Challenges and Perspectives of International Monetary Policy

 

Carlos Pinkusfeld interviews Ramaa Vausdevan (Colorado State University) and Franklin Serrano (Federal University of Rio de Janeiro) to discuss the complex challenges of monetary policy in the international arena. Exploring issues such as financial globalization, the influence of large economies on the global monetary system, and the implications for developing countries, the experts offer important perspectives on the role of central banks and the effectiveness of monetary policies in the globalized economy. This is an essential debate for those who want to understand the direction of the world economy in a context of dynamic changes and growing uncertainty.

 

Dollar dominance and the international monetary hierarchy

Our panel at the UNICAMP conference last Thursday, with Mark Schwartz, and Andrés Arauz.

Dollar Hegemony and Argentina

First part of a two part interview with Anita Fuentes at Security in Context. The discussion on Argentina and Milei is in the next part. I'll post it as soon as it is up.

Dollar Hegemony, coming soon

The dollar's hegemony rests on the economic, military, and international political power of the USA. There have been two eras of dollar hegemony which were characterized by different models. Dollar hegemony 1.0 corresponded to the Bretton Woods era (1946-1971). Dollar hegemony 2.0 corresponds to the Neoliberal era (1980-today). The deep foundation of both models is USA power, but the two models have different economic operating systems. The articles in this book explore this and consider two further questions: what is the future of dollar hegemony? And: is there a better way of organizing the world monetary order? There has been considerable speculation of a drift to currency multipolarity but, so far, there is little evidence of that. The Chinese renminbi might join or displace the dollar as the world's hegemonic currency, but that will require China making significant changes to its financial markets and monetary policy. Dollar hegemony imposes significant costs on developing and emerging market economies, but the international political economy of systemic reform is fraught, making reform unlikely.

The End of Bretton Woods

  

End of Bretton Woods with Barry Eichengreen, myself and Lilia Costabile, organized by L-P. Rochon and the Review of Political Economy.

The Consolidation of Dollar Hegemony after the Collapse of Bretton Woods: Bringing power back in

Collapse, ma non troppo!

New IDEAS Working Paper on the alternative views of the collapse of Bretton Woods. From the abstract:

Contrary to conventional views which suggest that the collapse of Bretton Woods represented the beginning of the end of the global hegemonic position of the dollar, the collapse of the system liberated American policy from convertibility to gold, and imposed a global fiat system still dominated by the floating dollar. The end of Bretton Woods and the set of regulations that imposed capital controls were part of the agenda of many powerful groups within the US, and led to the creation of a more dollarized world. The challenge to the dollar might arise, eventually, from the decline in the United States’power to determine the pricing of key commodities in global markets; but it is premature to think about the demise of the dollar. The limitations of the dominant views about Bretton Woods are ultimately tied to mainstream economics.

Read it here.

Paul Volcker's legacy

Paul Adolph Volcker (1927-2019)

Paul Volcker has passed away, and many obits (NYTimes here) and blog posts will be published in the next couple of days. Most likely, the majority will suggest how Carter appointed him to bring down inflation, a courageous decision, that might have costed him the election, and how Volcker went on to stabilize the so-called Great Inflation. Volcker was the head of the New York Fed from 1975 to 1979, before he was appointed chairman of the Fed in that year. He can be seen as the anti-Marriner Eccles, the first chairman properly speaking, and Roosevelt's central banker. Volcker was the quintessential Monetarist central banker, and his tenure is symbolic of the rise of Neoliberalism,* as much as Eccles' tenure was the symbol of the New Deal social democratic values.

It is important to remember that Volcker actually imposed Milton Friedman's monetary growth targets as the Fed policy, for the first time, since central banks, the Fed included, had traditionally acted by managing the interest rate, rather than trying to control the monetary aggregates. That policy was a failure and was short lived, being abandoned still during his tenure as chairman. Charles Goodhart noted that every time a central bank tried to control a monetary aggregate, the previously stable relationship between that monetary aggregate and economic activity broke down. This became know as Goodhart's Law.

