GLOBAL TURMOIL: THE INTERNATIONAL MONETARY SYSTEM TODAY

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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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LIVING WITH TURMOIL

• The intl monetary system faces multiple threats
• Europes 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.

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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

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THE CENTRAL CHALLENGE GOVERNANCE

• Governance arrangements for the formulation,
  implementation, and enforcement of the rules of
  the game
• In short, whos in charge?

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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

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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

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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

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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?

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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

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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 Europes sovereign debt crisis
• Reason again, demands of national sovereignty
• Again, unlikely to change

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CONFIDENCE

• Toward a leaderless currency system
• Dollars 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

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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)

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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

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AGENDA FOR BRICS AND ASIA

• Adjustment prepared to accept IMF surveillance?
• Liquidity prepared to submit domestic finances
  to intl rules?
• Confidence prepared to forego an exorbitant
  privilege?
• Leadership prepared to share the
  responsibilities of governance?