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Friday, May 15, 2009

Sachs: Rethinking the Global Money Supply

Jeff Sachs says the dominance of the dollar should end, and probably will end:

Rethink the Global Money Supply, by Jeffery Sachs, Scientific American: The People’s Bank of China jolted the financial world in March with a proposal for a new global monetary arrangement. The proposal ... has much to commend it. ...

President Richard Nixon delinked the dollar from gold in 1971 (to offset the U.S.’s expansionary monetary policies in the Vietnam era), and major currencies began to float against one another... But most global trade and financial transactions remained dollar-denominated, as did most foreign exchange reserves held by the world’s central banks. The exchange rates of many currencies also remained tightly tied to the dollar.

This special role of the dollar in the international monetary system has contributed to the global scale of the current crisis, which is rooted in a combination of overly expansionary monetary policies by the Federal Reserve and lax financial regulations. Easy money fed an unprecedented surge in bank credits, first in the U.S. and then elsewhere, as international banks funded themselves in the U.S. money markets. As bank loans flowed into other economies, many foreign central banks intervened to maintain currency stability with the dollar. The surge in the U.S. money supply was thus matched by a surge in the money supplies of countries linked to the U.S. dollar. The result was a temporary worldwide credit bubble...

China has now proposed that ... nations peg their currencies to a representative basket of others rather than to the dollar alone. ... U.S. monetary policy would accordingly lose its excessive global influence...

The U.S. response to the Chinese proposal was revealing. Treasury Secretary Timothy Geithner initially described himself as open to exploring the idea; his candor quickly caused the dollar to weaken in value—which it needs to do for the good of the U.S. economy. That weakening, however, led Geithner to reverse himself...

Geithner’s first reaction was right. The Chinese proposal requires study but seems consistent with the long-term shift to a more balanced world economy in which the U.S. plays a monetary role more coequal with Europe and Asia. No change of global monetary system will happen abruptly... We will probably move over time to a world of greater monetary cooperation within Asia, a rising role for the Chinese yuan, and greater symmetry in overall world monetary and financial relations.

    Posted by on Friday, May 15, 2009 at 02:41 PM in Economics, International Finance | Permalink  TrackBack (0)  Comments (22)

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