But the Volcker interest rate shock was part of the set of policies that brought inflation down, even if the effects were not necessarily the ones anticipated, and the mechanism not the one assumed by Monetarist theories. It was NOT the result of lower monetary emissions, as much as the fact that higher interest rates, significantly higher, and the recession that followed, together with the opening of the American economy to foreign competition led a large increase in unemployment. The worst recession since the Great Depression, and that reduced the bargaining power of workers.

The other consequence of the interest rate shock, and the more profound globally, was the appreciation of the dollar, which showed that the dollar was still the key currency globally,** and the collapse of the Mexican economy after a default, which led to the so-called Debt Crisis of the 1980s, which not only hit the Latin American periphery, but many countries in Eastern Europe, helping also in the eventual collapse of real socialism. Asian economies, and their Japanese creditors, were hit by the crisis, but managed better the problems of debt overhang, being able to continue to borrow and avoiding the collapse in growth known as the Lost Decade.

Volcker left the Fed in 1987, followed by Alan Greenspan, who was responsible for the deregulation of financial markets (e.g. the end of Glass-Steagall) more than any other person, perhaps. The legacy of financial deregulation is well-known, with a succession of bubbles, and rescues by the Fed of "too-big-to-fail" institutions. Volcker was a critic of financial deregulation after the crisis, suggesting famously that only the ATM was a useful financial innovation. The Volcker Rule, introduced with the Dodd-Frank legislation, forbade banks of using their own accounts for making some investments in derivatives and other financial instruments. In many ways, this was too little, too late.

If you read the regular obits and pieces in the media, I am sure his legacy will be defined fundamentally for achieving low inflation. He would be the father of what Ben Bernanke called the Great Moderation. But his policies are also co-responsible for lower growth rates, on average, wage stagnation, and increasing financial instability, in the center and the periphery.

* And yes Neoliberalism started with Carter, not Reagan, even if the latter was considerably more radical in his pursue of conservative policies.

** It is worth noticing that Volcker was the under secretary for international affairs during the Nixon Administration when the system of Bretton Woods collapsed, and the dollar was allowed to float. In a sense, he was there for the depreciation and then appreciation of the dollar, and the imposition of what has been termed the dollar diplomacy. In other words, he proved that abandonment of Bretton Woods was NOT the abandonment of a dollar based international monetary regime.

Handbook of the History of Money and Currency

The Handbook (subscription required) has been edited by Stefano Battilossi, Youssef Cassis and Kazuhiko Yago. It has many interesting chapters. Barry Eichengreen writes on what determines that a currency is used as an international currency (or even as the predominant currency). While he follows conventional views in suggesting that role of money as a means of exchange and the importance of the country in international transactions, he does also explore the role of power (military power) behind the key currency. My take on that topic in this paper with David Fields here.

There is also a very readable paper on the history of central banks by Stefano Ugolini here. It follows the evolutionary approach of Roberds and Velde, and in my view also suffers from conventional views on monetary theory that emphasize the exchange role of currencies, rather than the unit of account function. As a result, it downplays the role of fiscal agent of the state, that in my view was key in the early experiences with public banks. I would emphasize the importance of the development of public debt for the subsequent evolution of public banks, and the relevance of early central banks in the management of the Fiscal-Military State. On this see this and this.

There are interesting papers on paper money experiences, by François Velde (here) or on deflation, by  Richard Burdekin (here), to cite a couple.  There is, also, our entry (with Esteban Pérez) on the history of Central Banking in Latin America (here).

Foreign Exchange Trading and the Dollar

The new Bank for International Settlements (BIS) Triennial Central Bank Survey was published last month. The Foreign exchange turnover is down for the first time since they started in 1996. As the press release says: "Trading in FX markets averaged $5.1 trillion per day in April 2016. This is down from $5.4 trillion in April 2013." The figure below shows the main results.

Not surprisingly the dollar remained the key vehicle currency, being on one side of around 88% of all trades, while the euro has continued to slide down approximately from 39% in 2010 to 31% now. Also, while the yuan or renminbi is now the most actively traded developing country currency, the rise in the share in global foreign exchange turnover is from 2.2% to 4%.

