Manualillos para una crísis ( 1 )

Muy bueno!

Aunque esté parcialmente en desacuerdo.

The rumours of the dollar’s death are much exaggerated
By Martin Wolf

Published: October 13 2009 22:17 | Last updated: October 13 2009 22:17

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.

EDITOR’S CHOICE
Economists’ forum - Oct-01Lex: Chinese consumers - Sep-23Martin Wolf: Turner is asking the right questions on finance - Sep-10Martin Wolf: This crisis is a moment, but may not be a defining one - May-19Martin Wolf: Why Obama’s conservatism may not prove good enough - May-12Martin Wolf: Tackling Britain’s fiscal debacle - May-07We should start with what is not happening. In the recent panic, the children ran to their mother even though her mistakes did so much to cause the crisis. The dollar’s value rose. As confidence has returned, this has reversed. The dollar jumped 20 per cent between July 2008 and March of this year. Since then it has lost much of its gains. Thus, the dollar’s fall is a symptom of success, not of failure.

Can we find deeper signs that the world is abandoning the US currency? One beloved indicator is the price of gold, which has risen four-fold since the early 2000s (see chart). But its price is a dubious indicator of inflation risks: its previous peak was in January 1980, just before inflation was crushed.

Higher prices of gold reflect fear, not fact. This fear is not widely shared. The US government can borrow at 4.2 per cent over 30 years and 3.4 per cent over 10 years. During the crisis, the inflation expectations implied by the gap in yields between conventional and inflation-protected securities collapsed. These have since recovered – yet another sign of policy success. But they are still below where they were before the crisis. The immediate danger, given excess capacity, in the US and the world, is deflation, not inflation.

ECONOMISTS’ FORUM:

Comments on Martin Wolf’s column and contributions by leading economists

The dollar’s correction is not just natural; it is helpful. It will lower the risk of deflation in the US and facilitate the correction of the global “imbalances” that helped cause the crisis. I agree with a forthcoming article by Fred Bergsten of the Peterson Institute for International Economics that “huge inflows of foreign capital to the US facilitated the over-leveraging and underpricing of risk”.* Even those who are sceptical of this agree that the US needs export-led growth.

Finally, what can replace the dollar? Unless and until China removes exchange controls and develops deep and liquid financial markets – probably a generation away – the euro is the dollar’s only serious competitor. At present, 65 per cent of the world’s reserves are in dollars and 25 per cent in euros. Yes, there could be some shift. But it is likely to be slow. The eurozone also has high fiscal deficits and debts. The dollar will exist 30 years from now; the euro’s fate is less certain.

This view may be too complacent. The danger of a collapse of the dollar is small and of its replacement by another currency still smaller. But a global monetary system that rests on the currency of a single country is problematic, for both issuer and users. The risks are also growing, particularly since the emergence of “Bretton Woods II” – the practice of managing exchange rates against the dollar.



In the 1960s, Robert Triffin, a Belgian-American economist, argued that a global monetary system based on the dollar had a flaw: the increased liquidity the world sought would require current account deficits in the US. But, sooner or later, the overhang of monetary liabilities would undermine confidence in the key currency. This view – known as the “Triffin dilemma” – proved prescient: the Bretton Woods system fell in 1971.

Strictly speaking, reserves could be created if the key-currency country merely borrowed short term and lent long term. But, in practice, the demand for reserves has generated current account deficits in the issuing country. In a floating exchange-rate regime reserve accumulations should also be unnecessary. But, after the financial crises of the 1990s, emerging countries decided they needed to pursue export-led growth and insure themselves against crises. As a direct result, three quarters of the world’s currency reserves have been accumulated just in this decade.

Yet this very search for stability risks creating long-run instability. Indeed, Chinese policymakers are worried about the risk to the value of their vast dollar holdings that, on Triffin’s logic, their own policy exacerbates. US policymakers may repeat the “strong dollar” mantra. But this is an aspiration without an instrument. Relevant policy is made by the Federal Reserve, which has no mandate to preserve the dollar’s external value. The only way China’s policymakers can preserve the domestic value of external holdings is to support the dollar without limit, which compromises China’s domestic monetary stability and will prove self-defeating in the end.

