Nanjing and the New International Monetary System

By Dominique Strauss-Kahn

(Version in 中文)

I am delighted to be back in China this week for a high-level seminar in Nanjing on the international monetary system. Every time I come to this part of the world, I am impressed by the dynamism of the economies and the optimism of the people. The future is here.

The region’s economic performance over the past few decades has been nothing short of remarkable. Asia now accounts for about a third of the global economy, up from under just a fifth in 1980. This trend has been reinforced by the crisis, with the emerging market powerhouses leading the global recovery.

Asia has also made tremendous progress with poverty reduction. China alone has pulled hundreds of millions of people out of poverty over the past few decades. Such a feat has never before been accomplished in the history of human civilization.

But to sustain this progress, Asia needs to grapple with numerous challenges today, among them the need to deal with overheating pressures and volatile capital inflows. And this relates directly to our discussion at Nanjing.

The current international monetary system has certainly delivered a lot. But it also has flaws that need to be fixed, especially if the next phase of globalization is to succeed in bringing a strong and broad-based rise in living standards. I see four pressing issues:

  • Imbalances across and within countries. We need stronger cooperation to promote effective global adjustment and discourage countries from running policies that lead to global imbalances. The G20 Mutual Assessment Process and the IMF’s “spillover reports” for the five most important systemic economies—which look at the effects of country policies across their borders—are steps in the right direction. More ambitious ideas, including a strengthening of countries’ multilateral obligations and of accountability mechanisms for these, are also worth discussing.
  • No framework to oversee capital flows. Everybody knows that capital flows can sometimes be destabilizing. This is something many countries worry about. But we do not have globally agreed “rules of the road” on what they should do. Sometimes we need to look at old ideas with a fresh perspective, and we are developing more of a consensus view. In the past, capital controls were not in our toolkit. Today, we see them more as part of the toolkit, although only in specific circumstances and not, of course, as a substitute for good macroeconomic policies.
  • Inadequate global liquidity. We need to strengthen the global financial safety net, to reduce the need to “self-insure” by building up costly reserves buffers. There are a number of options here. One possibility is to strengthen partnerships with regional financing arrangements. Another is to improve the predictability of systemic liquidity provision more generally.
  • Too few options for safe global assets to meet the demand. The question here is how to diversify reserve assets. One option is to encourage greater international use of currencies other than the four currently in the SDR basket, including those of large dynamic emerging markets. Over the longer term, the SDR itself could play a greater role.

These issues go right to the heart of the IMF’s mandate, and their resolution will require further engagement and discussion among our global membership. Certainly, they are challenges in which all global citizens have a stake—to support an ongoing recovery and avoid future crises, ensuring better outcomes for all.

The Nanjing meeting was a useful step toward the international monetary system of the future. And speaking as the head of the IMF, it was also a useful step in advancing the partnership between Asia and the Fund. A partnership that I firmly believe will continue to strengthen in the future.

6 Responses

  1. Angus Cunningham,

    Permit me to note that you are correct although, given the generally long only nature of most index funds and, e.g., pension plans the term ‘speculation’ may not be applicable.

    I would suggest reading people like Steve Briese at Commitment of Traders
    http://www.commitmentsoftraders.org/

    Frank Veneroso’s 2007 presentation to the World Bank
    http://venerosoassociates.com/

    and, even though sparse, works such as the January, 2006, “Beyond Fundamentals…” by Citi commodity analyst [the late?] Alan Heap.

    On the energy side, the absense of historical understanding, of changes in crude oils’ price regime over the last decades, strikes me fairly amazing though i know it should not..

    You may find some of what’s available through the Oxford Institute of Energy Studies to be valuable, certainly the Fund would have.
    http://www.oxfordenergy.org/

    An incipient then developed commodity price bubble, supported and furthered by a number of interlocking stories began nearly ten years ago – had a G20 Mutual Assistance Process brrn in place, I expect the world economy would face brighter prospects.

    Regards

    AJS

  2. “Imbalances across and within countries. We need stronger cooperation to promote effective global adjustment and discourage countries from running policies that lead to global imbalances.”

    The Fed’s QE practice continues to be controversial not only between countries but within the US itself. So I paid close attention to a paper published recently by the Federal Reserve Bank of San Francisco on the issue of whether the Fed’s large asset purchases are fueling the rise in commodity prices.

