Now, it’s up to the IMF to stop being a stooge of the West - and back Beijing’s proposal
By ANTHONY ROWLEY 26 March 2009
China is stepping out of the shadows to emerge not only as a major player on the international economic stage but also as a significant force in global policy debate. Its economy continues to grow at a robust pace while others wither, its counter-recessionary stimulus measures gain traction while others ‘spin wheels’, and now China is showing the way towards reform of the international monetary order.
People’s Bank of China (PBOC) governor Zhou Xiaochuan produced what can best be termed a ‘statesmanlike’ paper on the central bank’s website this week in which he called for a new international reserve currency to replace the US dollar in this role. Emerging nations that are members of the Group of 20 (G-20) would do well to support this call when the group meets in London next week for its summit.
Some will see this as self-serving on China’s part since it does hold the world’s largest foreign exchange reserves (some US$2 trillion) of which most are in the form of US dollar assets. And it is true that Beijing is worried - as are many others - about the future course of a currency that could be vulnerable to hyper-inflation.
Chinese Premier Wen Jiabao voiced precisely such concerns a few weeks ago.
But the reforms that Mr. Zhou is proposing are of potential benefit to far more countries than China alone, many of them in Asia - which is home collectively to the world’s largest forex reserves. Japan has a strong vested interest in the reforms that China is proposing but timidly avoids suggesting them for fear of offending a US that serves as Japan’s military protector and, therefore, overall patron.
Debate on monetary reform has until now been oddly lacking in the current crisis, amidst the millions of words uttered on the need for reform of financial institutions, regulatory regimes and economic systems. And, if the spirit of John Maynard Keynes has been frequently invoked in this debate, it has been in the context of the need for fiscal stimulus rather than the great economist’s proposals for monetary reform.
The global crisis admittedly originated in the US financial sector and was transmitted to the global real economy via the trade and investment route. But the more fundamental underlying question is why a monetary bubble developed in the first place in the US that led to the sub-prime crisis and related collapses in financial (and then real) asset prices. Here Mr. Zhou offered an interesting analysis.
‘Issuing countries of reserve currencies are constantly confronted with a dilemma between achieving domestic monetary policy goals and meeting other countries’ demand for reserve currencies,’ he wrote. ‘On the one hand, monetary authorities cannot simply focus on domestic goals without (heeding) their international responsibilities. On the other hand, they cannot pursue different domestic and international objectives at the same time. They may either fail to adequately meet the demand of the global economy for liquidity as they try to ease inflation pressures at home, or create excess liquidity in the global markets by overly stimulating domestic demand.’
In other words, if a reserve currency-issuing country raises interest rates in order to nip in the bud an incipient asset bubble, it raises the cost of using that currency for those beyond its own borders as well as for domestic users. And, for exchange rates that are linked to the reserve currency, monetary tightening in the anchor currency’s home forces up rates elsewhere. The central bank of a reserve currency issuer may have to tolerate dangerous inflation in the price of goods, services and assets in the interests of a wider constituency.
If we substitute the US for such hypothetical countries (given that the dollar is by far still the world’s largest reserve currency), it is possible to see how the US desire to supply liquidity to the rest of the world could have helped fuel its asset bubble. What Mr. Zhou says applies also, however, to the euro and to any Asian common currency that might be launched at some future date.
Only a global reserve currency can escape this dilemma.
‘Though a super-sovereign reserve currency has long since been proposed, yet no substantive progress has been achieved to date,’ notes Mr. Zhou. ‘Back in the 1940s, Keynes proposed to introduce an international currency unit named ‘Bancor’, based on the value of 30 representative commodities. Unfortunately, the proposal was not accepted.’ Instead, the Bretton Woods system of fixed exchange rates among existing currencies was introduced, but soon broke down.
‘The IMF created the SDR (Special Drawing Right) in 1969, when the defects of the Bretton Woods system initially emerged, to mitigate the inherent risks sovereign reserve currencies caused. Yet, the role of the SDR has not been put into full play due to limitations on its allocation and the scope of its uses. However, it serves as the light in the tunnel for the reform of the international monetary system.’
The SDR, which is both a unit of account and a kind of ‘fiat currency’ of the International Monetary Fund - through which it can supply liquidity to its member countries - currently consists of a basket of the dollar, yen, euro and sterling, but Mr. Zhou wants it expanded to ‘include currencies of all major economies’. Instead of being used only ‘between governments and international institutions’, as at present, governments need to ‘set up a settlement system between the SDR and other currencies’, he says.
The international community should ‘actively promote the use of the SDR in international trade, commodities pricing, investment and corporate book-keeping. This will help enhance the role of the SDR, and will effectively reduce the fluctuation of prices of assets denominated in national currencies and related risks.’
Policymakers should also ‘create financial assets denominated in the SDR to increase its appeal. The introduction of SDR-denominated securities, which is being studied by the IMF, will be a good start.’
These are the kind of farsighted proposals that ought to be coming from so-called ‘advanced’ economies of the world, but they are so mired in their own recessions and steeped in their own problems that they cannot see the wood for the trees. They should at least have the good grace to acknowledge the merit of China’s proposal, and if the IMF can cease acting as a stooge of European and US interests, it can also give its intellectual backing to Beijing.
From the USA, I offer the following as the greatest enabler of the USA bubbles: real asset price histories, which well-show and would well-deter bubbles, are kept little-apparent to the people. See first chart here: “Real Dow & Real Homes & Personal Saving & Debt Burden” at http://homepage.mac.com/ttsmyf/RD_RJShomes_PSav.html I ask the G20 attendees from China to show these histories to 'clean the USA's environment'.
