I was reading Calculated Risk, an awesome financial blog! I highly recommend everyone to point your news reader to it, like now.
Done?
Great.
If you clicked on Calculated Risk, it was pointing to this speech by Zhou Xiaochuan, the Chinese Central Bank Governor (link to the People’s Bank of China’s website). The gist of the speech says that the going forward the world needs a new International Reserve Currency, one that is managed by a reformed International Monetary Fund. Mr. Zhou argues that nation states can’t have two separate policies— protecting their domestic market or defending an international policy. He says nations will fail one or the other. It can’t have both.
On the surface, on a knee-jerk reaction, Mr. Zhou makes sense. Maybe in a perfect, orderly world it would work.
It has been tried before and has failed. Then there is also the question of the Euro and the survival of a pan-European economic system.
What do you think? Does the world need a new international reserve currency?
Popularity: 1% [?]
coy,
I’m no finance whiz, but my gut tells me that the global realpolitik that drives the financial system globally is what really stabilizes or unsettles the situation.
Me thinks this Chinese perspective, well argued as it is opens the question of what role China itself wants to play in a post Bretton Woods arrangement.
In like manner that China’s massive military buildup is threatening to spark a new world arms race, Id like to see how America, Russia, and the EU will react to the call for a new international reserve currency.
Do shate your perspective.
Does the world need a new international reserve currency?
Like a hole in the head. “The gist of the speech says that the going forward the world needs a new International Reserve Currency, one that is managed by a reformed International Monetary Fund” is a Keynesian wet-dream. In any case, the IMF has floated a trial balloon already:
(I think China knows that the America can’t make good on all the American debt they bought despite Hillary’s assurances.)
Erratum: “… do share…”
Mr. Cocoy the suggestion is exactly the same suggestion of a certain English person named J.M. Keynes during the deliberations for Bretton Woods I
Why do you not put the entire piece of the Chinese Central bank?
The U.S. refused the commodity basket based standard for an international currency in 1944. They wanted the dollar based gold standard.
They knew fully well that in times of economic stress gold was deflationary so everyone knew it to be so that the dollar became and still remains the de-facto international reserve system of the world except in China and India and other countries whose capital accounts are closed.
The aim of G-20 and the group led by Stiglitz to replace the G-&, G-20 with a U.N. council to oversee the international monetary system.
An international fiscal and monetary policeman.
Right now countries that do not have developed capital markets practice open current and capital accounts are financially colonized by the U.S. and are in essence semi-colonies.
(I think China knows that the America can’t make good on all the American debt they bought despite Hillary’s assurances.)Jeg
Why are the Chinese still buying up more U.S. debt?
Why are the Chinese still buying up more U.S. debt?
Gee, I dont know. Im in China right now and there were reports that PM Wen Jiabao was worried about the US paper they hold. If that’s what the Chinese leaders are saying in public, imagine what theyre saying in private.
Maybe they have a naive belief that the Yanks will make good on their papers even to the detriment of the American people.
Bullshit, just regularize the market. The safety valve should be forward-looking, like a rudimentary financial system not based on market thinking. This is an opportunity to come up with non-market-based economics. I’m sure Star Trek fans would agree.
I mean, regulate, not regularize.
Why are the Chinese buying more U.S> debt?
The Chinese are still not spending enough (imbalance of reserves) and capital is nowhere to go but the U.S.: not Europe, not Asia, not Africa.
Also, they have to keep lending to their biggest debtor para hindi ma-bankrupt. Otherwise, tangay lahat ny pera nila.
Read the last two paragraphs and understand the implications of what the IMF has done in the past.
UN panel calls for council to replace G20
By Harvey Morris at the United Nations
Published: March 22 2009 23:06 | Last updated: March 22 2009 23:06
The Group of 20 should be replaced by a new Global Economic Council, an advisory panel of senior international economists has said.
Under the panel’s proposals, the council, which would be a United Nations body, would become the main forum for setting the agenda for worldwide economic and financial policy.
