Today's Wall Street Journal carries a very thoughtful commentary by Judy Shelton, entitled "Our One-Dollar Dilemma," in the WSJ. Dr. Shelton has been worried about the fragility of the dollar-based global currency system for some time, as her comment of four weeks ago, reproduced below, illustrates. She makes a good case, for vigilance. In today's column, she again argues -- even more compellingly -- for American leadership to craft means of crisis prevention. Haven't seen much of that yet!
COMMENTARY
Ruble Rumble
By JUDY SHELTON
August 30, 2007; Page A10
American fighter jets scrambled to intercept Russian bombers earlier this month near the island of Guam. It was the first time since the end of the Cold War that the Kremlin sought to provoke a U.S. response. It likely will not be the last. Fueled by revenues from energy exports, Russia appears bent on ratcheting up tensions.
But don't expect the next foray to take place over international waters. Vladimir Putin laid bare his ambitions at the St. Petersburg International Economic Forum in June by calling for a "new international financial architecture" to provide a base for economic development. Russia's next move is to challenge U.S. supremacy in world financial markets.
The notion of nudging America off its central perch in global economic affairs hardly seems plausible. But Russia's leader strikes a chord with other emerging-market economies -- Brazil, China, India -- when he describes current monetary and financial arrangements as "archaic, undemocratic and unwieldy."
Given the recent turmoil in world financial markets, Mr. Putin can expect heightened interest in his pitch for new regional alliances "based on trust and mutually beneficial integration" versus continued dependence on global institutions like the International Monetary Fund. Both Europe and Asia blame U.S. credit woes for their own unsettled markets. And newly independent nations on the periphery of established trade and security blocs have their own reasons to align with powerful patrons.
Mr. Putin even suggests that central banks should begin to hold reserves in a wider selection of currencies than dollars and euros in recognition of the "existing balance of power." It's hard to miss the implication: the ruble as a global reserve currency.
Is the man serious? The only reason the European Central Bank, say, or China's central bank, might hold reserves in rubles would be to pay for purchases from Russia. Today it is possible to buy Russian oil and gas using dollars or euros. The leading market exchanges for conducting international energy transactions are located in New York and London. But that is why officials at the White House, the Federal Reserve and the U.S. Treasury should be scrambling right now.
Mr. Putin is more than serious. He is determined to establish a world-class oil exchange on Russian territory and shift energy business away from existing global financial centers. A new facility is being readied in St. Petersburg's historic Bourse -- an imposing, white-colonnaded Greek Revival building that dominates the majestic sweep of the Strelka, or Spit, of Vasilievsky Island in the Neva delta and which is visible from the Winter Palace -- that will open to market traders within months and where transactions will be denominated in rubles.
It's a daring gambit and it constitutes no less than a demand for new international monetary arrangements on the scale of the post-World War II Bretton Woods agreement. "The global economy has experienced a transition," Mr. Putin notes pointedly. "Fifty years ago, 60% of world gross domestic product came from the Group of Seven industrial nations. Today 60% of world GDP comes from outside the G7."
Mr. Putin's plan to confront the privileged global role of U.S. currency resonates with Russians eager to recapture nationalist pride. Lampooning the sickly American dollar is popular with members of the Kremlin-financed youth group Nashi (meaning "ours"). And it potentially accommodates the burgeoning economic aspirations and swelling egos of Russia's partners in the Shanghai Cooperation Organization: Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan and China.
China, like Russia, bristles at its second-tier status within the global financial architecture. Harangued by the U.S. over exchange-rate policies, China has recently been flexing its monetary muscle by hinting that it might dump a portion of its considerable dollar reserves. The prospect of such a shock to the U.S. economy in the midst of a housing slump threatens to bring the whole edifice crashing down. Throw in statements of support from oil-producers Venezuela and Iran, and you have the makings of a devastating dollar rout.
If Russia insists that its energy clients pay in rubles, we cannot expect our allies to strenuously resist. Europe purchases nearly 30% of its energy from Russia. Rising energy demand in Asia will likewise boost demand for rubles as Russia targets China, India and Japan. Last month, Japan quietly acquiesced to Iran's request that it switch from dollars to yen in payment for Iranian oil.
Can U.S. leaders and financial authorities meet the challenge from the Kremlin? Is America prepared to offer its own proposals for establishing more stable currency and financial conditions for global trade? Or are we just interested in protecting our turf?
The next Bretton Woods should be launched as an earnest initiative from the nation that gave birth to democratic capitalism. Not as an act of aggression from a pumped-up Russian pretender.
Ms. Shelton is an economist and author of "Money Meltdown" (Free Press, 1994).
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Here is the commentary in today's WSJ to which I referred in my previous posting. Worth reading closely, I think.
