Transcript Bretton-Woods II

NS3040
Fall Term 2015
Issues With Bretton Woods II
Bretton Woods II Issues I
• Bretton Woods II is one way of describing the current
global financial system.
• Not a pure fixed exchange rate system like Bretton Woods I, but
many countries do maintain fixed rates
• Fact: no one is happy with the current system
• Three broad complaints
• First – the dominance of the dollar as a reserve currency
and America's management of it
• Bulk of foreign exchange transactions and reserves are in dollars
even though the US accounts for only 24% of global GDP
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Bretton Woods II Issues II
• Based on figures in chart, current system fails to reflect realities
of the world economy
• Finally it leaves others vulnerable to America’s domestic
monetary policy
• Second – system has fostered the creation of vast foreign
exchange reserves especially in emerging economies
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Bretton Woods II Issues III
• Global reserves increased from $1.3 trillion (5% of world
GDP in 1995 to $8.4 trillion (14%) by 2010
• Emerging economies hold two thirds of the total
• Most has been accumulated in the 2000s
• Huge reserves run counter to economic logic
• Mean poor countries which should have abundant investment
opportunities are lending cheaply to richer ones, mainly America
• Such lending helped create the 2008 financial crisis by pushing
down America’s long term interest rates
• Today with Americans saving rather than spending,
reducing global demand and recovery
• Third complaint: the scale and volatility of capital flows
• Financial crisis have become fore frequent in the past three
decades
• Emerging countries often have floods of capital or sudden
droughts – not best basis for long-term growth
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Bretton Woods II Issues IV
• Fundamental question: What improvements are feasible?
• Any monetary system will be constrained by the so-called
trilemma.
• If capital can flow across borders, countries must choose
between fixing their currencies and controlling their domestic
monetary system – cannot do both
• Classical 19th century gold standard – currencies tied to gold
• System collapsed because it allowed countries no monetary flexibility
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Bretton Woods II Issues V
•
In Bretton Woods regime currencies pegged to dollar which in
turn tied to gold
• Capital mobility limited so that countries had control over their
monetary conditions
•
• System collapsed in 1971 because US would not subordinate its
domestic policies to the gold link
Today’s system – no tie to gold or other anchor
• Contains a variety of exchange regimes and capital controls
• Capital controls were lifted three decades ago and financial markets are
highly integrated.
•
On paper emerging economy exchange regimes becoming more
flexible
• But most floats highly managed
• Most are export-oriented and need competitive exchange
• Countries don’t like to have their currencies strengthen when capital
flows in so they buy foreign exchange to stem tide builds up
reserves.
Bretton Woods II Issues VI
• Countries have also found that a strong reserve position
creates stability during times of uncertainty – Asian Crisis in
the late 1990s
• Question – what is a safe level of reserves?
• China’s are no doubt excessive
• The country’s behavior also affects others:
• Many emerging economies especially in Asia are reluctant to
risk their competitiveness by letting their currencies rise much
• Their currencies shadow the dollar creating Bretton Woods II
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Bretton Woods II Issues VII
• History Lessons
• Similarities between Bretton Woods II and the original Bretton
Woods mean many of today’s problems have historical
parallels
• Demand of emerging economies for dollars and fear that dollar
may lose it value – problem in Bretton Woods
• Triffin paradox – reserve country must issue lots of assets
(usually government bonds) to expand world liquidity
• But the more bonds it issues – more questions about
serviceability
• IMF estimates that at current rate of global reserve
accumulation global reserves would rise from
• 60% America’s GDP in 2010 to
• 200% in 2020 and
• 700% in 2035
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Bretton Woods II Issues VIII
• Possible Alternative Systems
• SDR
• Favored by China
• Would still be heavily weighted by dollar
• Not much of a SDR bond market – why hold them?
• IMF would have to be a World Central Bank – not much chance
countries would give up sovereignty to IMF
• China Yuan
• Country still has capital controls – limited bond market
• Currency not used much internationally
• System may evolve in this direction as dollar and British pound
did before dollar dominance – perhaps by 2030
• Greater role of IMF in providing reserves
• Countries would have a line of credit, so no need for large
reserves
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Bretton Woods II Issues IX
• Keynes idea of putting caps on balance of payments
surpluses and deficits
• Would force Asian countries to rebalance
• U.S. would have to increase savings, reduce government deficits
• Might eliminate need to maintain week currencies if economies
more diversified.
• What if countries ignore limits as in Europe?
• In sum – system will continue evolving with no formal
agreement in place -- unless a complete collapse occurs
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