… a new Bretton Woods-style system of managed international exchange rates, meaning central banks would be forced to intervene and either support or push down their currencies depending on how the rest of the world economy is behaving.
The proposals would also imply that surplus nations such as China and Germany should stimulate their economies further in order to cut their own imbalances, rather than, as in the present system, deficit nations such as the UK and US having to take the main burden of readjustment.
(The summary also ties in the financial crisis with global warming….).
Without having read the report, the explanation does not make a lot of sense to me. The article seems to suggest that imbalances between nations would be addressed by a central authority mandating the amount of inflation that must occur in each country.
In the present international monetary system, or “non-system” as James Grant refers to it, countries try to address, or more often, create, changes in purchasing power parity by inflating their own currency at a greater rate than that of their trading partners. The virtue of fixed exchange rates is that it imposes some discipline on the propensity of central banks to inflate. Imbalances in purchasing power parity between nations are corrected through trade in goods rather than money printing. Under the classical gold standard, the international price system coordinated the movement of gold and goods to accomplish this. It’s not clear how having a global authority mandate the amount of inflation in each nation would be an improvement over the current system, nor how that is compatible with fixed exchange rates.
Another problem with this proposal is the idea that surplus countries, e.g China, have surpluses because their economy is not sufficiently “stimulated” and that this could be fixed by more stimulus. The imbalances in China have been caused by their policy of pegging their currency below the market rate against the dollar. By doing this, they were in effect required to import the Fed’s inflation. Their capital structure became excessively mal-adjusted toward producing goods for export to American consumers. Domestic inflation, of which there has been plenty, could not move the exchange rate so it showed up entirely as asset bubbles. More stimulation (inflation) would only introduce more distortions in their domestic economy. What is needed is an exchange rate adjustment, something which would have been accomplished by an flow of gold from the US to China under the gold standard.
Some questions I have:
- What is the nature of the central authority that would mandate the amount of inflation in each country? A global central bank?
- The report talks about a single global currency but also about fixed exchange rates which only make sense if national currencies continued to exist. If national currencies still exist and trade at fixed exchange rates, then how does the global currency fit in? Would the national currencies have fixed parities against global currency?
- When the anchor currency was gold, redemption enforced the fixed ratios of national currencies against gold. Unless the global currency was a tradeable currency, what price mechanism would force the national currencies to maintain parity against the global currency?
- How would such a system avoid the problems that sunk the first Bretton Woods system, namely competing currency devaluations and excessive inflation of the anchor currency (which was the dollar)
- How is any of this an improvement over the classical gold standard with national currencies defined as fixed quantities of gold?
The report can be purchased from the United Nation’s Publications site. The price is, of course, in US$. Keeping with their socialist leanings, the price is variable depending on whether you live in the developed world ($55), a developing nation ($27.50), or a lesser-developed country ($13.75).