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Home > Blogs > Anthony Harrington > Why reform of the global monetary system tops the list of 10 impossible things… Part 1

Why reform of the global monetary system tops the list of 10 impossible things… Part 1

Paul Volker | Why reform of the global monetary system tops the list of 10 impossible things… Part 1 Anthony Harrington

Even in his eighties, the former chairman of the US Federal Reserve, Paul Volker, is a formidable figure and is certainly not a man to shy away from a serious challenge.  So it is perhaps not surprising to find him as a leading light in the band of former finance ministers and central bankers responsible for the Palais-Royal Initiative. This initiative sets out, in the immortal split infinitive of Captain Kirk, to boldly go where few have gone before - namely, to map the challenges and to propose some potential solutions to the mess that constitutes the world’s monetary system.

As the group says in its report:

“… the risks inherent in the current system (or “non-system” as many describe it) are too large to ignore. Those risks include retreating into a fragmented economic system vulnerable to protectionist pressure, and resorting to mutually inconsistent national or regional policies. In sum, the progress toward open, competitive markets on a global scale that has brought so many gains to so much of the world population is at risk.”

This bald summary of the risks in the present system also contains, by implication, an account of why the international monetary system (IMS) looks such a mess – at least to central bankers. Put at its simplest, having national currencies all moving dynamically in relation to each other creates a hugely complicated picture and, looked at on the largest scale, global trade imbalances continue to pose a real threat to financial stability as we go into the second decade of the 21st Century, with Renmibi surpluses and dollar deficits mounting to the skies.

Finding the other way out

The current “solution”, which consists of the Chinese recycling their surplus into dollar debts and the US swallowing dollar debt like a drunk on a protracted binge, is clearly no solution at all, merely another bust waiting to happen. As the Palais-Royal document so elegantly puts it, the risk is that these imbalances will “unwind in a disorderly manner”, an understatement if ever there was one.

However, the problem for any group setting out to reform the IMS has been well and truly highlighted by what Philipp Bagus, in his Viewpoint for QFINANCE calls 'The Tragedy of the Euro'. Here Bagus is referring not just to the contradiction of creating a single currency based on a monetary union without a corresponding fiscal union, but to the conflict at the heart of the vision of Europe which underlies the whole euro project. Should that vision be about a libertarian Europe composed of independent sovereign nations cooperating together (in which case, why exactly do you need a single currency?) Or should it be a kind of socialist behemoth, a vast centralized state with the mission to care for its citizens? In which case a single currency makes sense, but individual sovereign governments do not.

Committed socialists like the French President Nicolas Sarkozy contemplate the possibility of a united world government with joy. Those with more of a grasp of the failed history of central planning and those for whom “big government” equates to “Big Brother”, view the prospect with extreme disquiet. Put simply, any reform of the IMS has to find some way of circumventing the conflict between individualist and state-centred views of how things should be, or it is highly unlikely to ever get off the ground.

Since coming at the problem from the standpoint of molding the individual nations of the world into a single global government is an absolute non-starter, this leaves the Palais-Royal group with few options other than the often-mooted, but so far entirely theoretical idea of converting the IMF’s “special drawing rights” (SDRs) into some kind of global IMS as a replacement to the dollar.

We pick up the story in Part 2 tomorrow...

Further reading on global imbalances:




Tags: dollar deficit , euro , Federal Reserve , global imbalances , globalisation , globalization , IMF , IMS , International Monetary Fund , International Monetary System , Nicolas Sarkozy , Palais Royal Initiative , Palais-Royal , Paul Volker , Philipp Bagus , Renmibi , Renmibi surplus , Sarkozy , SDR , socialism , special drawing rights , US Federal Reserve
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