Wednesday, August 04, 2004

Martin Wolf has some interesting musings in the pages of the Financial Times today (sub. only):
Ninety-seven per cent of all debt placed in international markets between 1999 and 2001 was denominated in just five currencies: the US dollar, the euro, the yen, the pound sterling and the Swiss franc. Even well-run emerging market economies, such as Chile, cannot borrow in their own currencies.

Whatever the explanation for this difficulty, the limited currency composition of global lending has powerful consequences for capital flows. By definition, net borrowing then creates a potentially lethal currency mismatch. When a currency falls sharply, net borrowers will experience large balance sheet losses. Many financial institutions will be wiped out as a result of the insolvency of any debtor that is burdened by large net foreign currency liabilities.

. . . As Ronald McKinnon of Stanford University has argued, the more successful countries are in strengthening their balance of payments and limiting net foreign currency liabilities, the more they will suffer from "conflicted virtue". They will, in other words, find themselves under growing political pressure to allow their currencies to appreciate.

Such appreciations risk pushing low-inflation countries into deflation and, perhaps, even into a liquidity trap of the kind suffered by Japan in the 1990s. That has been a concern to China. Letting the currency appreciate while offsetting the contractionary impact through expansionary macroeconomic policies would risk creating a current account deficit. Should equity inflows halt, this would have to be financed by potentially destabilising net foreign borrowing.
Being the good liberal (in the European sense) that he is, Wolf wants a solution to this "problem"; he finds it in a global currency. But even Wolf understands that this idea is nothing more than a dream.

After all, why would the country producing the world's leading currency want to change anything? The US gets all the goodies from the status quo: countries in the Global South either run big current account surpluses, sending deflating goods/services and cheap money (esp. T-bills) to the US; or they borrow in dollars and live at the whim of global financial markets and international financial institutions largely controlled by US-based financial capital.

Even crashing currencies � la 1997-98 are simply another profit opportunity, as long as the state is there to rescue the biggest investors (as it always is -- S&L bailout, peso bailout, airline retirement fund bailout, IMF packages) if things go really badly. If you are are financial capital, what in the present system is there not to like?


Post a Comment

<< Home