the coming global monetary disorder
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THE COMING GLOBAL MONETARY DISORDER. Benjamin J. Cohen University of California, Santa Barbara Remarks Prepared for presentation at the Fundación Rafael del Pino , Madrid, Spain, 19 May 2014. EXECUTIVE SUMMARY. - PowerPoint PPT PresentationTRANSCRIPT
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THE COMING GLOBAL MONETARY DISORDER
Benjamin J. Cohen
University of California, Santa Barbara
Remarks Prepared for presentation at the Fundación Rafael del Pino,
Madrid, Spain, 19 May 2014
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EXECUTIVE SUMMARY Question: What is the outlook for the international monetary system (IMS)?
Answer: More disorder (most likely scenario)
Why? A growing sense of complacency, due to –◦ Overestimation of economic recovery ◦ Underestimation of future risks
What can we do?◦ Strengthen commitment to growth◦ Promote greater policy cooperation
But can we do it?
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CAVEAT Not everyone is complacent
◦ IMF (“Global Agenda”, April): “The global recovery has strengthened but remains far from robust”◦ The Economist (May 10th)warns that we “still face testing times”◦ Christine Lagarde (May 12th) warns of “deceiving calm”
But the signs of growing complacency are evident◦ Capital is flowing back into European periphery; sovereign borrowing cost are dropping; spreads are
narrowing◦ Ireland and Portugal have made a “clean exit” from their bail-outs, forgoing the safety net of a
precautionary line of credit◦ Central banks are pulling back (US, UK) or standing pat (ECB)
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THE GOOD NEWS The economic recovery is gaining strength
◦ Latest forecasts (IMF):2013 2014 2015
◦ World 3.0 3.6 3.9◦ USA 1.9 2.8 3.0◦ Euro area -0.5 1.2 1.5
◦ Germany 0.5 1.7 1.8◦ France 0.3 1.0 1.5◦ Italy -1.9 0.6 1.1◦ Spain -1.2 0.9 1.0
◦ United Kingdom 1.8 2.9 2.5◦ Japan 1.5 1.4 1.0◦ China 7.7 7.5 7.3
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THE BAD NEWS Growth projections may be too optimistic
Even if accurate, they are hardly impressive◦ Global growth is still well below potential◦ GDP in most advanced economies is still below 2008◦ Unemployment is still very high◦ Threat of deflation (“lowflation”)◦ “Secular stagnation”?
Worst: they underestimate three major dangers in the IMS◦ Exchange rate instability (“currency wars”?)◦ Peak currency competition (dollar crisis?)◦ Erosion of monetary cooperation (breakdown of governance?)
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CURRENCY WARS? An old problem: temptation to manipulate exchange rates
In principle, outlawed by IMF Article IV, “firm” surveillance
In practice, surveillance is ineffectual; governments do what they want (“dirty floats”)◦ Direct intervention in the foreign-exchange market◦ Monetary policy (interest rates, money supply)◦ Capital controls
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WHY IS SURVEILLANCE INEFFECTIVE?
Motivations are difficult to assess: Is an ER movement the aim of policy or an incidental b-product? Examples:
◦ US: Federal Reserve’s QE2◦ Japan: “Abenomics”◦ China (and other Asian nations): reserve accumulations – insurance or ER manipulation?
State sovereignty: IMF has little real authority to enforce the rules
Result: danger of renewed currency war◦ Aggravated by sluggish recovery◦ In turn, retards recovery (inhibiting adjustment, increasing volatility and uncertainty )
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DOLLAR CRISIS? Central role of the US dollar: good or bad?
◦ Good: Stabilizing “hegemon”◦ Bad: Destabilizing monopolist (“exorbitant privilege”)◦ Answer: both (but more good than bad)
Trend toward a multi-currency system: good or bad?◦ Good: Would impose discipline on the US◦ Bad: Would provoke competition, destabilizing shifts of confidence◦ Answer: again both (more bad than good)
Real question: Are there any real challengers to the dollar?◦ Two possible candidates: euro and yuan (renminbi, RMB)◦ Answer: NO, BUT…
◦ Neither is a threat to the dollar at the global level◦ But each will challenge at the regional level (an “asymmetrical multipolar system”)◦ Challenge will be sufficient to threaten greater instability
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THE EURO Potential as an int’l currency remains unrealized.
Why? Flawed from the start – an asymmetrical distribution of authority (monetary centralization, fiscal decentralization) – hence no credible mechanism to deal with internal payments problems
Ideal solution: a “transfer union” (mutualization of risk) on model of US◦ Balanced budgets◦ Bail-out ban◦ Automatic transfers
European “solution” – combination of◦ Fiscal limits (Stability and Growth Pact, now Fiscal Compact)◦ Bail-out ban, now European Stability Mechanism (ESM)◦ But NO automatic transfers
Result: persistent crisis, anti-growth bias
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ANTI-GROWTH BIAS Without automatic transfers, each imbalance crisis must be negotiated
Adjustment pressures tend to fall on debtors◦ [Keynes: “the process of adjustment is compulsory for the debtor and voluntary for the creditor”]
Only choice: “internal devaluation” (austerity) – hence an anti-growth bias
In short, an updated version of the gold standard without gold – a “cross of euros.”
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IS THE EURO DOOMED? Neither success nor failure
◦ Centripetal force: commitment to union, fear of consequences of breakdown◦ Centrifugal force: imperatives of sovereignty◦ Result: an uneasy, untidy series of compromises, limiting the appeal of the euro as an alternative to the
dollar
Nevertheless, the euro will be a challenge to the dollar in its own neighborhood – a potentially destabilizing competition
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THE YUAN A serious rival to the dollar? Clearly a Chinese goal
China’s strategy (choice of goals)◦ Two tracks
◦ Trade (swap agreements, trade invoicing)◦ Finance (bank and bond markets in Hong Kong)
◦ Well conceived – stresses most important roles (trade, investment, reserves)
China’s statecraft (choice of means) – less well conceived◦ Until now, reliance on China’s growing economic weight (“gravitational pull”)◦ Missing: financial development; rule of law◦ Why? Inconsistent with Chinese political economy model (“Beijing Consensus”)
Conclusion: Will not be a serious threat to the dollar for a long time – but like the euro, will be a challenge to the dollar in China’s own neighborhood – a potentially destabilizing competition
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GOVERNANCE Basic requirement: A minimum degree of policy cooperation; impossible without –
◦ A consensus on basic principles◦ Effective leadership by dominant monetary powers◦ Neither seems evident today
IMF◦ Promising reforms were agreed in 2010◦ But implementation has been blocked by the US (specifically, Republicans)◦ Result: pressures by BRICS, others to move on without the US – IMF could split
Group of 20◦ Newly designated as the central locus of monetary governance◦ But few accomplishments◦ Reasons
◦ Lack of consensus◦ Few have been willing to take the responsibility to lead
◦ Result: drift, risk of rising policy conflict
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CONCLUSION No reason to be complacent
◦ Improvements have been overestimated◦ Risks are underestimated
High risk of growing monetary disorder
What can we do?◦ Strengthen commitment to growth◦ Promote greater policy cooperation
Easier said than done
Be prepared!