At this point, the widespread concerns about US monetary stability and the dollar’s external role converge. A standard recommendation on the former is to preserve both the independence of the Federal Reserve and ensure long-run fiscal solvency. If the fear grows that either – or, worse, both – is in danger, a self-fulfilling crisis might ensue. The dollar could tumble and long-term interest rates soar. In such a crisis, it might well be feared, a less-than-independent Federal Reserve would be compelled to buy public debt. That would accelerate flight from the dollar.

The two key preconditions for long-run stability, then, are a credibly independent central bank and federal solvency, both of which seem to be within US control.

Yet this is too simple. Most analysts assume that the US fiscal position can be determined independently of decisions taken elsewhere. But if the US private sector were to deleverage over a long period (and so spend substantially less than its income), while the rest of the world wanted to accumulate dollar-denominated assets as reserves, the US government would naturally emerge as the borrower of last resort. A corollary of the Triffin dilemma is that the international role of the dollar could make it hard for the US to manage its fiscal affairs successfully, even if it wanted to do so.

I arrive, by a somewhat different route, at the same conclusion as Mr Bergsten: the global role of the dollar is not in the interests of the US. The case for moving to a different system is very strong. This is not because the dollar’s role is now endangered. It is rather because it impairs domestic and global stability. The time for alternatives is now.

* The Dollar and the Deficits, Foreign Affairs, November/December 2009

martin.wolf@ft.com
More columns at www.ft.com/martinwolf
Copyright The Financial Times Limited 2009. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.

Print articleEmail article

Order reprints
Digg reddit LinkedIn Facebook Delicious
Mixx Propeller Yahoo! Buzzstumbleupon
More from this columnist
The rumours of the dollar’s death are much exaggerated
Britain’s phoney debate on slashing spending
Finding a route to recovery and reform gets tough now
Why narrow banking alone is not the finance solution
This time will never be different
Why Cable’s mansions tax is right
Why China must do more to rebalance its economy
Do not learn wrong lessons from Lehman’s fall
Wheel of fortune turns as China outdoes west
Turner is asking the right questions on finance
Why it is still too early to start withdrawing stimulusFront page
World
Companies
Markets
Markets Data
Managed funds
Lex
Comment
Opinion
Analysis
Columnists
Samuel Brittan
Christopher Caldwell
Sue Cameron
Clive Crook
Niall Ferguson
John Gapper
Brian Groom
Jonathan Guthrie
Emma Jacobs
John Kay
Jurek Martin
Wolfgang Munchau
David Pilling
Ingram Pinn
Gideon Rachman
Michael Skapinker
Robert Shrimsley
Philip Stephens
Martin Wolf
More...
Editorial
Letters
Blogs
Obituaries
Ask the expert
Corrections
Video & Audio
Management
Business Education
Personal Finance
Arts & Leisure
Wealth
In depth
Special Reports
Jobs & classified
Services & tools
Left column contentMartin WolfEconomists’ ForumMartin Wolf’s forum: Leading economists from around the world debate issues raised by Martin Wolf, associate editor and chief economics commentator at the FT
PodcastListen to Martin Wolf read his weekly column
RSSGet Martin Wolf by RSS











BlogsBrussels BlogClive CrookCapitalism BlogDear LucyDon SullDragonbeatEconomists’ ForumEnergy SourceFTfm BlogGideon RachmanHealth blogJohn GapperManagement BlogMoney MattersMoney SupplyScience BlogTech BlogThe Undercover EconomistWestminster BlogWillem Buiter’s MavereconFormer BlogsLex Wolf blogG20 blogBudget blog 09Future of capitalism blogMargaret McCartney’s blogMBA blog

Regional pagesChinaIndiaBrusselsInteractivePodcastsAsk the expertMarkets Q&AAudio slideshowsInteractive graphics