european network academy of social movements miguel otero-iglesias, attac spain freiburg, 10 august...
TRANSCRIPT
European Network Academy of Social Movements
Miguel Otero-Iglesias, ATTAC SpainFreiburg, 10 August 2011
(Working Slides)
Understanding the Instabilities in the Flexible-Dollar-Standard
The Era of Bretton Woods (1944-1971)The International Monetary System (IMS) is
based on the dollar standard linked to goldThe dollar is fixed at $35 the ounce of goldThe rest of currencies are linked to the dollarTrade is promoted – Free current accountSpeculation and Exchange rate movements are
hindered: Capital Account controlsSince the 1960s the US is losing in
competitiveness and Europe and Japan start to catch up
Nonetheless, the US enjoys the ‘Exorbitant Privilege’
The Problem of the Triffin DilemmaThe US needs to run current account deficits to
provide the world with the necessary liquidityThe US is the demand pull in the IMSThis creates constant current account imbalances
between the US and its major creditor countriesThis undermines the credibility of the dollar in the
long runIn the 1970s it was mostly Europe (especially
Germany)In the 1980s it was JapanIn the 1990s, there is the emergence of the New
Economy and the US is able to regain competitiveness despite a strong dollar
In the 2000s the creditor is China
Monetary Power in ActionMonetary Power is the capacity to delay and deflect
the adjustment costs as much as possibleDelay means extending the time of adjustmentDeflecting means that when adjustment comes, the
monetary power is able to deflect some of the adjustment burden upon others
This is known as the ‘Dollar Weapon’You talk down the dollar, you introduce
expansionary monetary and fiscal policy, you ask others to appreciate and to implement expansionary fiscal policy
With Germany and with Japan the US had the upper hand because it provided the security umbrella
Exponential Growth in FX Reserves
GLOBAL FOREIGN EXCHANGE RESERVES ($m)
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
9,000,000
10,000,000Other developing
Mexico
Brazil
Algeria
Saudi Arabia
Russia
Other industrial
Australia
UK
Eurozone
US
Other Asia
Malaysia
Thailand
Hong Kong
Singapore
India
Korea
Taiwan
Japan
China
Who carries the adjustment cost?The US applies a policy of “benign neglect” in
relation to the dollarThe US tries to convince China to revalue its
currency as it did before with Germany and Japan
China does not give in and maintains a peg to the dollar until 2005, and reintroduces it in 2008
The hawkish attitude of the European Central Bank brings an appreciation bias to the euro
Europe is the only major trade player that has not an active policy in relation to its FX rate
Currency Wars Arrive to Brazil
POST-CRISIS REAL EXCHANGE RATES (JP Morgan)
80.0
90.0
100.0
110.0
120.0
130.0
140.0
150.0
Brazil Russia India China Turkey Indonesia Mexico
Current situation: “To put it crudely, the US wants to inflate
the rest of the world, while the latter is trying to deflate the US. The US must win, since it has infinite ammunition: there is no limit to the dollars the Federal Reserve can create. What needs to be discussed is the terms of the world’s surrender: the needed changes in nominal exchange rates and domestic policies around the world.” Martin Wolf, Financial Times, 12 October 2010
The main features of the FDSThe US is the main provider of liquidity and demand
pull of the system (first Bretton Woods, and then Bretton Woods II)
The system is inflationary in the good times and deflationary in recessions
In the FDS adjustment falls mainly on deficit countries, but the US who enjoys the exorbitant privilege
This asymmetry can be seen in the eurozone crisisThe rest is exposed, therefore there is the incentive
to be a surplus country (Germany, Japan, South East Asia, China)
Can we have a more stable IMS?
The Chinese Proposals to deal with the dollar overhang More use of the IMF SDRsInclusion of the Yuan/RMB in the SDR basketCreation of a Substitution Account in the IMFChina has proposed to create a managed
floating exchange rate regimeProblems:US unwilling to let its exorbitant privilege goUS demands flexible yuan, independent
central bank and opening of capital account (China will not accept)
Can the SDR without a political authority behind?
Do we need a world government?
Possible Future Scenarios?1) Increased competition between the Dollar,
the Euro and the Yuan (this can lead to major disruptions if transition not managed).
2) The US will press ahead with its exorbitant privilege, more quantitative easing (QE), more liquidity, more tensions and perhaps a return to a gold link or similar (uncertainty is widespread in the IMS)
3) The international community can move towards cooperation. SDRs as harbinger for a global currency a la Bancor. (The euro might provide useful lessons)
ConclusionThe FDS is structurally flawedThe Triffin Dilemma is the main cause of the instabilityThe US is the main source of demand but also the main
source of destabilising liquidity The growth in FX reserves is clear proof of this situationThe EZ has played by the rules (flexible exchange rate
and open capital account) and has carried most of the adjustment cost
A unipolar monetary system induces the hegemon to exploit it
A more coordinated and multilateral IMS could potentially be more stable