Transcript Financial Wealth Creation Via Currency Unification

Financial Wealth Creation Via
Currency Unification
John C. Edmunds
John E. Marthinsen
Bretton Woods, July 9, 2004
Financial Assets and Annual Output
• The IMF estimates that world financial
assets were worth $106 trillion as of 2002.
World GDP for the same year was $32
trillion.
• The debate about currency unification has
centered on what effect unification would
have on current output and employment,
not on the effect on the market value of
the world’s capital stock.
The World’s Capital Stock
• We estimate that the world stock of capital
assets is worth, at current market prices,
approximately $150 to $200 trillion. These
capital assets include real estate,
businesses, intellectual property, and
mineral resources.
• The market values of many capital assets
are depressed because of currency risk.
Currency Risk
• When the market prices a capital asset, it
uses a discount rate. This rate consists of
several components. Two of these are to
take into account the risk of devaluation
and the risk of inflation.
• If there is a single global currency,
devaluation ceases to be possible, and
there would be only one inflation rate for
the entire world.
Windfall Gains to Owners of Capital
Assets
• When the currencies of Europe unified to
create the euro, owners of long-term
Spanish and Italian government bonds
benefited. So did owners of other assets
that had quickly became much more
valuable.
• Windfall gains can happen again.
Windfall Gains, 2
• The possible magnitude of the windfall gains
that currency unification can deliver would,
according to our calculations, outweigh the costs
associated with giving up national monetary
autonomy.
• For example, GDP of the emerging countries
was $7.4 trillion in 2002. The value of financial
assets in those countries was only $8.4 trillion.
Stock market capitalization of the emerging
countries was only $1.5 trillion.
Windfall Gains, 3
• If the emerging countries stopped issuing
local currencies and instead adopted a
single global currency, the market values
of capital assets in those countries would
rise, because currency risk would no
longer exist.
• Those countries could then attract new
inflows of financing and their growth rates
could rise.
Real Economic Growth
• In Wealth by Association, we present a
macroeconomic model that links increases
in the market prices of stocks and bonds
to real economic growth.
• According to our analysis, when countries
unify their currencies, their real growth
rates can rise. Over a period of years the
effects on indicators of economic wellbeing can be large.
Conclusion
• Many countries face the challenge of
country risk, and are seeking ways of
reducing it.
• One way of reducing currency risk is to
cede monetary authority and adopt a
single global currency.
• This policy can create gains and stimulate
economic growth.
Conclusion, 2
• As the amount of financial assets grows,
the negative effects that unilateral,
unexpected changes in monetary policy
can cause are becoming larger.
• Meanwhile the benefits to individual
countries of having their own national
currencies do not grow as fast.
Conclusion, 3
• We hope that our contribution to the
debate about currency unification
stimulates discussion and we are pleased
to have had this opportunity to present our
analytical framework.