PS: For those interested here there is an old paper, but I think still relevant, on the dollar after the crisis, and why there should be no fear about its dominant position.

New Book: The Encyclopedia of Central Banking

New book on central banking, edited by L-P Rochon & Sergio Rossi, has recently been published. I have two chapters: 1. on Classical Dichotomy, & 2. on Dollar Hegemony.

See here.

PS: Posted here with an entry on Bretton Woods by Omar Hamouda.

New Book: "The Euro, The Dollar and the Global Financial Crisis" By Miguel Otero-Iglesias

Editorial Reviews:

Many scholars have contributed to ongoing debates about the competition between the dollar and the euro for global monetary dominance. Few have added as much value as Miguel Otero-Iglesias with his systematic and original survey of the views of financial elites in major emerging market economies. Where conventional interpretations emphasize material "reality," Otero-Iglesias's ideational analysis clearly demonstrates how important it is to consider as well how "reality" is perceived and framed by key actors. The euro may be structurally weak, limiting its "hard" power. But at the cognitive level of "soft" power, Otero-Iglesias suggests, Europe's money poses a significant challenge to America's greenback. This is an argument to be taken seriously.

Benjamin J. Cohen, Louis G. Lancaster Professor of International Political Economy University of California, Santa Barbara, USA.

This is a book I’ve been waiting for: a detailed analysis of what financial elites in the large reserve-holding countries are thinking about the future of the international monetary system. Drawing on extensive research, Miguel Otero-Iglesias argues persuasively that the views of authorities in China, Brazil, and the Gulf states matter enormously for the future of the global roles of dollar and the euro. An engaging and innovative book that makes a major contribution to our understanding of the world’s money."

Eric Helleiner, Faculty of Arts Chair in International Political Economy and Professor in the Department of Political Science of the University of Waterloo

In this original, well written and carefully researched book, Otero-Iglesias suspends motion in this fast moving story of currency rivalry to give the reader a view into the deeper logic of global monetary change. The author has synthesized skilfully across a wide spectrum of perspectives, from various systemically important emerging countries, and for which he has accessed key financial elites, and policy shapers, in China and Brazil, as well as the Gulf States. This book is truly a must read for scholars of the politics of the international monetary system, especially those with an eye to systemic change.

Gregory T. Chin, Associate Professor, York University, Canada and Co-Editor, Review of International Political Economy'

About the Author:
Miguel Otero-Iglesias is Senior Analyst on the European Economy and the Emerging Markets at the Elcano Royal Institute in Spain and Research Fellow in International Political Economy at the EU-Asia Institute at ESSCA School of Management in France.

For more info go here.

***My RIPE paper with Matias Vernengo, "Hegemonic Currencies During The Crisis, The Dollar Versus The Euro In a Cartalist Perspective" (see here), is cited.

The US Net International Investment Position (IIP)

The graph below shows the Net International Investment Position (IIP) as a share of GDP for the US, since 1976. The last report by the Bureau of Economic Analysis (BEA) is available here. Note that by the first quarter of the year the IIP corresponded to US$ 5.5 trillion, or slightly more than 30% of GDP.

The IIP position has been negative since the late 1980s, which is the reason why economists argue that the US is a debtor country. The negative position follows as a result of the persistent current account (CA) deficits, which imply that foreigners accumulate dollars and dollar denominated assets. A negative IIP means that foreigners have more financial claims on residents than vice versa, and is seen often as a problem for most countries.

The conventional view also suggests that CA deficits are not dangerous if they finance domestic investment, which leads to growth, and presumably higher exports, even though this is often not explained by mainstream authors that tend to forget that most countries borrow in foreign currency. In this case, in which the CA deficits allow for higher exports in the future, a negative IIP is seen as sustainable. On the other hand, if the CA is used to finance consumption, then the negative IIP would be unsustainable. Many analysts think that the US IIP is not sustainable and from time to time someone suggests that a run of the dollar is possible. For example, Paul Krugman famously predicted that a run on the dollar would eventually occur, what he termed a 'Wile E. Coyote moment,' in which agents holding dollars would finally get that the floor was gone, and the dollar would depreciate sharply (this was before the Lehman's collapse and the run for dollar denominated assets, and the appreciation of the dollar; subsequently the gradual depreciation of the dollar returned, but so far no Wile E. Coyote moment).