    Two researchers there analyzed some data from Bloomberg’s and the Netherlands Bureau for Economic Analysis in relation to the Jackson Hole Speech by Fed Chmn Bernanke. They concluded that QE had no effect on commodity prices. But when I looked at the data that’s certainly not what I found.

    I’ve overmarked the chart they published with (1) vertical green lines showing the six month period following the Jackson Hole speech, and (2) horizontal lines showing the increases in (a) a World Industrial Production Index and (b) an Industrial Metals Price Index:

    http://www.authentixcoaches.com/images/QE_Effect_on_Commodity_Prices_1104052.jpg

    If you look at this chart it shows just what many people have been saying: industrial metals prices buoyed well over 20% while industrial production rises only a bit over 4% to reach barely its previous peak.

    I hypothesize that the price inflation sparked after Mr. Bernanke’s speech was effected through derivative speculations by banks either taking advantage of QE-facilitated money themselves or advancing QE-facilitated loans to their hedge-fund clients.

    What do you think?

  3. [...] You can read Dominique Strauss Kahn’s jargon-laden take on it here. [...]

  4. [...] You can read Dominique Strauss Kahn’s jargon-laden take on it here. [...]

  5. Dear Mr. Strauss-Kahn,
    With all respect to your work and dedication to this Fund, it is mind boggling to me how one can make a mistake and yet take steps to exactly repeat the same things over and over again.

    Mr. Strauss-Kahn, it is not liquidity or “regulatory failure” that is the problem, it’s the total destruction of private markets (whether that’s in banking or in commerce in general ). The framework that you were talking about within the G-20 will make things worse as it does NOT address imbalances and public debt. Instead it tries to postpone the inevitable truth of government failure by destroying the biggest asset of our people: the currency.

    I’m sorry to say but you don’t understand money, you don’t understand credit and you don’t understand currency. All of these are most important to deal with the coming global implosion. Unfortunately nothing has and will be adressed. We may not go back too far in history to see where those actions lead to. Please think about it.

  6. “No framework to oversee capital flows.”

    Are the low central bank interest rates of virtually all advanced economy countries causing commercial and investment banks to lend money to people who plan to increase their payrolls, which have been slashed by 30 million people over the Great Recession? If it’s not doing much of that, what is it mostly doing?

    Well, my guess is that it’s mostly enabling banks to speculate in derivative markets or to lend to speculators in derivative markets — notably in currencies and commodities today, whereas in the last decade it was in collaterialized mortgages. It could also be being invested in places like Africa to develop that economy and relieve desperately high unemployment there. But I doubt that much of it is in actuality going to meet such real needs.

    Why do I think that? Because speculating in commodities, including currencies, is a desktop science whereas investing in needed economy-transforming activity is much more complicated. The latter and requires skills way beyond studying market news, dreaming up mathematical models of the market, and expenditures on computer programming, communications hardware and, let’s not forget, banker’s bonuses.

    If that’s right, and please tell me, hopefully with DATA or references to DATA SOURCES, if it’s wrong, then keeping central bank interest rates low is not currently able to help anyone who either needs or merits investment of loan capital but is instead setting the stage for amplifying “natural” inflation by channelling new funds into price changes that are triggered purely by speculators whose interest in investing in the general welfare is virtually zero.

    The dsFCF (differential speculative Financial Contracting Fee, or “smart FTT”) proposal would change that desktop focus. Or at least its implementation would make a much needed shift in the conditions under which people can today most easily make money. Instead of the QE (money printing) being used to make money speculating (on currencies, gold, silver, various energy producing commodities notably oil, on agricultural products, and a miscellany of other specialty commodities) and roiling those markets with overshooting high-frequency trading of derivatives directed by self-interested market pundits, the immediate users of QE funds would have to work to avoid the dsFCF; and the only way to avoid it would be to find and invest in the entrepreneurs who can put earnest human energy into avenues productive of employment that power transitions toward a fairer, greener, stabler global economy.

    This thinking needs clarifying for communication to legislators, regulators, the financial community at large, and real-world entrepreneurs interested in sustainable development (as opposed to Coke bottling plants).

    For reference, here’s the URL of the dsFCF draft paper:

    http://www.authentixcoaches.com/ACdsFCF-1.html

    I hope the IMF’s Capital Markets team studies it closely.

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