COMMENTARY
Our One-Dollar Dilemma
By JUDY SHELTON
September 27, 2007; Page A17
'The policy of this government is a strong-dollar policy." President Bush has consistently stuck to this story throughout his White House tenure, which spans three Treasury secretaries. Just last week, current Treasury chief Henry Paulson toed the line with the requisite statement: "I feel very strongly that a strong dollar is in our nation's interest and we believe currency values should be set in a competitive marketplace based on underlying economic fundamentals."
[One-Dollar Dilemma]
The dollar has become like the weather: Everybody talks about it, but nobody does anything about it.
To insist that the U.S. has a strong-dollar policy, while standing idly by as our money sinks against a basket of six currencies to its lowest level in 15 years, is to abrogate leadership in the global financial arena. The central banks of Europe and Asia are treading lightly, concerned about complaining too vociferously lest they precipitate the very dollar rout they fear. But as their own currencies rise, they are feeling the economic and political pressure from lost export competitiveness.
Meanwhile, the value of central-bank portfolios -- more than 60% of accumulated foreign-exchange reserves are kept in U.S. dollars -- is declining rapidly, causing great consternation. Should they sell their dollar assets, contributing to the tumult? Or ride the plunge all the way down at considerable loss?
When the Federal Reserve opted to reduce interest rates last week, it was clear that new doubts about its dedication to fighting inflation would take a toll on the value of the dollar. By saying that currency values should be set by the marketplace based on economic fundamentals, Treasury has taken a let-the-chips-fall-where-they-may approach, letting the dollar be the default mechanism for overly indulgent credit policies. While it is always a safe retreat to rely on market forces to determine the value of any product or service, the dollar is not just your average internationally traded good. It is the numeraire -- the world's predominant monetary unit for measuring the relative values of all those other assets, financial and physical, brought in good faith to the global marketplace.
At least, it was the world's primary reserve currency for most of the last century. It's the residual status of having served as the key currency under the 1944 Bretton Woods international monetary system -- the U.S. was obligated to maintain convertibility between the dollar and gold at a fixed price -- that feeds our current vanity about wanting a strong dollar while exhibiting a hands-off complacency.
If U.S. officials truly believe in the wisdom of exchange-rate markets, why even invoke a loaded word like strong when it can only suggest they want an overvalued dollar? Obviously, they don't. Or they wouldn't be pressing China so hard to raise the yuan.
So, is intervention the answer? Absolutely not; it would only exacerbate the dollar's untenable situation in the global financial system. And to its credit, the Bush administration has resisted efforts by Congress to intervene in foreign-exchange markets to manipulate the dollar's value.
Senate leaders have been seeking to correct what they view as tactical and strategic failures in U.S. international economic policy by mandating the Treasury to intervene if currencies become fundamentally "misaligned." In the process of finalizing legislation, it has become clear that politicians see a trade-off between imposing a tariff on goods exported from China -- making them more expensive for American consumers -- and raising the price of Chinese goods by strengthening the yuan, i.e., weakening the dollar (though they seldom put it the latter way).
The good thing about the debate is that it clarifies two very important points: (1) As irrational as foreign exchange markets can be, it would be worse to have the dollar's value artificially pegged by self-serving officials subject to political intimidation and (2) weakening the dollar is the same as imposing tariffs on goods imported from our trade partners.
And that's the travesty of the dollar and the tragedy of the international monetary system today. What we have is a non-system of chaotic exchange-rate movements that confounds rather than facilitates global free trade.
The massive currency swings that reign between the dollar, the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc wreak havoc on demand-and-supply outcomes for goods traded across borders. The New York Board of Trade's U.S. Dollar Index, which tracks the dollar's value relative to a basket of those six other currencies, has tumbled 34% since its July 2001 peak. Why pontificate about the importance of eliminating tariffs to promote open markets when the impact of a gyrating dollar is far more devastating, far more protectionist in its effect on global free trade?
It is time for the U.S. to acknowledge what we have tried to wave off under the pretense of allowing free markets to decree the value of our currency. For the intellectual record, we should recognize that markets are not free when entry is restricted; only governments can be suppliers of currency, which means the foreign-exchange market is already dominated by a cartel. And on the demand side, consumers of currency rarely have a choice that allows them to price their goods or services in violation of legal tender laws. In other words, foreign-exchange markets are inherently rigged in favor of a few players.
Meanwhile, the rest of us -- the ones who have to use money as a standard of value, a unit of account, a medium of exchange and a store of value -- are forced to make business plans and conduct transactions using a moving target. We are asked to accept the morality and rationality of free trade and open global markets while having to contend with monetary arrangements that negate the benefits of comparative advantage.
