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GLOBAL TURMOIL: THE INTERNATIONAL MONETARY SYSTEM TODAY

GLOBAL TURMOIL: THE INTERNATIONAL MONETARY SYSTEM TODAY. Benjamin J. Cohen University of California, Santa Barbara Remarks prepared for presentation at a Conference on the BRICS and Asia, Currency Internationalization, and International Monetary Reform, Hong Kong, December 10-11, 2012.

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GLOBAL TURMOIL: THE INTERNATIONAL MONETARY SYSTEM TODAY

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  1. GLOBAL TURMOIL: THE INTERNATIONAL MONETARY SYSTEM TODAY Benjamin J. Cohen University of California, Santa Barbara Remarks prepared for presentation at a Conference on the BRICS and Asia, Currency Internationalization, and International Monetary Reform, Hong Kong, December 10-11, 2012

  2. LIVING WITH TURMOIL • The int’l monetary system faces multiple threats • Europe’s sovereign debt crisis • Weakening US dollar • Dimming growth prospects • “Currency wars” • Volatile capital flows • Is worse to come? In my opinion, No. Governments will muddle through. Modest reforms are possible – but not more. • Outlook: We have to learn to live with a certain amount of monetary turmoil.

  3. OUTLINE OF MY REMARKS • 1. The central challenge: governance • 2. The four key elements of global monetary governance • Adjustment • Liquidity • Confidence • Leadership • 3. Implications for the BRICS and Asia

  4. THE CENTRAL CHALLENGE: GOVERNANCE • Governance: arrangements for the formulation, implementation, and enforcement of the “rules of the game” • In short, who’s in charge?

  5. GLOBAL MONETARY GOVERNANCE • “Governance without government” • No central authority: governance must rely on cooperation among sovereign governments • Two problems • Compromises are inevitable; the rules will always be sub-optimal • Violations are likely: behavior will be imperfect, too

  6. GLOBAL MONETARY GOVERNANCE • Four critical elements: • Adjustment: management of exchange rates • Liquidity: management of the supply of balance-of-payments financing • Confidence: maintenance of trust in principal instruments of liquidity • Leadership: exercise of power for the common good

  7. BRETTON WOODS SYSTEM • Design was state-centric: key decisions to be made by governments or their agents (IMF). Rules were clear and transparent • Adjustment: par-value system • Liquidity: International Monetary Fund • Confidence: US dollar was “as good as gold” • Leadership: the United States

  8. THE SYSTEM TODAY • Two major changes • Revival of global financial markets • Exchange rates now determined by markets • Financing is also market-determined • Greater risk of destabilizing shifts of confidence among major currencies • Result: a sharper risk of systemic crises • Diffusion of power among states • Deadlocked leadership • Can matters be improved?

  9. ADJUSTMENT • Amendment of IMF charter (1978) • Exchange rates free to float • Subject to IMF surveillance • But surveillance has been ineffective • States have been free to do what they want • Result: risk of “currency wars” • Reason: Demands of national sovereignty • Unlikely to change

  10. LIQUIDITY • With revival of financial markets, liquidity supply has become hostage to investor sentiment • Behavior is often pro-cyclical • Thus tendency toward repeated crises • Failed responses by governments • Repeated promises to strengthen rules • In practice, little accomplished • Example: Europe’s sovereign debt crisis • Reason: again, demands of national sovereignty • Again, unlikely to change

  11. CONFIDENCE • Toward a “leaderless” currency system • Dollar’s dominance is weakening • But there is no obvious alternative • Heightened risk of sudden shifts of confidence – destabilizing capital movements • Good or bad? • Good? Greater discipline on the US – no more “exorbitant privilege” • Bad? Others will also seek to enjoy an exorbitant privilege

  12. LEADERSHIP • Effective leadership rests on two critical factors: • Consensus on basic principles • Concentration of power • Most conspicuous today by their absence. • Consensus has broken down • Power is more diffused (especially autonomy)

  13. IMPLICATIONS FOR BRICS AND ASIA • Revival of global financial markets • Advantage: ready access to finance • Disadvantage: vulnerability • Policy option: capital controls? • Diffusion of power among states • Gain to date: autonomy • Potential gain: influence • Policy option: build a “winning coalition”? • Problem: still no consensus on what is needed

  14. AGENDA FOR BRICS AND ASIA • Adjustment: prepared to accept IMF surveillance? • Liquidity: prepared to submit domestic finances to int’l rules? • Confidence: prepared to forego an “exorbitant privilege”? • Leadership: prepared to share the responsibilities of governance?

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