The title of this blog is the title of an Opinion piece in Friday January 8th US print edition of the Wall Street Journal – see Beware the Currency Wars of 2015. It was written my Mike Newton, former macro trader and global head of emerging market FX strategy at HSBC. The article was spot on in it is calling for global orchestration of monetary policy: “The situation demands policy coordination.”
Bretton Woods came about when the global community accepted a shared goal related to stable prices as means to support economic growth, over any one nations attempt at individual growth. It was an imperfect framework, and it was used to circumvent the fallout of the breakdown in the gold standard, another but slightly less imperfect system. The gold standard, when based on sterling, worked for longer and was more stable. This was mainly because Britain’s growth objectives were helpful to most other participating nations. The Bretton Woods agreement broke down chiefly due to France and U.S.’s desire to hoard gold and the U.S. Governments actions that resulted in an imbalance between its spending and reserves (i.e. debt). However for periods of time both systems helped Global Inc. to cope with the then current economic conditions. This is what we need today:
- The US is experiencing lopsided growth, with fast growing employment but with low wage growth, coupled with energy driven deflation
- The Euro zone is not a homogenous set of economic states. It is a mixed bag of states needing different medicine: periphery states (i.e. Greece, Portugal) need investment, debt reduction, and regulatory reform; central and northern economies (i.e. Germany, Nordics) need higher interest rates to balance export growth. Add to this Italy, Spain and France, central economies that need regulatory reform, debt reduction, and different interest rates to the periphery and Germany, and the entire zone is inconsistent.
- A global financial sector hampered by increased regulation in the interests of saving ourselves from ourselves (and the next financial crisis)
There was a half-baked attempt at global coordination during this economic cycle. The London G20 summit of 2009 suggested that a memo calling for new spending and better coordination of policy would help the situation. Now you have the Fed talking of pushing interest rates up just at the same time that the EU is talking of billions of Euro’s in terms of QE. Now you have trading blocs doing everything they can to help themselves, and no real coordination at all. If ever there was an excuse for real effective global monetary policy coordination this is it. I called this in October last year in: Economic Minute 4 – Global Call for Bretton Woods II. The global economy will lurch on for a long while, accidentally looking for a road to growth. If we can just put away our own toys for a moment, and sit down as adults, we might agree on a better way.
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