Dear Reader,
One of the most discussed topics in recent weeks is the high uncertainty in the worlds currency market, also titled as the currency wars.
The world economy is showing clear signs of global imbalances in world trade, caused by the financial crisis. Since financial institutions are getting back on their feet, the focus shifted to even more serious problems – countries increasing public debts.
The President of the World Bank, Robert Zoellick raised his voice last week and made a plausible suggestion concerning the debate, he argued: “Leading economies should consider readopting a modified global gold standard to guide currency movements.”
(Source: FT)
To be more precise, his idea proposes to involve the dollar, the euro, the yen, the pound and a renmibi that moves towards internationalisation (adopts to the market conditions) and then an open capital account.
According to Zoellick, this system should also consider “employing gold as an international reference point of market expectations about inflation, deflation and future currency values.”
A successor is needed, and he calls it “Bretton Woods II”.
I found an interesting video, where Zoellick explains his plans explicitly (please refer to http://www.youtube.com/watch?v=okJdmy5TSRo)
I found an interesting video, where Zoellick explains his plans explicitly (please refer to http://www.youtube.com/watch?v=okJdmy5TSRo)
The key players in this discussion are the U.S, China and the EU. The U.S. is accusing China of holding down their domestic currency to maintain the dominance in exports. Additionally it blames other countries for contributing to global account imbalances and creating capital market distortions. On the other hand Germany’s finance minister criticises the US Federal Reserve’s decision to pump another 600 billion dollar into the financial markets. He argued that: “It is not consistent when the Americans accuse the Chinese of exchange rate manipulation and then steer the dollar exchange rate artificially lower with the help of their central bank’s sprinting press.”
World Bank President Zoelicks view underlines the importance of the debate and suggests a change in the system, which could replace the failed 1970 Bretton Woods agreement on fixed exchange rates.
I agree with Mr. Zoellicks suggestion introducing a new system or reform the old one. The extent of changes in the market since 1971 are immense, therefore I think it is eligible to consider changes in the Bretton Woods arrangement. Although Gold is considered as “old money” from many economists, markets are mainly using it as an alternative monetary asset nowadays.
(Source: GoldPrice.org)
Additionally the gold price hit a record high of 1389 Dollars the ounce, mainly influenced by the move of the Federal Reserve ($600bn). Another criticism to the US could be the decision making in isolation. This kind of decisions should normally be done in extreme cases and in consultation with other states.
On Thursday the G-20 Summit will be held in South Korea, where the subject of currencies will be covered.
E.V.
Sources:
1. NY Times
2. FT
3. FAZ
4. FAZ
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