We are in the middle of a currency war.
The only means left for the United States to pull itself out of the economic slump caused by the global financial crisis is the unconventional tactic of "quantitative easing." That means the central bank directly pumping money into the economy through various measures.
Due to a shortage of attractive investment targets at home, surplus dollars have been flowing out of the United States and pouring into emerging economies, pushing up their currencies and raising concerns about inflation.
The situation has led to angry policy responses from these countries. Some of them have imposed taxes on foreign capital to stop the inflow of funds, while others have made massive interventions in the currency market to prevent appreciation of their currencies. China has been keeping the yuan at an artificially low level.
French president's request
French President Nicolas Sarkozy, who is presiding over the Group of 20 (G-20) meetings this year, asked a group of 18 experts, including former officials in charge of the currency policies of various governments, to make recommendations about reform of the international currency regime. The group submitted its proposal to Sarkozy in January.
The group was led by former International Monetary Fund Managing Director Michel Camdessus and included former U.S. Federal Reserve Board Chairman Paul Volcker and myself. A current deputy governor of the People's Bank of China also joined the discussions, which began in autumn last year.
Sarkozy said he would draw up his own reform plan based on the group's proposals and use it to launch a debate on a new international currency regime at the two-day meeting of G-20 finance ministers and central bank governors held in Paris through Saturday.
Since the era of President Charles de Gaulle, France has been critical of U.S. hegemony. The French government has been arguing that the root cause of currency instability is the dollar's status as the world's currency.
The problem as seen by the French is this: The dollar is used widely for international settlements and as the premier reserve currency but it is, in reality, just the currency of the United States. Its supply is determined by U.S. policy, and is not under international control.
France has been arguing for the eventual creation of a new artificial international currency like the IMF's special drawing rights (SDRs)--international reserve assets allocated to individual member countries.
The French argument reflects a longstanding dispute that started at the Bretton Woods conference in 1944, where John Maynard Keynes' proposal to create a world reserve currency was shot down by the United States
Now, China is trying to promote the idea for slightly different reasons. China probably has the long-term goal of making the yuan an international currency that can challenge the dollar's predominance.
The report by the group of 18 experts calls measures to promote the widespread use of SDRs to be considered. It also recommends the enhancement of the capabilities of the G-20 and the IMF to control international liquidity and the creation of a council of eminent persons in the private sector which has the power to make recommendations to the G-20.
The report does not single out the United States for criticism, and reflects the opinions of all the countries involved in its creation.
The recommendations on the future of the international currency regime are based on an assumption that the dollar-based monetary regime will continue for at least several more decades. That's simply because there is no realistic alternative to the dollar.
SDRs are useful for loans between governments but not easy to use for the international settlement of commercial transactions. Making SDRs more usable is a long-term challenge.
Some people are calling for a deal among major countries on exchange rate adjustments like the 1985 Plaza Accord. But the global power balance has changed dramatically, and now major industrial countries alone cannot ensure effective international policy cooperation.
China appears to have learned lessons from policy failures by Japan, which allowed its cooperation in international policy to cause financial bubbles. In addition, the United States no longer has the same ability to engineer agreements on economic issues through multilateral negotiations. The challenge will be making sure that the G-20 works as an effective forum for policy coordination.
The above-mentioned report proposed a three-layer decision-making structure--the group of G-20 leaders at the top, the meeting of G-20 finance ministers and central bakers in the middle and the IMF executive board at the bottom. There are also arguments for radically reforming the IMF. But it would be absurd to expect the United States to accept not having effective veto power in the IMF or to expect China to accept being subject to international policy monitoring in exchange for a greater say in the body. In other words, a structural reform of the IMF alone will not change a situation in which the world's two biggest economies cannot balance their national interests with global perspectives.
Peer pressure on China
In future G-20 discussions, other emerging economies should try to put collective peer pressure on China to end its opaque currency control policy, to take into account possible effects on the world of its economic management policy and to raise its awareness of itself as a leading nation.
