In many scholarly and activist circles, the International Monetary Fund (IMF, or ‘the Fund’) has a reputation as a global bully. The phrase ‘Washington consensus’ has come to invoke a rigid orthodoxy of austerity and liberalization which the Fund, along with its cousins the World Bank and the US Treasury, imposes on developing countries. As an organization, the IMF is seemingly monolithic, drawing comparison to the Vatican even amongst its own staff.
The post The IMF and global exchange rates: dissensus in Washington appeared first on OUPblog.
By Barry Eichengreen
If the euro’s crisis has a silver lining, it is that it has diverted attention away from risks to the dollar. It was not that long ago that confident observers were all predicting that the dollar was about to lose its “exorbitant privilege” as the leading international currency. First there was financial crisis, born and bred in the United States. Then there was QE2, which seemed designed to drive down the dollar on foreign exchange markets. All this made the dollar’s loss of preeminence seem inevitable.
The tables have turned. Now it is Europe that has deep economic and financial problems. Now it is the European Central Bank that seems certain to have to ramp up its bond-buying program. Now it is the euro area where political gridlock prevents policy makers from resolving the problem.
In the U.S. meanwhile, we have the extension of the Bush tax cuts together with payroll tax reductions, which amount to a further extension of the expiring fiscal stimulus. This tax “compromise,” as it is known, has led economists to up their forecasts of U.S. growth in 2011 from 3 to 4%. In Europe, meanwhile, where fiscal austerity is all the rage, these kind of upward revisions are exceedingly unlikely.
All this means that the dollar will be stronger than expected, the euro weaker. China may have made political noises about purchasing Irish and Spanish bonds, but which currency – the euro or the dollar – do you think prudent central banks will find it more attractive to hold?
There are of course a variety of smaller economies whose currencies are likely to be attractive to foreign investors, both public and private, from the Canadian loonie and Australian dollar to the Brazilian real and Indian rupee. But the bond markets of countries like Canada and Australia are too small for their currencies to ever play more than a modest role in international portfolios.
Brazilian and Indian markets are potentially larger. But these countries worry about what significant foreign purchases of their securities would mean for their export competitiveness. They worry about the implications of foreign capital inflows for inflation and asset bubbles. India therefore retains capital controls which limit the access of foreign investors to its markets, in turn limiting the attractiveness of its currency for international use. Brazil has tripled its pre-existing tax on foreign purchases of its securities. Other emerging markets have moved in the same direction.
China is in the same boat. Ten years from now the renminbi is likely to be a major player in the international domain. But for now capital controls limit its attractiveness as an investment vehicle and an international currency. This has not prevented the Malaysian central bank from adding Chinese bonds to its foreign reserves. It has not prevented companies like McDonald’s and Caterpillar from issuing renminbi-denominated bonds to finance their Chinese operations. But China will have to move significantly further in opening its financial markets, enhancing their liquidity, and strengthening rule of law before its currency comes into widespread international use.
So the dollar is here to stay, more likely than not, if only for want of an alternative.
The one thing that co
Today’s poem is brought to you by Random.
Haikus are easy
But sometimes they don’t make sense
Refrigerator
Here are some other things that amused me.
Last week at Comic Con, Michelle and I met the guy who made this winning Steampunk Iron Man costume! [Agent M]
Hey Philadelphia! Hollerado’s single-take music video for “Americanarama.” [YouTube]
Have books? Then you need bookshelves. 35 of them. 35 awesome, incredible bookshelves. [Francesco Mugnai]
Your Ad Here. (Hopefully not.) [eConsultancy]
Gritty, gorgeous photos of broken neon signs. [Slate]
Crochet animal sculptures. Heck yes I said it! [My Modern Met]
If you’re an unknown band trying to gain popularity, this is not the way to do it. [AV Club]
You know what’s cool?
How far will your dollar go? These photos will show you. [Jonathan Blaustein]
Phonebook art! [Inventor Spot]
Marhsall Goldman is a Professor of Economics Emeritus at Wellesley College and Senior Scholar at the Davis Center for Russian Studies at Harvard University. In his book, Petrostate: Putin, Power, and the New Russia , Goldman chronicles Russia’s dramatic reemergence on the world stage, illuminating the key reason for its rebirth: the use of its ever-expanding energy wealth to reassert its traditional great power ambitions. In the article below Goldman reflects Russia’s role in increasing energy prices.
As energy prices rise to record heights, most consumers are unaware that it’s not only OPEC members who are the beneficiaries, but Russia which today actually produces more petroleum that Saudi Arabia. Russia has been the world’s largest producer of petroleum several times in the past including at the beginning of the twentieth century and again in the 1950s. But its role today when energy prices are at record levels has made Russia an especially important economic and political power, more so than ever before in the country’s history.
In more recent times, the bounty brought in by Russian petroleum exports has transformed Russia from near bankruptcy in August 1998 to levels of prosperity unmatched not only in Soviet but Czarist history. The Russian government today has built up nearly $500 billion in foreign currencies—not bad considering that less than a decade ago, in 1998, Russia’s treasury was effectively empty. Moreover the Russian company, Gazprom, the world’s largest producer of natural gas has just recently become the world’s second largest corporation as measured by the combined value of its corporate stock, a distinction that until just recently was held by General Electric. Today only Exxon-Mobil is larger than Gazprom, but Prime Minister Putin has promised that he will do all he can to help Gazprom reach first place. More than that Putin has begun to question why it is that the dollar is the world’s currency standard. As the US dollar loses value, the ruble has strengthened, gaining 20 per cent in recent weeks.
Not surprisingly both Putin and his protégé, Dmitri Medvedev his successor as President, have begun to demand that the ruble be included as a world currency (not bad considering that only a few years ago the ruble was not even convertible into other currencies) and that Russia have a say in selecting the leaders of international financial groups such as the International Monetary Fund and the World Bank.
Given the likelihood that energy prices will remain at high levels for some time to come, it is likely that Russia will seek to use its new wealth to reassert itself as both an energy and a political superpower.
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