Time for a new Bretton Woods

In the monetary system organized by the US leaders at the end of WW II, currencies were linked to the US Dollar, which was linked to Gold.

The US accounted for over 50% the World's output of goods and services. In the mid 1950′s, all East Asia accounted for only about 4% of global output.

China's economic reforms began only 30 yrs ago. By then, the US Dollar began its decline. Its official convertibility to Gold at UD$35 was suspended in Y 1971.

Friday,6 July, Gold is priced at $1,578.90+ oz, and China's foreign exchange reserves exceed US$2.4-T

As the USD declined over time, US trade deficits increased, challenging economic orthodoxy. Today US debt levels, fiscal deficits and entitlements have climbed to unsustainable levels, leaving the US increasingly dependent on China for credit.

The US has worked to put China under pressure to reduce its trade surplus by revaluing the Yuan (Renminbi), but China is concerned about protecting its investments from a further decline of the USD.

I believe China will appreciate the Renminbi on its own timeline, as it diversifies its investments and internationalizes its currency, as a stronger Renminbi will help contain inflation, fostering domestic consumption, and reducing the cost of imports.

But many of China's imports are commodities and components which fuel its exports. A stronger renminbi would facilitate China's foreign direct investments, and enhance its economic competitiveness, again challenging the Western orthodox POV.

The US ran trade surpluses with a strong USD. Floating the Renminbi while liberalizing capital controls is no quick fix for the World's monetary instability.

As Europe struggles to contain fallout from Greece's fiscal profligacy, and the US struggles to regulate its struggling banking industry (the one that triggered the recent World financial crisis), their debt continues to grow.

There is growing concern that the USD no longer meets the tests of a reserve currency. Yes, is everywhere in the trillions, but not a reliable store of value.

It is looking more and more like the World has overreached its capacity for financial governance, and monetary stability though the IMF has become more realistic since inflicting its conditions on East Asians during the financial crisis of Y 1997.

East Asia should now become a source of global monetary stability by exercising the responsibility that comes with its control of some 70% of the World's foreign reserves.

Japan proposed an East Asian monetary regime in Y 1997 to defend against currency speculation, extend credit to the afflicted, stabilize exchange rates, and develop a regional financial market and Asian currency unit.

The Chiang Mai initiative for currency swaps was a modest beginning. Free trade agreements in East Asia are moving forward. The China-ASEAN free trade agreement is a reality.

However, there appears to be little movement on the regional monetary front. The region remains underrepresented in the World's financial institutions.

China does not even have one seatr on the IMF board. President Obama's recent State of the Union address was revealing in that it ignored the World as if the State of the Union was severable, or the Union was in retreat.

The world increasingly looks to China. A Beijing consensus is an appealing alternative to the Washington Consensus for many outside the shrinking West.

Back to Y 1944, where is the leadership the US offered the world in 1944 at Bretton Woods?

The East Asian monetary regime could anchor a reformed global monetary order with the institutional and financial ability to enforce uniform standards for capital adequacy and transparency, and provide balance of payments financing with realistic conditions and expertise offering sound development assistance for the frontier economies.

Perhaps it will lead to a Global Monetary Fund that backs a global currency unit or (the dream of Maynard Keynes) a global currency.

Work on East Asian financial regionalism has been underway since the Y 1997 crisis. Lots of research has been done and much of in the Asian Development Bank and Institute.

However, there are many complex issues to consider, including the relationship of the Japanese Yen and China's RMB (Renminbi), and the accommodation of countries at different levels of development.

The integration of an East Asian regime in a global regime raises more issues, but there is movement. Debt-laden Japan's new PM is speaking warmly of an East Asian Community and developing ties to China.

The ongoing European experience is worth looking at carefully. It created a Central Bank and common currency, but no Monetary Fund, likely forcing it to turn to the IMF for assistance.

EU leaders will soon be calling for a new Bretton Woods. With that the US could lose privileges associated with maintaining the World's reserve currency, but that is the USA's own doing.

Many serious thinkers and policy maker, believe that most countries would gain from global monetary stability. American realists are calling for new thinking.

China is the Great Creditor Nation today, and will soon have the World's largest economy. As the new World leader in the 21st Century (the 20th Century belonged to the USA) should move to convene a new Bretton Woods and take the initiative in East Asia and the World, inviting other nations to join it in a co-operative effort to create a new monetary order for a New World.
Paul A. Ebeling, Jnr.

Paul A. Ebeling, Jnr. writes and publishes The Red Roadmaster's Technical Report on the US Major Market Indices, a weekly, highly-regarded financial market letter, read by opinion makers, business leaders and organizations around the world.

Paul A. Ebeling, Jnr has studied the global financial and stock markets since 1984, following a successful business career that included investment banking, and market and business analysis. He is a specialist in equities/commodities, and an accomplished chart reader who advises technicians with regard to Major Indices Resistance/Support Levels.