IMF Economist Calls For World Currency
Hossein Askari and Noureddine Krichene Asia Times Monday, June 9, 2008
The Following piece by Hossein Askari, professor of international business and international affairs at George Washington University, and Noureddine Krichene, economist at the International Monetary Fund, appeared in the Asia Times.
The world economy is suffering from high inflation, stemming from overly expansionary monetary policy in the United States, as indicated by negative real interest rates and the rapidly depreciating dollar. Low interest rates discourage savings, reduce bond yields and cause investors to seek higher yields in speculative commodities and foreign currency markets. Consequently, energy and food prices have exploded to levels threatening social and economic upheavals.
Oil prices, by climbing from US$20 a barrel in 2001 to $135 barrel in May this year, illustrate the extent of the dollar's depreciation and interest rates distortions. Whereas a $100 bill would have bought five barrels of oil in 2001, now it buys only 0.74 barrel, losing approximately 85% of its real value.
Inflation imposes a heavy tax burden on dollar holders, cuts disproportionately the real incomes of workers and pensioners, redistributes wealth in favor of debtors at the expense of creditors, and stifles economic growth.
Given that the US dollar accounted for 41% of total international reserves at the end of 2007, (against 17% for euros), its fast depreciation makes it a risky asset for holders and could lead to a run from the dollar toward more stable currencies or more stable assets, such as gold, commodities, real estate and safer financial assets. A flight from the dollar could create a liquidity crisis, in turn disrupting international trade and world economic growth. Oil and food exporters, wary of the rapidly depreciating value of their foreign exchange reserves, would be induced to curtail exports, with attendant consequences for the real world economy.
The current inflationary episode is neither novel nor surprising, but its severity could prove to be exceptional and it could last for some time. Indeed, following the collapse of the gold standard in 1914, the world economy became vulnerable to recurrent monetary disruptions stemming from expansionary monetary policies in reserve currency centers, suffering deep contractions in trade and economic growth, most notably the Great Depression.
The present monetary conditions are similar in many respects to the ones that prevailed in the 1930s. Major reserve currency countries, now and then, fearing domestic recession and unemployment, were reluctant to contract monetary policy and incurred large balance of payments deficits, followed by competitive devaluations, speculative attacks and inflationary spirals.
In spite of the Bretton-Woods Agreement and successive reforms of the international financial system, a main deficiency of the post-1914 system remained the absence of monetary discipline and ultimately a reserve anchor (formerly gold) for monetary policy in reserve centers.
Hossein Askari and Noureddine Krichene Asia Times Monday, June 9, 2008
The Following piece by Hossein Askari, professor of international business and international affairs at George Washington University, and Noureddine Krichene, economist at the International Monetary Fund, appeared in the Asia Times.
The world economy is suffering from high inflation, stemming from overly expansionary monetary policy in the United States, as indicated by negative real interest rates and the rapidly depreciating dollar. Low interest rates discourage savings, reduce bond yields and cause investors to seek higher yields in speculative commodities and foreign currency markets. Consequently, energy and food prices have exploded to levels threatening social and economic upheavals.
Oil prices, by climbing from US$20 a barrel in 2001 to $135 barrel in May this year, illustrate the extent of the dollar's depreciation and interest rates distortions. Whereas a $100 bill would have bought five barrels of oil in 2001, now it buys only 0.74 barrel, losing approximately 85% of its real value.
Inflation imposes a heavy tax burden on dollar holders, cuts disproportionately the real incomes of workers and pensioners, redistributes wealth in favor of debtors at the expense of creditors, and stifles economic growth.
Given that the US dollar accounted for 41% of total international reserves at the end of 2007, (against 17% for euros), its fast depreciation makes it a risky asset for holders and could lead to a run from the dollar toward more stable currencies or more stable assets, such as gold, commodities, real estate and safer financial assets. A flight from the dollar could create a liquidity crisis, in turn disrupting international trade and world economic growth. Oil and food exporters, wary of the rapidly depreciating value of their foreign exchange reserves, would be induced to curtail exports, with attendant consequences for the real world economy.
The current inflationary episode is neither novel nor surprising, but its severity could prove to be exceptional and it could last for some time. Indeed, following the collapse of the gold standard in 1914, the world economy became vulnerable to recurrent monetary disruptions stemming from expansionary monetary policies in reserve currency centers, suffering deep contractions in trade and economic growth, most notably the Great Depression.
The present monetary conditions are similar in many respects to the ones that prevailed in the 1930s. Major reserve currency countries, now and then, fearing domestic recession and unemployment, were reluctant to contract monetary policy and incurred large balance of payments deficits, followed by competitive devaluations, speculative attacks and inflationary spirals.
In spite of the Bretton-Woods Agreement and successive reforms of the international financial system, a main deficiency of the post-1914 system remained the absence of monetary discipline and ultimately a reserve anchor (formerly gold) for monetary policy in reserve centers.
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