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U.S. one hundred dollar notes are seen in this picture illustration taken in Seoul February 7, 2011. (LEE JAE-WON/REUTERS)
U.S. one hundred dollar notes are seen in this picture illustration taken in Seoul February 7, 2011. (LEE JAE-WON/REUTERS)

Economy Lab

Why the currency markets are in an ‘age of improvisation’ Add to ...

Do you see a day when there might be a return to a stricter global monetary system?

I don’t.

In the 1940s, there was a deal to be struck between the U.S. and the world. The U.S. really was the world’s only credible international creditor. The only way you could trade internationally other than barter was with gold and dollars. Both were in very short supply in the 1940s, so the U.S. offered the world a deal: We will provide you with short-term balance of payments assistance through our new International Monetary Fund, in return for which you pledge not to devalue your currency without the acquiescence of this new fund, which of course would be American dominated. The world wasn’t wild about the deal, but it was the best on offer…

Compare that to the situation between China and the United States today. The U.S. now is the world’s largest international debtor; China is the world’s largest international creditor. Chinese holdings of dollar-denominated securities amounts to $1,000 (U.S.) per Chinese resident. If China were to provoke a dollar crisis by trying to nudge the world to an alternative monetary system in which the dollar was not central, China would risk a collapse of the purchasing power of its vast hoard of dollar-denominated assets. The U.S. for its part sees little motivation to change this system. It still raises debt in a currency that it mints…There isn’t the political basis for a deal to be struck between China and the United States right now. I don’t any new Bretton Woods emerging out this situation. I can see circumstances under which this system collapses.

Talk about that.

If global imbalances continue to get worse, and those imbalances are mainly created by two countries, the U.S. and China, I can envision a circumstance in which the world does begin to lose confidence in a fiat dollar. But I would argue that would lead into a collapse in confidence in fiat currencies generally…

What would be the alternative to the U.S. dollar? One alternative I would highlight is gold. Central banks have been rebuilding their gold stocks after selling them off aggressively in the 1990s. I can see a circumstance in which those gold stocks were sufficiently rebuilt where countries might be motivated to start using them once again to start settling trade balances. I can also imagine a circumstance in which gold banks emerge. You already see the beginnings of this where people will own digital representations of gold and they can pay for goods and services across borders using transfers of gold, digital transfers. If this became popular, there is no reason such banks couldn’t issue smart cards so you could go into a café and pay for your cappuccino by swiping your card for a tenth of a gram of gold. I don’t think this is science fiction at all. So I can foresee circumstances in which gold would re-emerge as the foundation of the world monetary system without any government wanting it to happen or trying to make it happen.

What is your preferred option?

My preferred option is for the Federal Reserve to be more cognizant in carrying out its policies, the effects on other major nations. I feel the United States is often willfully blind to the fact that much of the world has to import its monetary policy because of the fact most of the world trades using U.S. dollars, whether they like it or not.

Do you the Fed is targeting the currency?

Concentrating would be too strong a term. I don’t think it’s a firs-order target. But I do think it’s a third- or fourth-order target. There is no doubt in my mind that the Fed chairman views a lower dollar as a useful vehicle with which to promote a revival of growth in the U.S. economy. It’s not something we would expect him to emphasize publicly for reasons domestic and international. It would be naïve at best to assume that because he doesn’t speak about it that it’s not very much on the Fed’s radar…Chairman Bernanke’s view, which he has stated repeatedly, is the Fed is pursuing not only the right policy from the perspective of the United States, but it is pursuing a policy that is consistent with reviving global growth. The problem is the rest of the world doesn’t accept that. Brazil, Korea, China, Japan, all of them can be expected to take actions to mute the effect of a rapidly growing supply of dollars.

(The interview has been condensed and edited.)

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