The proposal, made by an 18-member UN commission headed by Joseph Stiglitz, the Nobel-prizewinning economist, will be raised at next week’s expanded G20 summit in London, at which heads of state will debate a global response to the world financial crisis. It is part of a draft 10-point plan put forward by the panel, appointed last October by the 192-member UN General Assembly, to study reform of international financial institutions, including the World Bank and International Monetary Fund. The team includes academics, central bank officials, and former and serving ministers from Japan, western Europe, Africa, Latin America and Asia.
The new UN body, which would be independent of the Security Council in which the main powers hold a veto, would have a membership of 20 to 25, Mr Stiglitz told the FT. The proposal goes to the general assembly this week.
The panel’s plan also proposes a new global reserve system that would provide support to developing countries on a regular basis and would not be subject to veto by industrialised countries that dominate existing international financial institutions, such as the IMF.
The plan calls for developed countries to set aside 1 per cent of their fiscal stimulus plans, in addition to existing foreign aid budgets, to spend in developing countries. “While the decision on stimulus is national, it should be judged on its global impacts,” the panel says in a draft document.
It also calls on advanced economies to abide by pledges to avoid protectionism “and . . . insure that stimulus packages and recovery programmes do not further distort the economic playing field and further increase global imbalances”.
The draft criticises “misguided policy recommendations” by institutions such as the IMF that have prevented developed countries from adopting the counter-cyclical stimulus policies being pursued by the developed countries.
The draft document says that a global response to the financial crisis “must encompass more than the G7 or G8 or G20, but the representatives of the entire planet, from the G192”.
Why are there so many stupid people around?
Since When Did China Get Worried About Losing Money on Its Dollar Investments?
The value of the dollar plunged by almost 50 percent against the euro in the years from 2002 to 2008 (it has since recovered part of these losses). China eagerly bought up U.S. government bonds during this period, even though it was consistently losing money on its investment.
This history makes its sudden expression of concern about losing money on its dollar holdings so peculiar. This public expression of concern presumably has a political motive rather than reflecting the actual views of Chinese leader, which would more typically be expressed privately to their counterparts in the United States.
The media should have pointed this history out to readers and noted how extraordinary it is that such a statement would be made in public. The public nature of the statement is the real news, not the supposed “worry” about the future value of their investments.
–Dean Baker
Why Is China’s Prime Minister Complaining About the Risk of Holding U.S. Government Bonds?
By all accounts China’s Prime Minister, Wen Jiabao, is an intelligent man. Therefore he knows that China will lose a substantial portion of its investment in U.S. Treasury bonds. This raises the question of why he is complaining about the risks in China’s holding of U.S. Treasury bonds, when he knows that there is no risk, the investment is a sure loser.
The loss will come for two reasons.
First, the United States is running a large trade deficit. The only way that this surplus can be sustained is if the Chinese government and other central banks continue to buy up ever more U.S. dollars, thereby preventing the currency from falling. If the Chinese government ever stops buying vast amounts of U.S. dollars, the dollar will fall in value against other currencies (as it did in the years 2002-2007) causing China large losses on its holdings.
But, this loss is China’s decision, not the result of U.S. government policy. As long as China wants to spend hundreds of billions of dollars each year propping up the dollar, it can prevent losses on its prior holdings due to a fall in the value of the dollar, but there would be no reason for Mr. Wen to complain about a policy that he or his successor will decide.
China will also lose money on its bonds because the interest rate on U.S. Treasury bonds will almost certainly rise as the economy recovers. The Congressional Budget Office projects that the yield on 10-year Treasury bonds will rise from 3.0 percent today to 4.8 percent in a few years. This would imply a loss of about 15 percent in the value of a 10-year Treasury bond.
For these reasons, Mr. Wen knows that China will lose money on its Treasury bond holdings. The news reporting on his comments should be asking why he is complaining about the risk of losses that he knows are virtually certain.
–Dean Baker
Good gravy, these experts. You can’t teach them anything about the real world outside academia.
