A Keynesian solution to global imbalances

{"text":[[{"start":null,"text":""}],[{"start":6,"text":"For the better part of a year, policymakers and economists have been drawing attention to the financial stability risks of wide and persistent current account imbalances between countries. The alarm grew during the IMF-World Bank spring meetings last month and will reach fever pitch ahead of next month’s G7 summit in France."}],[{"start":26.8,"text":"The concern is well-founded. Imbalances, which are an inherent feature of the international trading system, are nearing their highest level in 150 years. According to the IMF, they are concentrated in a small number of major economies, heightening the risk to global output. In countries running a current account deficit, persistent imbalances have hollowed out domestic manufacturing and generated a political backlash, as today’s tariffs and other trade protectionism show."}],[{"start":54.95,"text":"Historically, imbalances have been redressed through either co-ordinated policy intervention, such as the 1985 Plaza Accord, or crisis, such as the 2008 financial crash. But in both of these cases, the reversals were temporary."}],[{"start":71.65,"text":"Policymakers are keen to avoid an unwinding through disorderly adjustment, which could damage global demand. As a first-best response, the Centre for Economic Policy Research’s fourth Paris Report recommends fiscal consolidation in the US, boosting household consumption in China and an increase in productive investment — modelled on former Italian premier Mario Draghi’s report — in Europe. These measures would encourage more balanced patterns of global saving and investment."}],[{"start":null,"text":""}],[{"start":101.5,"text":"In international forums, there is near-unanimous agreement that any move to redress imbalances should be symmetric and gradual. Policymakers also acknowledge that this will be difficult to achieve against the current geoeconomic backdrop. “The chances of . . . pre-emptive action are close to zero,” chief economics commentator Martin Wolf wrote earlier this week. "}],[{"start":123.8,"text":"But absent from the proposals has been any discussion of a longer-term structural fix to prevent the build-up of large imbalances and the related political pressures in the first place. Increasingly, the recommendations — such as increased macroeconomic policy co-operation and enhanced financial surveillance — look timid relative to the scale of the risks."}],[{"start":144.7,"text":"Here’s why the proposed solutions fall short: there is a structural flaw in the system. As Belgian-American economist Robert Triffin observed in 1960, a country that supplies the world’s reserve currency must run persistent deficits to meet global demand for safe assets."}],[{"start":161.14999999999998,"text":"John Maynard Keynes also understood the problem was structural. At Bretton Woods in 1944, he proposed a new financial institution, the International Clearing Union (ICU), which was aimed at preventing the build-up of imbalances. The ICU would be built around an international reserve currency called bancor."}],[{"start":180.99999999999997,"text":"Born of Keynes’ animus towards the gold standard, bancor was designed to automatically correct trade imbalances through exchange rate adjustment when countries breached limits on holdings. Its innovation was that it imposed penalties on countries for running either a surplus or deficit."}],[{"start":199.29999999999998,"text":"The proposal, despite its implementation challenges, was ultimately rejected by the US on political rather than economic grounds. The US, which was then the world’s largest creditor, had little incentive to sign up to a system that would penalise its surplus. This consolidated the dollar as the anchor of the international monetary system."}],[{"start":null,"text":""}],[{"start":219.85,"text":"Regardless, demand for a non-dollar international currency endured. For example, in 2009, the then Chinese central bank governor Zhou Xiaochuan suggested moving towards a “super-sovereign reserve currency”. Although the bancor proposal was far-sighted, Zhou said, he recommended expanding the role of the IMF’s special drawing rights (SDR) to reform the international monetary system."}],[{"start":243.85,"text":"SDRs, foreign exchange reserve assets introduced in 1969 to provide additional liquidity, were originally tied to the value of gold, as was bancor. Following the collapse of Bretton Woods, they were converted into a unit of account based on a basket of national currencies. Today, SDRs are used to supplement IMF members’ foreign reserves."}],[{"start":null,"text":""}],[{"start":268.3,"text":"Yet political restrictions on their issuance have prevented them from ever becoming the “principal reserve asset in the international monetary system”, as envisioned in the IMF constitution. Moreover, a lack of penalties for overdrafts and excess holdings deprives SDRs of the self-adjusting mechanism that was the key innovation of bancor."}],[{"start":289.3,"text":"There are other potential challengers to dollar dominance in the international monetary framework. One came from Mark Carney in one of his final speeches as Bank of England governor. He proposed the adoption of a “synthetic hegemonic currency”, which could be based on a basket of central bank digital currencies. Another example is the seemingly moribund proposal for a Brics currency."}],[{"start":313.2,"text":"Every time the global monetary system faces stress, or countries are forced to make macroeconomic adjustments in response to the US financial cycle, the case for a neutral international currency reasserts itself."}],[{"start":328,"text":"Amid the Trump administration’s assault on the global trading and monetary system, the international community appears to have ceded ground to those who wish to undo it from within. Now, policymakers face a choice between watching it fragment and proposing serious reform. If they don’t attempt to fix it, others will."}],[{"start":347.35,"text":"Food for thought"}],[{"start":348.8,"text":"Unreliable data has an economic cost. This paper tries to put a number on it."}],[{"start":null,"text":"

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"}],[{"start":353.6,"text":"Free Lunch on Sunday is edited by Harvey Nriapia"}],[{"start":null,"text":""}],[{"start":363.25,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1778414617_2842.mp3"}