At 13:58 15/11/2010 -0500, Ed wrote:
Well, where do we go from here? In how many different directions?
There are only two. Discipline or chaos. Or perhaps only one. Discipline
via chaos.
Keith
Ed
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November 15, 2010
Sarkozy sets stage for open season on the dollar
By KEVIN CARMICHAEL
From Monday's Globe and Mail
Those who said nothing happened at the G20 missed the French leader's
press conference
Those who grumbled that nothing of significance happened at the Group of
20 summit missed Nicolas Sarkozy's press conference. The French leader
said he and Chinese President Hu Jintao have come up with a strategy that
will ensure much of the next 12 months is spent questioning the U.S.
dollar's role as the world's reserve currency.
Mr. Sarkozy, who took over the G20 presidency at the end of the Seoul
meeting from Lee Myung-bak, didn't put it quite this way, of course. He
started by repeating what he has been saying for a while: That his No. 1
agenda item will be an examination of the international monetary system.
Then the new twist: Mr. Hu, who visited Mr. Sarkozy before the summit, had
agreed to host a "seminar" on the subject under the G20 banner in the spring.
The symbolism of China hosting a major gathering to discuss currency
policy is impossible to miss. In March, 2009, Zhou Xiaochuan, the governor
of China's central bank, proposed replacing the dollar as the reserve
currency with the Special Drawing Right, or SDR, a little-used unit of
exchange run by the International Monetary Fund. (The IMF bases the SDR's
value on a basket of the dollar, euro, pound and yen.) Mr. Zhou's
suggestion created a stir as investors wondered if China was getting ready
to abandon the dollar. Now, thanks to Mr. Sarkozy, Mr. Zhou will get to
organize an entire conference on the subject with the world's currency
traders watching in rapt attention. There will be fireworks.
In Seoul, G20 leaders agreed to "build a more stable and resilient
international monetary system," which Mr. Sarkozy presented as evidence
that he's not alone in looking for a better way to organize global
currency policy.
"Two years ago, people looked at us like we were weird," Mr. Sarkozy said,
referring to the French government's criticism since the financial crisis
of excessive volatility in foreign exchange markets. "Now the G20 is
agreed that we have to improve our world order."
Many will scoff and sneer at all of this. Back when the smaller group of
seven advanced economies was running the show, former officials will
snidely say they had to put up with talk of overhauling the monetary order
once every seven years when France's turn came to set the agenda.
Mr. Sarkozy likely won't recreate the talks held in Bretton Woods, New
Hampshire, in 1944 that established a system of fixed exchange rates to
the dollar, which was in turn pegged to gold. But it would be wrong to
assume talk of changing the international monetary system will go away
when Mr. Sarkozy's presidency does.
The U.S. system of government is proving incapable of delivering the sound
economic policy necessary to ensure that the dollar's value remains
stable. The biggest reason the Federal Reserve is proceeding with its
dollar-weakening strategy of creating money to buy financial assets is
because Congress is incapable of doing anything to address the country's
unacceptably high unemployment rate. A critical mass of fast-growing
economies is rightly asking why policy makers and politicians in
Washington should have such an outsized role in determining the well-being
of sovereign countries.
What is unclear is where all this will lead. The U.S. isn't going to give
up the advantages of controlling the world's most used currency without a
fight.
There will be lots of talk of creating a new reserve currency. World Bank
president Robert Zoellick already has launched the first salvo, proposing
last a week a SDR-like unit that would include the yuan in the reference
basket and have some link to the price of gold. This talk tends to forget
that businesses and individuals will ultimately have to agree to accept
the use of a new unit of exchange.
Ousmène Mandeng of London-based Ashmore Investment Management, who is a
former IMF official, proposes a simpler solution: competition. The failure
of "Bretton Woods II" is that too few countries are willing to play by the
rules. Mr. Mandeng proposes changing the incentive to follow good economic
policies by forcing governments to compete for the role of reserve
currency. The G20 could encourage greater use of as many as a dozen
currencies for global exchange, perhaps by instructing central banks to
diversify their reserves. Mr. Mandeng reckons this would force U.S.
politicians to take their deficit and debt more seriously because they
could no longer rely on heavy demand for Treasuries to keep borrowing
costs low.
Other ideas will emerge, including from the emerging-market governments
that are so eager to change the system. The short-term winners will be
currency traders, who thrive on volatility.
The price of gold jumped after Mr. Zoellick's proposal appeared in the
Financial Times on Monday as some investors bet the metal is on track to
return as a base for international exchange rates. Gold fell later in the
week when Bank of Canada Governor Mark Carney dismissed that idea.
Millions made and lost as the result of a simple op-ed in a newspaper. And
Mr. Sarkozy has barely got started. It's going to be a wild year.
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Keith Hudson, Saltford, England
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