It's a cynical approach that undermines genuine individual effort -- rewarding people who guess right about currencies rather than those who strive to deliver value. Exchange-rate movements transform an efficient supplier from a strong-currency country into a noncompetitive loser, while the supplier who has done nothing to produce an improved-quality good for less expense finds that the cheap-currency policies of his country make him a first-class competitor.
If we truly believe in a global marketplace where outcomes are determined by competition and competence, not localized monetary policies, we need a global monetary unit of measure. We need a meaningful global currency. It could start as a voluntary one -- a parallel currency available to buyers and sellers wherever they find themselves wanting to do business around the world or in cyberspace.
When can we expect U.S. leadership on the need for a new Bretton Woods? Prof. Robert Mundell, the Nobel economist who has long argued for a reformed international monetary system using gold as a reserve asset, should be consulted as soon as possible; ideally, by President Bush or one of the candidates who aspires to succeed him. The next best choice would be French President Nicolas Sarkozy, who needs to move away from simply browbeating monetary officials at the European Central Bank. If Mr. Sarkozy resents current policies, why not propose a new system entirely, one that would establish a level monetary playing field for international trade?
Someone with a bold vision for the future of democratic capitalism, someone who appreciates the entrepreneurial spirit, needs to seize the moment before money meltdown takes a terrible toll on world trade. If America does not take the lead on this issue, rest assured, one of our competitors will.
Ms. Shelton is an economist and author of "Money Meltdown" (Free Press, 1994).
Currency fluctuations such as we see between the U.S., Japan, and Europe and among all countries or monetary unions around the world are wasteful, risky, unnecessary and obsolete.
What is needed is a Single Global Currency, managed by a Global Central Bank within a Global Monetary Union. (See www.singleglobalcurrency.org)
The benefits of a Single Global Currency are staggering, and the world should begin now to plan for such a Global Monetary Union.
The world needs a Single Global Currency and the sooner, the better. We have the dollar and the euro and credit cards, but citizens of the world still use about 146 currencies and pay about $400 billion annually to buy and sell other currencies when they are needed for conducting international transactions.
1. The existence of the 13-nation, soon to be 15-nation, eurozone shows that monetary union can be successful. The eurozone is expanding because the people of the Europe want stable money.
2. The Single Global Currency will eliminate currency risk and the risk of currency crises and almost all concern about balance of payments or the current account, and global imbalances.
3. The goal of the Single Global Currency Assn. (www.singleglobalcurrency.org) is a Single Global Currency by 2024, to be managed by a Global Central Bank which would operate in a manner similar to the European Central Bank or the Eastern Caribbean Monetary Union Central Bank. 2024 is now 17 years away. In 1985, when the euro was 17 years away, there was still a Soviet Union and a Berlin Wall.
4. Other regions are exploring the creation and expansion of monetary unions in Latin America, West, South and East Africa, the Arabian Gulf and South and East Asia. A key value of a monetary union is that the value of its money does not depend upon any particular national government, but upon the management of a central bank, the primary goal of which is stable money. The currencies of regional monetary unions are better than one-nation currencies, but they still must co-exist in a multi-currency world with fluctuating currency values.
5. Implementing a Single Global Currency within a Global Monetary Union will take time. What is needed now is more research and writing about the prospects. Is the claim of $400 billion in potential savings (in my book, "The Single Global Currency - Common Cents for the World") from the avoidance of foreign exchange transaction costs a reasonable estimate? If not, what IS the total value of the cost of exchanging $3.2 trillion every working day?
6. It is true that within a monetary union, individual countries no longer control their monetary policy, but in return they get more stable money and lower inflation and lower interest rates. The power to control monetary policy often meant the power to inflate a currency to please the exporters, but those policies came at a cost to importers and to those whose assets were denominated in the inflating currency. The costs and benefits of inflating a currency work out to about a zero sum game.
7. From underdeveloped countries, much of the wealth is sent to safe financial centers to avoid the risks of currency failure. With a Single Global Currency, that incentive to send money out of a country would no longer exist. To be sure, other risks would remain, but not currency risk.
8. The value of assets in countries with risky currencies is depressed due to that risk. When those countries move, perhaps in an intermediate step, to a regional monetary union currency, and then to a Single Global Currency, the value of those assets will increase dramatically, approximately by $36 trillion, due to the elimination of currency risk.
9. With a Single Global Currency, the world will no longer need to maintain foreign exchange reserves, which would free approximately $4.1 trillion now tied up on those low-interest or no-interest assets around the world.
10. To some, the implementation of a Single Global Currency seems unrealistic, but consider how realistic the euro looked in 1995 when it only had a name.
Now is the time to begin planning for a Single Global Currency, managed by a Global Central Bank within a Global Monetary Union.
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