Monday, January 08, 2007


Growth and responsibility in the global economy

The official website of the German presidency is here.

The agenda is here, and includes the aim of reducing imbalances in the global economy.

In connection with this aim, the US Council on Foreign Relations has recently published a paper on floating exchange rates, a system that replaced the world's fixed exchange rates in the 1970's and is said to have caused instability in the economy.


Floating exchange rates have proved a source of tremendous periodic instability, yielding repeated currency crises in countries whose currencies are not acceptable for international transactions, but which build up imbalances in their national balance sheets through their imports of dollar capital. The fundamental difference between capital flows under indelibly fixed and flexible exchange rates was well known generations ago, decades before the modern era of globalisation.

It was well understood before the Bretton Woods era [pre 1945] that monetary nationalism would fundamentally change the way capital flows naturally operate, making of a benign economic force one that would necessarily wreak havoc with flexible exchange rates. The global monetary order that has emerged since the 1970s is now globalisation’s greatest source of vulnerability.

What is to be done? Realistically, sauve qui peut must be the message for nations whose currencies are not wanted by foreigners. Dollarization—abandonment of parochial currencies in favor of the dollar, euro or other internationally accepted money—is, in a world of fiat currencies, unsupported by gold or silver, the only way to globalize safely.

Of course, the status of internationally accepted money is not heaven-bestowed and there is no way effectively to insure against the unwinding of "global imbalances" should China, with nearly $1,000bn (€755bn) of reserves, and other reserve-rich central banks come to fear the unbearable lightness of their fiat holdings. Digitized commodity money may then be in store for us. . . As radical and implausible as it may sound, digitizing the earth’s 2,500-year experiment with commodity money may ultimately prove far more sustainable than our recent 35-year experiment with monetary sovereignty.
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