general, built up their reserves? (btw, a bit of an aside, here is an oped stiglitz wrote in july 2007 – 10 years after the asian crisis and 1 month before the start of ours. 10 years after the Asian crisis, we’re not out of the woods yet). almost all the policy space was all on our side – our leaders had options that china’s leaders did not. our financial system wasn’t just ours, it was the one we (and our
poodlesvassalsallies) were attempting to impose on the world. the chinese needed entry into the WTO far more than we needed them. seriously, what would you have had them do?finally on the issue of “acting virtuous” – again, i have no idea what you are referring to. could you give me a link or links? i look at zhou’s speech and i don’t see any references, even implicit ones, to his or china’s virtue. it seems quite a responsible speech focused on an alternative he says would work better than the current reserve system. however, i do read it as perhaps an implicit rejection of the american myth of our own goodness and wisdom. what really strikes me though is to compare zhou’s speech to obama’s 30 paper global oped. obama did have some good bits, but it is mostly talking points and the bad bits were very bad – narcissistic and dishonest. here are some that struck me (the last one is perhaps my favorite in up-is-down world):
this is not going to go over well with anyone who has been paying attention.