Daily Current Affairs – 11th April, 2016DEVENDRA VISHWAKARMA
Time for a single world currency
The world economic crisis shows the “inherent vulnerabilities and systemic risks in the existing international monetary system” and therefore, there is a need to better insulate countries from the ills of one country or one currency
Dominance of Dollars—
- The pricing and trading of almost all standard commodities, including crude oil, are carried out in dollars (“dollar goods”)
- Most international assets/liabilities are held in dollars (“dollar stocks”)
- The dollar represents the “vehicle currency” in the international foreign exchange market
Role of the dollar (foreign exchange)
- The exchange rate of any single currency vis-a-vis the dollar is taken as the most important indicator for its external value
- Almost all foreign exchange transactions concern trades between the dollar and some other currency (the dollar serves as the “vehicle currency”)
- Exchange rate expectations are formed primarily with respect to future movements of dollar rates
- Influences the relative price between commodities and manufactures in world trade,
- The terms of trade between industrial and developing countries,
- The speed of inflation and deflation in world trade
- The level of the real interest on international debts
Collapse of the Bretton Woods system of fixed exchange rates in 1971 paved way for different crisis and mini-crisis because of the absence of any kind of global monetary order-
- Despite the faults— it gave the world a monetary order, within which trade, investment and portfolio allocation decisions could be made without the distorting effect of uncertain, uncoordinated and volatile exchange rates
- Utility of system of fixed exchange rates stands valid, thus, in a world even more globalized today, and even more subject to destabilizing volatility
Negotiations on the new global currency
- Destabilizing and destructive volatility in global trade
- Investment and financial capital movement patterns induced or exacerbated by the excessive volatility of flexible exchange rate regimes
- National objectives leveraging damaging spill-overs for other countries (how America’s economic problems — and by extension the dollar — can wreak havoc on nations around the world)
- In the form of excessive volatility in capital flows and associated movements in their exchange rates
- Crisis of 2013 had badly affected India, and so—the right thing for the Fed and others to do would be to take account of these harmful spill-overs when they formulate monetary policy
Arguments against a global currency—
- Under fixed rates (or a common currency), countries would lose their ability to pursue independent monetary policy, and that this loss would be significant (the correlation of macroeconomic conditions across regions)
- No parallel institution existing at the global level to establish adequate checks and balances
- Desirable to maintain some level of competition, as through a number of channels, global currency competition provides a check on inflation
- Would require acceptance from nations that have long used the dollar and hold huge stockpiles of the U.S. currency
- Managing such a currency would require balancing the contradictory needs of countries with high and low growth or with trade surpluses or deficits
- No national currency should serve as a world currency, instead, a genuine world currency should be created as a basket of the main national currencies
- International settlements should be handled at fixed exchange rates by a “Clearing Union.”
- Temporary disequilibria in global economic goods and financing should be corrected by expansionary policies in the surplus countries and not by belt-tightening measures in the deficit countries. In this way equilibrium can be restored at a higher rather than a lower level of activity
- The IMF should create a “reserve currency” based on shares in the body held by its 185 member nations, known as special drawing rights, or SDRs- should be used for trade, pricing commodities and accounting, not just government finance.
- The basket of currencies forming the basis for SDR valuation should be expanded to include currencies of all major economies. Proper representation and a bigger voice for the developing countries are the need of the hour
Connecting the Dots:
- How does the interaction between dollar interest rates, dollar exchange rates and dollar prices determine the movements in the real interest on international debt?
- Of liquor bans and the ballot box:
- Alcohol and elections seem to be the two great signifiers of Indian politics as they both mark its deep sense of hypocrisy, populism, cynicism and realism.
Debates in constituent assembly over the issue of liquor ban:
- The approach of Gandhians:
- Prohibition of liquor, more than khadi, was often the ideological plank Gandhians identified themselves with.
- During the Constituent Assembly debates, the Gandhians, in their ideological way, wanted to introduce prohibition as part of the Directive Principles of the Constitution.
- In this, they, the Gandhians, were almost strict and correct in their attitudes.
- Protest by the tribal leaders:
- Many tribal leaders protested against the ban as it seeks to interfere with their religious right as consumption of liquor brewed from rice was part of a tribal religious tradition.