IF 200 -- August 29, 2011 -- 16/20

Emerging countries, with the economy firing on all cylinders, are also attracting strong inflows of foreign capital pushing their currencies to alarming levels, threatening the vitality of their export sectors and raising inflation worries.    Money flees low interest rates in the U.S., Japan and Europe, to reach out to plumper returns in the currency of Australia, New Zealand, Brazil, Canada, South Korea, Israel, South Africa and ...Uruguay.

“Currency Wars” began to spread across the globe as Brazil, Japan and Switzerland tried to calm currency waters, but to little avail, if any, so far.    Are there viable solutions at hand?

From the ashes of the 2007-2009 crisis, the G-20 came to life as global comprehension, cooperation and coordination was deemed to be the cure to the financial and economic agony spreading across the planet.    Beyond the G-20, other ideas have emerged.

The World Bank sees a multipolar global economy developing by 2025, to which emerging economies -- Brazil, China, India, Indonesia and the Russian Federation -- would contribute the largest share of total growth.    Concurrently, the international monetary system “should” cease to be dominated by a single currency.    The World Bank identified the U.S., the EUROZONE and China as the major growth poles driving the world to its “new order”.    Based on this unfolding reality, the World Bank envisions a multicurrency system in which the U.S. Dollar, the EURO and the Chinese Renminbi, would each serve as full-fledged international currencies.    However, such a system would herald a return to a fixed exchange rate arrangement between major countries providing the “reserve” currencies in a world of “free capital mobility”.    Moreover, a multipolar currency system, as suggested by the World Bank, would be a daunting task requiring policy coordination and loss of national monetary policy sovereignty.    As we have observed, such a system has not worked in Europe!

The IMF proposed to adopt its SDRs unit (Special Drawing Rights, created in 1969 to support the Bretton Woods fixed exchange rate system) as a global reserve currency.    Hence, China seems to favour this idea.    Incidentally, Madame Christine Lagarde, Managing Director of the IMF, nominated Mr. Zhu Min, the first Chinese Vice-President Special Advisor at the IMF.    Are these two events related?    Do they infer future intense work for a “bancor” type supranational currency (idea fathered by John Maynard Keynes)?    Will a supranational currency be the solution?

In 2008, even the United Nations gathered global experts in view of designing reforms of the international monetary and financial system.    The UN-mandated “Commission of Experts” published in September 2009 a plethora of prescriptions aimed at global coordination of monetary policy and fiscal policy, a more balanced size of the financial sector as a share of GDP, a restructuring of the financial system, the role of central banks, more balanced allocation of capital to productive use, etc.    The UN too, along with the IMF and China, seems in favour of a “Global Reserve Bank” and an international “reserve” currency, not linked to the external position of any particular national economy and designed to regulate the creation of global liquidity and maintain global stability.

All represent great ideas for the future!

4. A New World standing on Values

The world is indeed at a crossroad.    The world will have to choose between an ever evolving financial sector mostly disconnected from the economy made of real human beings, living in a real world, working in a real economy and deserving fair compensation for hard labour.

Some global leaders have strongly called for moral values to be put back into the management of planet Earth.    It is imperative, indeed!    However, their call sounds so much like “populist” political prescription during the global financial and economic crises. 

Yet, people need their leaders to be visionary and to have the political courage for setting into motion progressive economic and political strategies in advance for future generations.    Unfortunately, politicians only worry about the next election!    In the meantime, the world of finance never sleeps!    It constantly moves forward with very innovative financial engineering.