Since When Did China Get Worried About Losing Money on Its Dollar Investments?
When Prime Minister Wen Jiabao said he was worried, that’s a pretty good indication.
J_AG,
i know. :D
on my blog post, i did mention that it (bretton woods) also failed.
as a matter of brevity, i thought everyone could simply click on the link to the chinese site. i didn’t want to waste space rehashing something that is perfectly available on the web.
If Bretton Woods have failed are the IMF and WB zombie multilateral institutions?
They do have their representative offices here in the Philippines. IMF in the BSP and WB in Pasig somewhere.
The Philippines state continues to be a card and dues paying member.
What do you mean it has failed?
Ding,
This is China flexing its muscles because, well… they have muscles right now. The same mindset that they’ve been evoking the past 10 years, given their African initiative, given their massive Armed forces, given their space programs, even the Olympics. This is China taking a bolder step into the wider world, more confident simply because they’ve got money.
The only thing I can see why they want a new international reserve is to rattle some cages with the Americans. it won’t happen because well, it has been done before and we know it failed. the Dollar looses its brilliance a bit, means America loses a bit of pride. heheh. nothing more, imho.
i don’t think it’ll happen. i’ve this gut feeling that going forward, we don’t need tighter regulation, but better monitoring capabilities first for the existing system. the US SEC can’t keep up with the private sector. They couldn’t see everything re the derivatives voodoo the financial institutions were doing. So that i think is part of the puzzle.
I think more than Keynes, the world needs a better understanding of Fisher and modern behavioral economics.
Mismo, coy.
Indeed I think the Chinese, and the Americans know they may sooner rather than later have a face-off in this part of the world.
Remember the recent mini-incident in the fishing waters of the Spratlys?
I am developing a separate piece on that but am still completing my research. Abangan, bro.
J_AG,
this:
Bretton Woods entry on wikipedia.
Ding,
I look forward to your post! :D
You come up with wikipedia to explain your thesis on Bretton Woods that it failed. But if it failed why was it not shut down in 1972?
Are those bureaucrats there getting tax free incomes for doing nothing?
History teaches us that all major parties to Bretton Woods agreed to this reformation of BW in the early part of 70′s. The Institutions are still alive as far as I know and you can go to both their web sites.
So the institutions are still functioning as far as I know.
Please explain your opinion on why you believe it has failed when it was reformatted by the same people who organized it.
Please check the Jamaica Agreement and the Smithsonian Agreement of the early 70′s.
It still exists in much the same way GATT then became the WTO.
Same question, why are people so stupid?
So far it has worked for the G-7 and not for the others.
I have to agree with our resident expert here, coy. BW didnt die. It mutated. We dont have a fixed-rate reserve anymore but a Friedmanite utopia of freely fluctuating competing currencies, but the soul of BW is still there: the control by Central Banks of the economy. The Keynesian dream is of a world central bank and a world currency and that is closer now than ever before. It’s a good time to apply for a job at the UN since theyll soon be making their own money out of nothing. But dont worry. Theyll allow a little bit to trickle down.
Not quite accurate JEG the Basel II program for banks worldwide made external oversight extinct and self regulation the order of the day following the neo-liberal framework of Friedman.
Plus the same ideology allowed outrageous leverage
“In 2004, the Securities and Exchange Commission, after hard lobbying by Wall Street, reversed its 1975 rule limiting investment banks to leverage of 15-to-1. The new limit could be as high as 40-to-1 if the investment banks’ own computer models said it was safe.” Jim Jubak
All those people who lost money in pre-need and Legacy have this prevailing mindset to thank.
Jeg, the illusion of printing money is more a contingent debt than anything else. If it works you will never have to physically monetize the whole though fiscal policy.
Confidence sometimes is much better than gold.
That is the role of Central Banks.
Here in the Philippines the fiscal agencies and monetary agencies are captured by the moneyed class. The handmaiden of capitalism is cronyism.