2 comments:
Solid dose of financial good sense from China
Now, it’s up to the IMF to stop being a stooge of the West - and back Beijing’s proposal
By ANTHONY ROWLEY
26 March 2009
China is stepping out of the shadows to emerge not only as a major player on the international economic stage but also as a significant force in global policy debate. Its economy continues to grow at a robust pace while others wither, its counter-recessionary stimulus measures gain traction while others ‘spin wheels’, and now China is showing the way towards reform of the international monetary order.
People’s Bank of China (PBOC) governor Zhou Xiaochuan produced what can best be termed a ‘statesmanlike’ paper on the central bank’s website this week in which he called for a new international reserve currency to replace the US dollar in this role. Emerging nations that are members of the Group of 20 (G-20) would do well to support this call when the group meets in London next week for its summit.
Some will see this as self-serving on China’s part since it does hold the world’s largest foreign exchange reserves (some US$2 trillion) of which most are in the form of US dollar assets. And it is true that Beijing is worried - as are many others - about the future course of a currency that could be vulnerable to hyper-inflation.
Chinese Premier Wen Jiabao voiced precisely such concerns a few weeks ago.
But the reforms that Mr. Zhou is proposing are of potential benefit to far more countries than China alone, many of them in Asia - which is home collectively to the world’s largest forex reserves. Japan has a strong vested interest in the reforms that China is proposing but timidly avoids suggesting them for fear of offending a US that serves as Japan’s military protector and, therefore, overall patron.
Debate on monetary reform has until now been oddly lacking in the current crisis, amidst the millions of words uttered on the need for reform of financial institutions, regulatory regimes and economic systems. And, if the spirit of John Maynard Keynes has been frequently invoked in this debate, it has been in the context of the need for fiscal stimulus rather than the great economist’s proposals for monetary reform.
The global crisis admittedly originated in the US financial sector and was transmitted to the global real economy via the trade and investment route. But the more fundamental underlying question is why a monetary bubble developed in the first place in the US that led to the sub-prime crisis and related collapses in financial (and then real) asset prices. Here Mr. Zhou offered an interesting analysis.
‘Issuing countries of reserve currencies are constantly confronted with a dilemma between achieving domestic monetary policy goals and meeting other countries’ demand for reserve currencies,’ he wrote. ‘On the one hand, monetary authorities cannot simply focus on domestic goals without (heeding) their international responsibilities. On the other hand, they cannot pursue different domestic and international objectives at the same time. They may either fail to adequately meet the demand of the global economy for liquidity as they try to ease inflation pressures at home, or create excess liquidity in the global markets by overly stimulating domestic demand.’
In other words, if a reserve currency-issuing country raises interest rates in order to nip in the bud an incipient asset bubble, it raises the cost of using that currency for those beyond its own borders as well as for domestic users. And, for exchange rates that are linked to the reserve currency, monetary tightening in the anchor currency’s home forces up rates elsewhere. The central bank of a reserve currency issuer may have to tolerate dangerous inflation in the price of goods, services and assets in the interests of a wider constituency.
If we substitute the US for such hypothetical countries (given that the dollar is by far still the world’s largest reserve currency), it is possible to see how the US desire to supply liquidity to the rest of the world could have helped fuel its asset bubble. What Mr. Zhou says applies also, however, to the euro and to any Asian common currency that might be launched at some future date.
Only a global reserve currency can escape this dilemma.
‘Though a super-sovereign reserve currency has long since been proposed, yet no substantive progress has been achieved to date,’ notes Mr. Zhou. ‘Back in the 1940s, Keynes proposed to introduce an international currency unit named ‘Bancor’, based on the value of 30 representative commodities. Unfortunately, the proposal was not accepted.’ Instead, the Bretton Woods system of fixed exchange rates among existing currencies was introduced, but soon broke down.
‘The IMF created the SDR (Special Drawing Right) in 1969, when the defects of the Bretton Woods system initially emerged, to mitigate the inherent risks sovereign reserve currencies caused. Yet, the role of the SDR has not been put into full play due to limitations on its allocation and the scope of its uses. However, it serves as the light in the tunnel for the reform of the international monetary system.’
The SDR, which is both a unit of account and a kind of ‘fiat currency’ of the International Monetary Fund - through which it can supply liquidity to its member countries - currently consists of a basket of the dollar, yen, euro and sterling, but Mr. Zhou wants it expanded to ‘include currencies of all major economies’. Instead of being used only ‘between governments and international institutions’, as at present, governments need to ‘set up a settlement system between the SDR and other currencies’, he says.
The international community should ‘actively promote the use of the SDR in international trade, commodities pricing, investment and corporate book-keeping. This will help enhance the role of the SDR, and will effectively reduce the fluctuation of prices of assets denominated in national currencies and related risks.’
Policymakers should also ‘create financial assets denominated in the SDR to increase its appeal. The introduction of SDR-denominated securities, which is being studied by the IMF, will be a good start.’
These are the kind of farsighted proposals that ought to be coming from so-called ‘advanced’ economies of the world, but they are so mired in their own recessions and steeped in their own problems that they cannot see the wood for the trees. They should at least have the good grace to acknowledge the merit of China’s proposal, and if the IMF can cease acting as a stooge of European and US interests, it can also give its intellectual backing to Beijing.
From the USA, I offer the following as the greatest enabler of the USA bubbles:
real asset price histories, which well-show and would well-deter bubbles, are kept little-apparent to the people. See first chart here:
“Real Dow & Real Homes & Personal Saving & Debt Burden” at
http://homepage.mac.com/ttsmyf/RD_RJShomes_PSav.html
I ask the G20 attendees from China to show these histories to 'clean the USA's environment'.
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