The Downfall of the U.S. Dollar

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The current political standstill in the U.S. can have two main results in terms of the international monetary currency. The first of them is the growing unpredictability of U.S. dollar, the U.S. Treasury securities. Japan and China have shown that they are worried by the situation. The both countries are among the biggest US Treasuries investors. The American flawed political system plays a major role in the global economy. Therefore, it can lead to default of one of the most important reserve assets in the world.

The other possible consequence of the situation is that IMF may delay its governance reforms. They can increase the contributions of IMF countries two times. In addition, they will offer more voting rights to the biggest emerging economies. These reforms are seen as a major progress. However, the U.S. still has not accepted them. Since the United States can impose a veto over the resolutions of the International Monetary Fund, the reforms are not likely to break through any time soon.

The United States default scenario may be avoided if the ceiling of the governement debt rises. There was such an agreement about two years ago. No matter the final result, one thing is now more that obvious. The world needs a new international monetary system. The one, which we use today, is not secure enough. But, whatever the outcome, the latest episode makes it clear that our globalized world deserves a better international monetary system. That is due to the fact that it was established in an impromptu way after the crash in the 1970s.

The gobal financial crisis taught us something very important. Namely, that we need to restructure our international financial and monetary system. It is true that they were a number of reforms in 2009 and 2010. However, they did not change the situation much.

The ideas for reforms come from every direction. There are proposals from a commission summoned by UN’s General Assembly, the governor of the People’s Bank of China, as well as the French Palais Royal Initiative. The academic field is also very active in the discussions on this problem.

One of the first steps of reform is to entrust a greater role to the only international money left to the world. More specifically, these are the Special Drawing Rights (SDRs) of the International Monetary Fund. They were adopted in 1969 due to yet another crisis of the U.S. dollar. SDRs was accepted together with an agreement which made the special drawing right international monetary system’s key reserve asset. However, this agreement never really went into force. It was brought up only during crises, including the one in 2009.

IMF should agree on a more flexible use of the Special Drawing Rights. This should happen in a manner similar to the one used by central banks. In other words, SDRs could be established in times of global recessions and removed during boom periods. They also need to become a main source of the financing of the International Monetary Fund. In additon, SDRs should take the place of lending by member states to the IMF or quota subscriptions. The most basic practice would be for countries to transfer the Special Drawing Rights to the IMF. After that, the Fund could lend them to countries. The remaining will be used for sovereign bond investing.

The International Monetary Fund should also get a more central role than G-20, for example. That is because the IMF is a real coordination tool for the global macroeconiomic policy. This coordination needs to decrease global inequities. One of them was EU’s increasing external surplus. It left a great number of emerging economies with rising deficits.

All other global currences, like the euro and the dollar, would not stop existing after the adoption of SDRs. Therefore, the cooperation should also set all the duties of regions and countries which have reserve currencies.

The global exchange-rate sysmem should also be reformed. It should effectively oppose any manipulation of currency. However, in order that to happen, the term manipulation should be better explained and defined. In addition, the high rates of exchange-rate volatility should also be decreased.

Another important thing is that the management of capital flows should be adopted on a macroprudential basis. This point was agreed on by the G-20 in 2011. The International Monetary Fund approved it in 2012.

A governance reform is also necessary for the international monetary system. Developing and emerging economies need to get stronger positions. Other reforms which should not be overlooked are also those proposed by the changes should include those recommended by the Palais Royal Initiative, the 2009 Committee on IMF Governance Reform, the Stiglitz Commission and a few more.

Among the biggest goals of the reforms should also be the elimination of veto rights practiced by any IMF country. Presently, some of the U.S. political leaders have a hard time acting like grown people. As a result, the world is in a stalemate position. The negative results of that are now getting more than clear.

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