A revival of Bretton Woods?
( Global Trade And The Currency Market - The Big Picture Matters )
Much of the arrangements the Bretton Woods system brought into existence continue to be relevant in today's global market. Some observers call it the "Bretton Woods II" making reference to the system of currency relations in which currencies, particularly the Chinese renminbi (Yuan), remained pegged to the US Dollar. The argument is that a system of pegged currencies is both stable and desirable although this notion causes considerable controversy and opens the question: how long a system of heavily managed exchange rates as seen in many emerging market economies will last?
The answer depends on the expectations of the US creditors, mainly the Asian economies. The similarities between the original system and Bretton Woods II are evident: the US deficit, the US loose monetary policies, the fixed pegs to the US, and the massive ongoing reserve accumulation by Asian central banks. These exchange rate policies can lead to an inflation rise in those emerging economies forcing them to abandon the pegs and/or letting currencies appreciate at a faster rate as a necessary step to control inflation.
Over the very long term, economies move in cycles and what were yesterday's emerging economies, like Japan or Germany, become today's stable, mature markets while other countries step into the role of the emerging countries and join the globalization party, such as the case of China, India, or Brazil. Suddenly it was 1944 all over again: what made economic sense for the emerging markets of yesterday continues to make sense for those of today and likely for those of tomorrow.
Just like their predecessors, many of these countries, particularly China and other Asian economies, believe today that keeping undervalued currencies is a key to grow and sustain their exports to the developed markets of the US and Europe and thus to increase domestic wealth. This shows why fixed-rate systems never died out completely. These countries' central banks see a weak currency as a critical element of the country's export-oriented economic policy. But on the other side the inflationary pressures derived from this monetary policy are creating serious problems to their economies.
The US trade deficit grew to unprecedented highs throughout the so-called Bretton Woods II, supported by strong US consumer demand and the rapid industrialization of China and other emerging economies. As of today, the US Dollar is still the most extended reserve currency and the form in which many countries hold US debt instruments.
Clearly, any dramatic moves on the part of the countries that have accumulated large holdings of US Dollar reserves to change the status quo arrangement would have the potential to create turbulence in international capital markets. For instance, the political relationship between the US and China is also a significant part of this equation and of the big picture itself. This has always been a sensitive political topic and of much importance when considering the current monetary system.
Asian economies seem to be willing to perpetuate this status quo because the US consumer has supported the growth of their economy during the last decades. But at this point you are surely raising questions like: What happens if they don't want that debt anymore? Or, what if one or another member of this arrangement concludes that its self-interest lies in abandoning the system? These are certainly questions that belong to a broad analysis and for which you should try to find objective answers. previous
Joseph Trevisani writes in one of his market views:
The funds will be borrowed from foreign governments with their own political and economic agendas. For China the logic is clear. China is the world's largest holder of US Treasury securities with $653 billion in their vaults. Joseph Trevisani is one of our contributors. Read all you can from this author to get a clear view of the big picture. sourceFxstreet.com
( Global Trade And The Currency Market - The Big Picture Matters )Much of the arrangements the Bretton Woods system brought into existence continue to be relevant in today's global market. Some observers call it the "Bretton Woods II" making reference to the system of currency relations in which currencies, particularly the Chinese renminbi (Yuan), remained pegged to the US Dollar. The argument is that a system of pegged currencies is both stable and desirable although this notion causes considerable controversy and opens the question: how long a system of heavily managed exchange rates as seen in many emerging market economies will last?
The answer depends on the expectations of the US creditors, mainly the Asian economies. The similarities between the original system and Bretton Woods II are evident: the US deficit, the US loose monetary policies, the fixed pegs to the US, and the massive ongoing reserve accumulation by Asian central banks. These exchange rate policies can lead to an inflation rise in those emerging economies forcing them to abandon the pegs and/or letting currencies appreciate at a faster rate as a necessary step to control inflation.
Over the very long term, economies move in cycles and what were yesterday's emerging economies, like Japan or Germany, become today's stable, mature markets while other countries step into the role of the emerging countries and join the globalization party, such as the case of China, India, or Brazil. Suddenly it was 1944 all over again: what made economic sense for the emerging markets of yesterday continues to make sense for those of today and likely for those of tomorrow.
Just like their predecessors, many of these countries, particularly China and other Asian economies, believe today that keeping undervalued currencies is a key to grow and sustain their exports to the developed markets of the US and Europe and thus to increase domestic wealth. This shows why fixed-rate systems never died out completely. These countries' central banks see a weak currency as a critical element of the country's export-oriented economic policy. But on the other side the inflationary pressures derived from this monetary policy are creating serious problems to their economies.
The US trade deficit grew to unprecedented highs throughout the so-called Bretton Woods II, supported by strong US consumer demand and the rapid industrialization of China and other emerging economies. As of today, the US Dollar is still the most extended reserve currency and the form in which many countries hold US debt instruments.
Clearly, any dramatic moves on the part of the countries that have accumulated large holdings of US Dollar reserves to change the status quo arrangement would have the potential to create turbulence in international capital markets. For instance, the political relationship between the US and China is also a significant part of this equation and of the big picture itself. This has always been a sensitive political topic and of much importance when considering the current monetary system.
Asian economies seem to be willing to perpetuate this status quo because the US consumer has supported the growth of their economy during the last decades. But at this point you are surely raising questions like: What happens if they don't want that debt anymore? Or, what if one or another member of this arrangement concludes that its self-interest lies in abandoning the system? These are certainly questions that belong to a broad analysis and for which you should try to find objective answers. previous
Joseph Trevisani writes in one of his market views:
The funds will be borrowed from foreign governments with their own political and economic agendas. For China the logic is clear. China is the world's largest holder of US Treasury securities with $653 billion in their vaults. Joseph Trevisani is one of our contributors. Read all you can from this author to get a clear view of the big picture. sourceFxstreet.com