"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Monday, January 10, 2011

France Scales Back its Goal of Global Monetary Reform

After the last G20 meeting in South Korea,  France attained the Presidency of the G20.  In recent years, especially with the onset of the Global Financial Crisis, the G20, and to an extent, the IMF have become the de facto global bodies for international cooperation, or at least a forum for the appearance of cooperation.  The UN has become largely ineffective, if not entirely absent from the crisis.

Last year, French President Nicolas Sarkozy was rather ambitious in what his goals would be in confronting the global financial crisis.  From Bloomberg last November, at the G20 in Seoul:
The group’s final statement after a summit in Seoul today, which cited the dangers of competitive devaluations and volatile capital flows, underscored Sarkozy’s main goal as president of the group of “updating” the global monetary order, he said in a closing press conference. 
“It’s already a success that the G-20 agrees that the international monetary system is a problem,” Sarkozy said. “That wasn’t always the case.”
While Sarkozy avoided castigating any country for unstable foreign-exchange markets, in the past he blamed the dollar’s dominant role as a reserve currency for helping fuel the financial crisis. French officials have been vague about what they’d suggest to replace it, partly because there aren’t any ready alternatives.

No one can say that Sarkozy lacked ambition.  I guess it is due to the uniquely French habit of publicly admonishing the US and its (mis)handling of the US Dollar.  Charles de Gaulle was well known for his criticism of US monetary and fiscal policy in the 1960s.  Many would say it was France's alarm over US Dollar management that accelerated the end of the Bretton Woods System of US Dollar/Gold convertibility.  de Gaulle, after all, not only wanted his dollars exchanged for gold, he actually sent battleships to New York City to physically pick the stuff up.  Germany was not so distrustful, and to this day, much German gold sits in the vaults of the NY Federal Reserve.

But enough of the history.  It looks like Sarkozy has scaled back his ambitious plans for heading the G20 this year.  From iMarketNews:
G20:  France Downsizes its Aim to Reform Global Monetary System 
France's high hopes for an overhaul of the global monetary system under its presidency of the G20 slammed into the hard realities of sovereign national interests at a brain-storming session this week.
A debate among eminent academics and finance ministers -- all sympathetic to the aim of restructuring the chaotic and risk-prone world of volatile exchange rates and uncontrolled capital flows -- over alternatives and how to get there made clear that the odds for even minor corrections are extremely small.
French Finance Minister Christine Lagarde, who knows as well as anybody how intractable international negotiations can be, made clear from the outset that France's ambitions for reform are in fact fairly modest.
"I won't supply any answers," Lagarde told a two-day colloquium here bravely entitled "New World, New Capitalism." Rather the aim of France as it takes over the presidency of the G20 this year is to pose the questions, solicit responses and explore solutions, she said.
This is big a step down from President Nicolas Sarkozy's dream of dethroning the dollar and ushering in a multi-polar monetary order. 
So there you have it.  Once again, international cooperation is subordinated to national interests.  But this should not really be a surprise.  In the early 1900s, it was the British Pound that was the world's reserve currency.  And why?  Because of a thing called the British Empire.  And at the close of World War II, as the British Empire faded, the US, the lone dominant power, took over that role with the US dollar under what was called the Bretton Woods System.  That system lasted until 1971 when Nixon closed the gold window and ended gold convertibility of the US Dollar.  The new system, the one we have today, was once again dictated by the US to the rest of the world.  The US was still a Superpower, and the Western World was still living under the threat of the USSR.  Not much room for disagreements back then.

However, those days are over.   If historically, a monetary system is dictated to the rest of the world by the pre-eminent economic and military power, what happens when that  superpower's status is diminishing as others attain military and economic strength?  Has there ever been a period in history when global cooperation amongst (somewhat) equals resulted in an agreed upon monetary system?  I can not find any examples.

Alan Beattie, in yesterday's Financial Times, wrote: Tensions Rise in Currency Wars.   The Financial Times also had another article titled:  Trade War Looming, Warns Brazil.  These should be no surprise.  When a Superpower is facing tremendous financial issues of its own in an increasingly multipolar world, it will have a difficult time dictating what everyone else should do.  And everyone else does what they have to do to protect themselves - thinking about the global consequences is a secondary concern, if it is a concern at all.

It is a central tenet to the theory of this blog that international conflict, not cooperation will likely be the outcome of the global financial crisis.  So far, I have yet to see any concrete steps that lead in the direction of global cooperation.

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