China became a major player in the global economy only recently, but it is deeply unhappy about the fact that the international rules for financial markets and trade have been developed under the leadership of industrial nations. If industrial countries press China to carry out reforms, that would only create antagonism. Pressure from emerging economies would be more productive.
The G-20 should also urge the United States to make more serious efforts to prevent a loss of confidence in the dollar by reducing its budget and current-account deficits and foreign debts.
The United States, however, would counter such arguments by saying the flip side of its current-account deficit is the surpluses of countries like China, oil-producing nations, Japan and Germany. Both countries that consume excessively and those that save excessively are responsible for imbalances.
The United States would also say that huge demand created by American consumers' profligate spending has been the driving force behind high global economic growth. The United States has been making this argument for decades. But the fact is that the situation in the United States keeps deteriorating.
President Barack Obama's State of the Union Address reflected his desire to revitalize the U.S. economy. But the Obama administration appears to be dragging its feet on efforts to tackle such crucial policy challenges as reforming financial regulation, changing the social security system and restoring fiscal health.
The U.S. economy grew by attracting funds from rest of the world and spending more than was saved by its people. The long-term challenge of weaning Americans from a growth model that is dependent on the financial industry and on household consumption is inconsistent with the short-term need to simulate consumer spending to get out of the current economic slump. The United States is struggling to find a solution to this dilemma. I hope the United States will revitalize its economy, but the outlook is murky.
The dollar's rise to become the world's premier reserve currency in place of the British pound did not prompt any thought of the decline of a civilization or the end of Western hegemony. That shift took place between the currencies of two Western countries that had friendly relations and shared the same values.
But ascent of the yuan to that position would be much more difficult because it would involve the currencies of two countries that are at odds with each other.
As for the euro, Europe's stance during the euro crisis indicates that Europeans regard their single currency as a tool for achieving stability and prosperity within the region. They don't seem to be committed to making the euro a global currency.
Japan has long been under pressure to change its economic structure in a way that allows it to benefit from a strong yen. But it has only made half-hearted efforts at such restructuring.
The future of the international currency regime is drenched with imponderables.
Source: http://www.asahi.com
The only means left for the United States to pull itself out of the economic slump caused by the global financial crisis is the unconventional tactic of "quantitative easing." That means the central bank directly pumping money into the economy through various measures.
Due to a shortage of attractive investment targets at home, surplus dollars have been flowing out of the United States and pouring into emerging economies, pushing up their currencies and raising concerns about inflation.
The situation has led to angry policy responses from these countries. Some of them have imposed taxes on foreign capital to stop the inflow of funds, while others have made massive interventions in the currency market to prevent appreciation of their currencies. China has been keeping the yuan at an artificially low level.
French president's request
French President Nicolas Sarkozy, who is presiding over the Group of 20 (G-20) meetings this year, asked a group of 18 experts, including former officials in charge of the currency policies of various governments, to make recommendations about reform of the international currency regime. The group submitted its proposal to Sarkozy in January.
The group was led by former International Monetary Fund Managing Director Michel Camdessus and included former U.S. Federal Reserve Board Chairman Paul Volcker and myself. A current deputy governor of the People's Bank of China also joined the discussions, which began in autumn last year.
Sarkozy said he would draw up his own reform plan based on the group's proposals and use it to launch a debate on a new international currency regime at the two-day meeting of G-20 finance ministers and central bank governors held in Paris through Saturday.
Since the era of President Charles de Gaulle, France has been critical of U.S. hegemony. The French government has been arguing that the root cause of currency instability is the dollar's status as the world's currency.
The problem as seen by the French is this: The dollar is used widely for international settlements and as the premier reserve currency but it is, in reality, just the currency of the United States. Its supply is determined by U.S. policy, and is not under international control.
France has been arguing for the eventual creation of a new artificial international currency like the IMF's special drawing rights (SDRs)--international reserve assets allocated to individual member countries.
The French argument reflects a longstanding dispute that started at the Bretton Woods conference in 1944, where John Maynard Keynes' proposal to create a world reserve currency was shot down by the United States
Now, China is trying to promote the idea for slightly different reasons. China probably has the long-term goal of making the yuan an international currency that can challenge the dollar's predominance.