J_AG and Jeg,
BW was all about fixed currencies. The world as you clearly point out is all about free fluctuating currencies. Hasn’t been for sometime. On that point BW is a fail.
i also don’t dispute that you are correct, that IMF and WB have reinvented themselves and made themselves more significant after BW.
As for Central Banks having control, I don’t think we can remove that. Heck, when Alan Greenspan sneezed, the world used to shake in fear. Talk about being the most powerful institution in the world. In various degrees this power is mirrored in various countries’ central banks, right?
As for whether there should be a global central bank, it may come to that. In fact it may be the only logical way to prevent a similar crisis in the future but i don’t see that happening unless all member nations agree to the same set of laws. That means, more than the economy of individual nations are tied together. Call it, the EU-writ large. Also given the European experiment, a single global currency will face the same challenges as the EU is facing right now.
I also think that that a new international reserve currency is a mistake. i also agree with @bluewaterpro that it is “pointless”.
Heck, I think improving coordination, power and intelligence gathering by individual SECs can help, more than any additional “regulation”. I mean, they couldn’t keep up with $C, et.al., could they?
As for Central Banks having control, I don’t think we can remove that.
I reluctantly agree. Reluctantly because I dont trust central banks but there’s nothing we can do about it short of a full-scale popular uprising. We’re like addicts who need our fresh infusion of crack just to feel normal. Im basically a minarchist so any form of government, I view with suspicion. That’s where Im coming from as far as the economy is concerned.
The U.S. Dollar has been tarnished as a result
of the U.S. economic downturn. Pres. Obama is
printing U.S. Dollar as fast as the speed of
light, and spending it at the same rate.
So, the decline of the U.S. dollar is already
on they way. We cannot predict the future. But,
it seems we have not yet hit the bottom of the
economic fall.
I’m in favor of international reserve. This is a good idea. I don’t think America and Europe are amenable to this because it would take their influence of world economy away from them.
Renato Pacifico, it won’t happen. not in 10 years, not in 20 years. too complicated to move towards one. and second, even if it wasn’t complicated to do so… it would be a pointless endeavor.
the problem isn’t the US Dollar but the fact we don’t know how HUGE the toxic assets are. getting that waste out of the picture so people can start trading “more normally” would be what gets the ball rolling.
Cocoy once again you talk in riddles. A floating rate regime means full convertibility of a currency. A free float.
What most emerging markets practice are wide or narrow fixed trading bands. As long as a country does not allow full convertibility the country is still under the BW regime.
The Philippines practice managed floats with open capital accounts but not full convertibility.
You do not have to steal from the budget you can rig the BAP trading floor.
96% of all U.S. mortgages are being fully serviced.
So what is the problem?
Only 4% of total mortgages are in trouble….
What is the problem????
96% of all U.S. mortgages are being fully serviced.
So what is the problem
Hi J_AG. Are you saying there is no problem?
Will the G-7 now push the new world order under the multipolar world of the Euro and the Dollar and drown all other pretenders to the throne?
http://www.project-syndicate.org/commentary/kedar1
The Bourbons of Global Finance
by Howard Stein and Claudia Kedar
ANN ARBOR, MICHIGAN – Today’s International Monetary Fund (and, to a lesser degree, the World Bank) recall Talleyrand’s description of France’s Bourbon kings: it has learned nothing and forgotten nothing. At a time when rich countries like the United States are running deficits of 12% of GDP because of the global financial meltdown, the IMF has been telling countries like Latvia and Ukraine, which did not start the crisis but have turned to the Fund to help combat it, that they must balance their budgets if they want aid.
Such hypocrisy would be laughable if global economic conditions weren’t so dire that even countries that once swore never again to deal with the IMF have returned to its door, cap in hand. Some leading economists in Argentina justify this reversal by arguing that the world now has an “Obama IMF,” one presumably friendlier and more attuned to local problems than the “Bush Fund.” But, as the IMF programs for Latvia and Ukraine suggest, the main difference may only be a smile.
The Chinese won’t know what hit them.
The sentence starting with “The Chinese are mine”