It is the season of dollar panic. These panic-mongers are varied: gold bugs, fiscal hawks and many others agree that the dollar, the dominant currency since the first world war, is on its death bed. Hyperinflationary collapse is in store. Does this make sense? No. All the same, the dollar-based global monetary system is defective. It would be good to start building alternative arrangements.
From the FT:
Neil Dennis: Sterling declines after inflation hits 5-year low
UK Daily View: Chris Giles on the significance of a five-year low for consumer price inflation (video)
Peter Garnham: Ragged pound may prove the best ballast for rebalancing
Editorial: The upside of sterling’s slide
Peter Garnham: Weak dollar hides feeble pound
From Elsewhere:
World Bank Crisis Talk: Pity the pound
The Independent: Talking down the pound
Evening Standard: Why it’s a good thing the pound is weaker
From the FT:
Dave Shellock: Overview: gold hits record high as dollar tumbles
Martin Sandbu: The dollar: It would take a revolution to overthrow the greenback
Jennifer Hughes: Mighty dollar turns a paler green
Elsewhere:
Neal Kimberley, Reuters Blog: “Dollar demise”: Inexorable but not sudden
Menzie Chinn, Econbrowser: The Dollar in Doubt?
Simon Johnson, Peterson Institute: Obama’s secret jobs plan; the dollar plunge
Dean Baker, CEPR: Big Deficit Bob Rubin and the Strong Dollar
By Ronald McKinnon
Tensions between the US and China escalated recently when Timothy Geithner, the new US Treasury secretary, suggested that China might be designated as a “currency manipulator’. Premier Wen Jiabao mounted a vigorous defence of China’s existing exchange rate policy at a high level meeting of world leaders at Davos, Switzerland. Mr Wen pledged to keep the renminbi at a “reasonable and balanced level”.
By Eswar Prasad
Timothy Geithner, in his first foray into international economic affairs as US Treasury secretary, has kicked off a public row with the Chinese by accusing them of currency manipulation. The Chinese have vehemently rebutted this accusation and flexed their own muscles, telling the US to get its own house in order before lecturing others.
The world economy, already on its knees, cannot afford escalating economic tensions between China and the US.
By Maurice Obstfeld, Jay C. Shambaugh and Alan M. Taylor
Since the early 1990s, central banks in many emerging markets and developing countries have accumulated foreign reserves at an unprecedented rate. The macroeconomic impact of these official flows has been profound and they have contributed significantly to global imbalances. Providing an explanation for these trends remains a major puzzle in international macroeconomics, and prevailing theories based on trade or debt deliver poor empirical performance. We argue that part of this great reserve accumulation is a response to the threat of financial instability in the context of rapidly expanding financial systems, increasingly mobile capital, and exchange rate objectives. The recent turbulence in global financial markets supports this view.
By Martin Wolf
“A full decade after Europe’s leaders took the decision to launch the euro, we have good reason to be proud of our single currency. The Economic and Monetary Union and the euro are a major success.” Self-congratulation is in order at birthday parties. So nobody should be surprised at the effusive remarks in the foreword by Joaquín Almunia, commissioner for economic and monetary affairs, to an excellent study of “Emu@10” (sic).*
How could anybody dare to question the achievements of the single currency? It is considered a credible rival to the US dollar. Jeffrey Frankel of Harvard even predicted in March that the “euro could replace the dollar within 10 years”.** This is a far cry from the scepticism, particularly in English-speaking circles, that greeted both its launch and the subsequent period of declining value against the US dollar. This is a credible currency.
The remainder of this column can be read here. Debate from our panel of economists appears below.
Read the debate - contributors so far include Desmond Lachman, Roland Vaubel and Alberto Alesina
By Charles Wyplosz
In 1971, with the greenback weak and falling, US Treasury secretary John Connally famously told the rest of the world that the US dollar was “our currency and your problem”. Thirty years later, with the dollar strong and still rising, Robert Rubin, his successor, no less famously stated that “a strong dollar is in the interest of the United States”.
These days, because the dollar is weak and falling, we would have expected US officials to return to Connally’s mantra but they unexpectedly chose Rubin’s. On reflection, glorifying a strong dollar when it is so weak means they do not care. Connally without compassion, if you prefer.
Jean-Claude Trichet, president of the European Central Bank, is thereby left bemoaning “excessive exchange rate moves”. This, too, is an extraordinary statement. In the past week the dollar has barely lost 1 per cent vis a vis the euro. That is significant, but “excessive”? Yes, he may be reacting to the 6 per cent dollar depreciation in the past month. Or to the 17 per cent change over the past 12 months. Or perhaps the 31 per cent depreciation since the dollar was last strongish in late November 2005.
Well, currencies float. They are bound to be sometimes overvalued and sometimes undervalued. This is what they do and these numbers are not especially large by historical standards. Margaret Thatcher, former UK prime minister, was right when she said that exchange rates were a matter for markets to decide.
Of course, markets react to monetary policies. As the US economy faces a recession, a weak dollar is in the country’s interests. As inflation exceeds its own definition of price stability, a strong euro is in the interests of the eurozone. End of story? Not quite. (Continued)
Charles Wyplosz is professor of economics at the Graduate Institute of Geneva. The remainder of his column can be read here. Comment from our expert panel and guest members can be read below.
By Dani Rodrik and Arvind Subramanian
First large downhill flows of capital – from rich countries to poor countries – led to the Latin American debt crisis of the early 1980s. In the 1990s similar flows begat the Asian financial crisis.
Since 2002 the flows have been uphill, from emerging markets and oil-exporting countries to the developed world, especially the US. But the outcome has not been very different. So, it does not seem to matter how capital flows. That it flows in sufficiently large quantities across borders – the celebrated phenomenon of financial globalisation – seems to spell trouble.
Causes and consequences vary, depending on which way capital flows. Developing country borrowing was associated with unsustainable fiscal policies (Latin America) and inappropriate exchange rate policies (Asia). But the financial sector was not blameless: for every overborrower there was an overlender.
The pathologies were different when the US went on a borrowing binge. Large current account surpluses and the associated savings glut in the rest of the world fed a global liquidity boom, which stoked asset prices. Even though the roots of the subprime crisis lie in domestic finance, international capital flows magnified its scale.
The remainder of this column can be read here. Debate from our panel of economists appears below.
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