The report by the group of 18 experts calls measures to promote the widespread use of SDRs to be considered. It also recommends the enhancement of the capabilities of the G-20 and the IMF to control international liquidity and the creation of a council of eminent persons in the private sector which has the power to make recommendations to the G-20.
The report does not single out the United States for criticism, and reflects the opinions of all the countries involved in its creation.
The recommendations on the future of the international currency regime are based on an assumption that the dollar-based monetary regime will continue for at least several more decades. That's simply because there is no realistic alternative to the dollar.
SDRs are useful for loans between governments but not easy to use for the international settlement of commercial transactions. Making SDRs more usable is a long-term challenge.
Some people are calling for a deal among major countries on exchange rate adjustments like the 1985 Plaza Accord. But the global power balance has changed dramatically, and now major industrial countries alone cannot ensure effective international policy cooperation.
China appears to have learned lessons from policy failures by Japan, which allowed its cooperation in international policy to cause financial bubbles. In addition, the United States no longer has the same ability to engineer agreements on economic issues through multilateral negotiations. The challenge will be making sure that the G-20 works as an effective forum for policy coordination.
The above-mentioned report proposed a three-layer decision-making structure--the group of G-20 leaders at the top, the meeting of G-20 finance ministers and central bakers in the middle and the IMF executive board at the bottom. There are also arguments for radically reforming the IMF. But it would be absurd to expect the United States to accept not having effective veto power in the IMF or to expect China to accept being subject to international policy monitoring in exchange for a greater say in the body. In other words, a structural reform of the IMF alone will not change a situation in which the world's two biggest economies cannot balance their national interests with global perspectives.
Peer pressure on China
In future G-20 discussions, other emerging economies should try to put collective peer pressure on China to end its opaque currency control policy, to take into account possible effects on the world of its economic management policy and to raise its awareness of itself as a leading nation.
China became a major player in the global economy only recently, but it is deeply unhappy about the fact that the international rules for financial markets and trade have been developed under the leadership of industrial nations. If industrial countries press China to carry out reforms, that would only create antagonism. Pressure from emerging economies would be more productive.
The G-20 should also urge the United States to make more serious efforts to prevent a loss of confidence in the dollar by reducing its budget and current-account deficits and foreign debts.
The United States, however, would counter such arguments by saying the flip side of its current-account deficit is the surpluses of countries like China, oil-producing nations, Japan and Germany. Both countries that consume excessively and those that save excessively are responsible for imbalances.
The United States would also say that huge demand created by American consumers' profligate spending has been the driving force behind high global economic growth. The United States has been making this argument for decades. But the fact is that the situation in the United States keeps deteriorating.
President Barack Obama's State of the Union Address reflected his desire to revitalize the U.S. economy. But the Obama administration appears to be dragging its feet on efforts to tackle such crucial policy challenges as reforming financial regulation, changing the social security system and restoring fiscal health.
The U.S. economy grew by attracting funds from rest of the world and spending more than was saved by its people. The long-term challenge of weaning Americans from a growth model that is dependent on the financial industry and on household consumption is inconsistent with the short-term need to simulate consumer spending to get out of the current economic slump. The United States is struggling to find a solution to this dilemma. I hope the United States will revitalize its economy, but the outlook is murky.
The dollar's rise to become the world's premier reserve currency in place of the British pound did not prompt any thought of the decline of a civilization or the end of Western hegemony. That shift took place between the currencies of two Western countries that had friendly relations and shared the same values.
But ascent of the yuan to that position would be much more difficult because it would involve the currencies of two countries that are at odds with each other.
As for the euro, Europe's stance during the euro crisis indicates that Europeans regard their single currency as a tool for achieving stability and prosperity within the region. They don't seem to be committed to making the euro a global currency.
Japan has long been under pressure to change its economic structure in a way that allows it to benefit from a strong yen. But it has only made half-hearted efforts at such restructuring.
The future of the international currency regime is drenched with imponderables.
Source: http://www.asahi.com
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