Some mainstream authors are also puzzled by the fact the US, in spite of having persistent CA deficits and a large and negative IIP, has consistently had a positive net investment income position. In other words, interest and profits resulting from holding foreign assets has exceeded the payments of income to owners of US assets. Hausmann and Sturzenegger argued creatively (let's call it that) that the reason for this 'paradox' is that the CA does not measure well the net international investment position, since insurance and liquidity services go unaccounted. Their adjusted measure to add those invisible services, which they refer to as 'dark matter'* would explain the paradox, and why the US IIP is sustainable after all.

Note, however, that once one takes into account that the US holds the reserve/vehicle currency much of the discussion about the dangers of the CA deficits, the sustainability of IIP and the paradox of the positive net investment income position sort of vanishes. US debts are in dollars, which implies that there is no possibility of default in a fiat system. Chartalism holds in the open economy too.

The US does not need to export to obtain dollars, and how it uses the accumulation of financial claims on the US by foreigners is not crucial for sustainability. Holding the key currency does NOT come without consequences, but those are not the ones often suggested by the mainstream. Certainly given US policy choices there has been a loss of industrial jobs in the Rust Belt, yet as noted in another post, not with a significant loss in terms of technological advantage for US corporations. The consequence, thus, of the hegemonic position of the dollar, together with other policy choices (e.g. financial deregulation, lower taxes for the wealthy, deregulation of labor markets, etc.) has been one that affected the balance between labor and capital domestically.

Also, there is no need for dark matter, or other neologisms, to understand why the US has positive net investment income flows. By definition, the key currency is the risk free asset, and hence investments denominated in other currencies must pay a risk premium. Yes, sure BOP accounts are imperfect, like NIPA or any other measure of the economy. But there is no need to revamp the BOP accounts to get that the US CA deficit and the negative IIP are not really unsustainable.

* Hausmann has a flair for coining terms for ideas or problems that were well known by heterodox authors, and to incorporate them inconspicuously in the mainstream discourse. He refers to the notion that developing countries cannot borrow long term in their own currency as "the original sin." Note that the original sin is exactly the notion suggested by Prebisch, Kaldor, Thirlwall and others, that argue that since these countries cannot borrow internationally, and must pay with exports in the long run, then the CA becomes a constraint for economic growth.

Kevin P. Gallagher On The Fed, Emerging Markets, & Role of The Dollar

By Kevin P. Gallagher

From Foreign Policy Magazine

Emerging-market and developing countries resented U.S. Federal Reserve Chair Ben Bernanke during his spell in office. In 2012, Brazilian President Dilma Rousseff scolded Bernanke and the Fed's loose monetary policy for creating a "tsunami" of financial flows to emerging markets that was appreciating currencies, causing asset bubbles, and exporting financial instability to the developing world. It may just turn out that they dislike Janet Yellen even more.Although it was Bernanke who started tapering the Fed's loose policy, Yellen will be the one to end quantitative easing and, eventually, raise short-term interest rates. And those could be an even bigger problem for emerging markets than the initial tsunami.Yellen's recent confirmation that quantitative easing (QE) will cease in October 2014 is the latest and firmest signal that U.S. monetary policy is reversing direction. The Fed began the year talking about the "tapering" of loose monetary policy, relaxing QE's bond-buying program and potentially raising interest rates. Now a concrete end to QE is on the horizon. The big question that emerging markets are now asking is how quickly and how suddenly interest rates will go up. Following the latest numbers that the United States' GDP grew by 4 percent during the second quarter, some monetary policy hawks are calling for interest-rate hikes soon to cool the economy. That's exactly what emerging markets are worried about....

Read rest here.

