Beyond Bretton Woods 2

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Beyond Bretton Woods 2

There are three broad complaints. The first concerns the dominance of the dollar as a reserve currency and America’s management of it. The bulk of foreign-exchange transactions and reserves are in dollars, even though the United States accounts for only 24% of global GDP (see chart 1). A disproportionate share of world trade is conducted in dollars. To many people the supremacy of the greenback in commerce, commodity pricing and official reserves cannot be sensible. Not only does it fail to reflect the realities of the world economy; it leaves others vulnerable to America’s domestic monetary policy.

The second criticism is that the system has fostered the creation of vast foreign-exchange reserves, particularly by emerging economies. Global reserves have risen from $1.3 trillion (5% of world GDP) in 1995 to $8.4 trillion (14%) today. Emerging economies hold two-thirds of the total. Most of their hoard has been accumulated in the past ten years (see chart 2).

These huge reserves offend economic logic, since they mean poor countries, which should have abundant investment opportunities of their own, are lending cheaply to richer ones, mainly America. Such lending helped precipitate the financial crisis by pushing down America’s long-term interest rates. Today, with Americans saving rather than spending, they represent additional thrift at a time when the world needs more demand.

The third complaint is about the scale and volatility of capital flows. Financial crises have become more frequent in the past three decades. Many politicians argue that a financial system in which emerging economies can suffer floods of foreign capital (as now) or sudden droughts (as in 1997-98 and 2008) cannot be the best basis for long-term growth.

France, which assumes the chairmanship of the G20 after the Seoul summit, thinks the world can do better. Nicolas Sarkozy, the country’s president, wants to put international monetary reform at the top of the group’s agenda for the next year. He wants a debate “without taboos” on how to improve an outdated system.

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