And for more on the role of the dollar in the world economy see here, here, and here

Bretton Woods Conference transcripts now available

The transcripts of 1944 Bretton Woods Conference were recently found at the Treasury, and have been published (a sample is available here). More info here. As noted by the NYTimes do NOT expect any major surprises though.

NPR Planet Money on Bretton Woods and the Role of the Dollar

Listen here (if the one on top doesn't work). Not bad, I should add, but it relies too much on Benn Steil's terrible book. In particular the evidence on Harry Dexter White being a Soviet spy is exaggerated. The best evidence is inconclusive. And as the program says White was responsible, or mainly so, for the use of the dollar as the key currency, which gave the US a great economic advantage. If he was pro-Soviet he was awful, wasn't him?

What is 'Dollar Hegemony'?

Fields, David (Forthcoming), “Dollar Hegemony,” Edward Elgar Encyclopedia on Central Banking, edited by L.P. Rochon et. al, Edward Elgar

Today, the world economy operates under the artifice of US hegemony, fortified by the US dollar as an international reserve and vehicle currency. How did the United States arrive at achieving such pre-eminence?

From 1944 to 1973, the financial architecture of the world economy centered on a US engineered Keynesian accumulation agenda as a response to the devastation wrought by the Great Depression. The capitalist institutional structure, or social structure of accumulation (see Kotz et al., 1994), rested on finance being subservient to the promotion of industrial enterprise.

With socially-engineered capital–labour compromises in developed countries, neo-colonial governing institutions in the Third World, active State regulation in decisions with respect to capacity utilization, and a co-respective form of competition among large corporations set by regulations that brought together monetary authorities, large banks as well as large industrial capitalists, the post-World-War-II system was the era of “regulated capitalism”. Altogether, the world system was underpinned by the Bretton Woods arrangement, which called for globally fixed exchange rates against the US dollar tied to the price of gold and capital controls.

The international political-economic conditions were such that domestic macroeconomic autonomy, specifically with respect to monetary policy, for aggregate demand management could be feasible. Capital controls were seen as essential to reduce the volatility of capital flows and allow for low interest rates with the objective of pursuing full employment. As Keynes (1980, p. 276) argued, “we cannot hope to control rates of interest at home if movements of capital moneys out of the country are unrestricted.”

By the 1960s, however, US officials began to actively encouraging the growth of the Euromarket, that is, the pool of unregulated US dollar reserves concentrated in the City of London (Helleiner, 1994). With traditionally marginalized segments of the population in developed countries, particularly in the United States and in Western Europe, demanding social, political, and economic rights, and with national liberation movements in the Third World overthrowing US-supported oppressive governments, calls for an expanded role of the State in meeting citizens’ needs dramatically circumscribed global capital accumulation owing to heightened nominal wage–price spirals. Consequently, the global capitalist rate of profit fell (Duménil and Levy, 2004, p. 24). The Euromarket thus became the means for international financial markets to re-establish their influence, lost as a result of the Great Depression, and allow industrial enterprise to rebuild the conditions for future profitability via offshoring.

Speculative capital flows, however, began to undermine the capacity for the United States to guarantee the convertibility of US dollars into gold at fixed parity (Triffin, 1960). Even though the US dollar was the key international currency, it was fixed to gold. As such, debt was ultimately redeemable in an asset that was not directly controlled by the US monetary authority. Default was a possibility, even if a remote one, since through manipulation of the rate of interest, and through coercion and cooperation with other central banks in the world economy, the stability of the system could be maintained. With the globalization of finance via the Euromarket, nevertheless, speculation against the gold–dollar parity proliferated, making functional finance on a worldwide basis difficult to manage.

In 1971, Nixon closed the gold window and loosened capital controls. American officials concluded that it was no longer in their interests to maintain the linchpin relation between gold and the US dollar, and ipso facto withdrew support for the Bretton Woods system by which exchange rates were fixed and flows of capital were to a large degree controlled (see Helleiner, 1994; Vernengo, 2003; Ingham, 2008). The deregulation of financial markets established a global market of mobile financial capital, and the US dollar established itself as a global fiat-money standard. The world economy moved from a fixed dollar standard to a flexible dollar standard (Serrano, 2003).

For the first time in history, it is possible for the hegemonic country, in this case the United States, to be a global debtor, as national States are within their domestic economies, and to provide a default-risk-free asset to facilitate global capital accumulation. The risk that the United States would be unable to expand demand globally, because it is forced to maintain a fixed exchange rate between its currency and an external asset, is thus non-existent. It is true, however, that foreign countries and agents may show unwillingness to hold US-dollar-denominated assets, but, as in the domestic case, the US Federal Reserve (Fed) can always monetize public debt. This would be inflationary and lead to a run on the US dollar only if there is currency substitution on a massive scale, which would require a credible alternative to the US dollar (which does not exist yet). As such, the United States can therefore incur foreign debt without any reasonable limit.

Global imbalances, in particular the large US current account deficits that reflect their so-called “exorbitant privilege”, are instrumental for the functioning of the world economy, as evidenced by the dominance of the US dollar in international trade (Fields and Vernengo, 2013). An important part of this is associated to the fact that key commodities, like oil, are priced in US dollars in international markets. This not only implies that there cannot be an insufficient amount of dollars for the United States to import key commodities, but also that a depreciation of the US dollar does not reduce US imports necessarily (Parboni, 1981).

In fact, the Fed is the world economy’s central bank, which acts as the safety valve for mass amounts of international liquidity (Arrighi, 1999). The hegemonic position of the US dollar structures the world economy in such a fashion that the United States determines the international transmission mechanism for global economic activity. Hence, the role of the US dollar in international markets, and the advantages that come with it, are the spoils of structural power. The provision of this asset allows the United States to become the source of global demand, and to insulate itself from fluctuations and contradictions of perilous cumulative disequilibria that may arise in the world economy. The US dollar enables the United States to set the global social, political, and economic conditions, within which the transmission of misery (contagion) between countries, and between global and national levels, is essentially regulated.


REFERENCES:

Arrighi, G. (1999), “The global market”, Journal of World Systems Research, 5 (2), pp. 217–51.

Duménil, G. and D. Lévy (2004), Capital Resurgent: Roots of the Neoliberal Revolution, Boston: Harvard University Press.

Fields, D. and M. Vernengo (2013), “Hegemonic currencies during the crisis: the dollar versus the euro in a Cartalist perspective”, Review of International Political Economy, 20 (4), pp. 740–59.

Helleiner, E. (1994), States and the Reemergence of Global Finance: From Bretton Woods to the 1990s, Ithaca: Cornell University Press.

Ingham, G. (2008), Capitalism, Cambridge: Polity Press.

Keynes, J.M. (1980), The Collected Writings of John Maynard Keynes, Vol. XXV: Activities 1940–1944. Shaping the Post-War World: The Clearing Union, London and Cambridge: Macmillan and Cambridge University Press.

Kotz, D., T. McDonough and M. Reich (eds) (1994), Social Structures of Accumulation: The Political Economy of Growth and Crisis, Cambridge: Cambridge University Press.

Parboni, R. (1981), The Dollar and Its Rivals: Recession, Inflation, and International Finance, London: Verso.

Serrano, F. (2003), “From static gold to floating dollar”, Contributions to Political Economy, 22 (1), pp. 87–102.

Triffin, R. (1960), Gold and the Dollar Crisis: The Future of Convertibility, New Haven: Yale University Press.

Vernengo, M. (2003), “Bretton Woods”, in J. King (ed.), The Elgar Companion to Post Keynesian Economics, Cheltenham, UK and Northampton, MA, USA: Edward Elgar, pp. 30–34.

McKinnon and Wolf on global imbalances and Chinese liberalization

This is a bit old. It was published earlier this month in the Financial Times, as a response to Wolf's column. McKinnon is a well-known exchange rate specialist, and one of the few that has, correctly in my judgment, not been overly concerned with the international role of the dollar for the last three decades. His concern with Chinese liberalization of financial markets is that it would lead to inflows, since interest rates in the developed world are too low, and instead of balancing the trade surpluses, it would lead to more accumulation of reserves. The implicit notion is that if rates of interest were higher abroad, and Chinese funds flowed abroad it would be okay to liberalize, one supposes.

Note that this is also what Martin Wolf suggested in the original column (subscription required). In his words: "In the long run China’s capital account will presumably become largely open and in time, no doubt, China’s savers will own large parts of the world." In other words, the idea is that Chinese funds would finance the over spending in the rest of the world, and help in dealing with global imbalances, and Chinese savers would invest in real assets abroad. In contrast, if inflows were added to the trade surpluses, the Chinese would add to the 'problem' of the global imbalances.

Note that this view goes hand in hand with the notion that the accumulation of reserves is intrinsically bad. Wolf says:

"The principal form of capital outflow has been the accumulation of foreign currency reserves by the government. At $3.8tn last December (almost $3,000 for each Chinese person), these are gigantic and extremely unrewarding. It would be far better if some of this were converted into real assets."

Don't get me wrong, China holds more reserves than it needs for avoiding a currency crisis, or any sort of balance of payments problem that might arise (in a very distant future). Yet, the notion that China could open the capital account and not get into the kinds of problems that all the countries that liberalized financial markets did seems excessively optimistic.

There is essentially no problem if China maintains a trade surplus and attracts capital flows, increasing their reserves. And that has no relation to the financing of their investment, or the transition to a more consumer oriented economy. As I said a while ago global rebalancing is one of the myths of the current crisis. If the US grows faster, say as the result of an improbable fiscal expansion, the imbalances would grow larger, and that would be good.

I hope that China doesn't open the capital account, but that has nothing to do with the global imbalances, and all to do with the problems of financial liberalization.

In the long run China’s capital account will presumably become largely open and in time, no doubt, China’s savers will own large parts of the world. - See more at: http://magazine.thenews.com.pk/mag/moneymatter_detail.asp?id=7688&catId=194#sthash.fw6I8fiF.dpuf

Tokunaga & Epstein - Endogenous Finance of a Dollar-Based World-System: A Minskian Approach

Junji Tokunaga & Gerald Epstein 

From the Abstract:

Global financing patterns have been at the center of debates on the global financial crisis in recent years. The global imbalance view, a prominent hypothesis, attributes the financial crisis to excess saving over investment in emerging market countries which have run current account surplus since the end of the 1990s. The excess saving flowed into advanced countries running current account deficits, particularly the U.S., thus depressing long-term interest rates and fuelling a credit boom there in the 2000s. According to this view, the financial crisis was triggered by an external and exogenous shock that resulted from excess saving in emerging market countries, not the shadow banking system in advanced countries which was the epicenter of the financial crisis. Instead, we argue that a key cause of the global financial crisis was the dynamic expansion of balance sheets at large complex financial institutions (LCFIs)(Borio and Disyatat [2011] and Shin [2012]), driven by the endogenously elastic finance of global dollar funding in the global shadow banking system. The endogenously elastic finance of the global dollar contributed to the buildup of global financial fragility that led to the global financial crisis. Importantly, the supreme position of U.S. dollar as debt- financing currency, underpinned by the dominant role of the dollar in the development of new financial innovations and instruments, and was a driving force in this endogenously dynamic and ultimately destructive process.

Read rest here 

Tom O'Brien From Alpha to Omega Podcast on the Role of the Dollar

I was interviewed by Tom O'Brien of the "From Alpha to Omega" podcast. Episode also available here.



For more of Tom's interviews go here. The paper discussed in the interview is this one.

Krugman is Right for the Wrong Reasons on Dollar Hegemony

Paul Krugman argues (see here) that supposed threats of the US dollar losing its significance as the international vehicle currency are overblown (which I certainly agree with). He reaches his conclusion, however, from a mettalist perspective, suggesting that the dollar's role reflects self-sustaining increasing returns, that is, people use dollars because the markets are thicker (many buyers and sellers) and more liquid; i.e. it is 'confidence', not power, which rules the roost. For an analysis of the mettalist perspective, along with the alternative chartalist conception of dollar hegemony, see here.