Inflation Sounding the Death Knell For Bretton Woods II?Jul 7, 2008

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Inflation Sounding the Death Knell For Bretton Woods II?Jul 7, 2008

Post by MrsCK on Tue Jul 08, 2008 6:35 am


  • Bretton Woods II (via Dooley,
    Folkerts-Landau, Garber): large US current account deficit has been and
    is generally expected to be financed by dollar bloc emerging market
    countries at low real interest rates. Low rates in the US and other
    industrial countries support asset prices that look high by historical
    standards at this stage of the business cycle but are fully consistent
    with the unusual combination of low market discount rates in a period
    of rapid growth, high profit, and low inflation

  • Dooley,
    Folkerts-Landau, Garber: The US CA deficit is an integral and
    sustainable result of its role as the center country in the revived BW
    system. This system will last for years more and the the benefits of
    stable, weak exchange rates exceed the costs of reserve accumulation
    for emerging economies

  • Roubini: The exchange rate policies of China, the GCC, Russia, India,
    Argentina and other informal members of BW2 – have fed the commodity
    price inflation and domestic inflation in many emerging market
    economies which are now contributing to global inflation. Even if the
    BW2 economies further resist currency appreciation and desperately hold
    on BW2 - as the rate of accelerated forex accumulation in 2008 so far
    suggests – the resulting global inflation would at some point destroy
    BW2 as it erodes the competitiveness of the BW2 club

  • Wolf:
    imbalances are going to prove even more destabilising now that the US
    bubble has burst as the accomodative monetary policy the US needs
    contributes to an expansion of those overheating economies linked to

  • Cooper: If it no longer reasonable for the US to be
    the anchor currency. If several dollar pegged currencies were revalued,
    we might see panicked selling of US dollar further destabilizing
    economic order

  • Many emerging markets are now reporting
    double-digit inflation including those with dollar pegs or who are
    resisting appreciating against the US dollar or defacto pegs to the US
    Dollar now reporting double digit inflation. But BW II may not be as
    solid as aggregate figures imply. Many Asian countries have allowed
    their currencies to appreciate at faster paces than in the past. But
    China and GCC still charter members. China alone added over $250
    billion in foreign exchange reserves in H1, (including the increase in
    fx held by state banks its total reserve accumulation might reach
    $800-900b this year). GCC fx reserves doubled in 2007 as countries like the UAE sought to defend currency pegs against appreciation pressure

  • Dialynas/Auerback:
    In contrast to its forebear, BWII is not global in scope; nor does it
    retain any vestigial linkage to gold, nor any contractual obligations.
    It is less a monetary “system” and more monetary fiction which
    artificially distorts risk premiums and encourages destabilizing
    financial practices like the “yen carry trade'

  • Pettis: The old
    mechanism, large trade deficits in some countries balanced by rapid
    reserve accumulation in others, has become more complex and maybe even
    pro-cyclical and volatility enhancing. Now large trade deficits in some
    countries plus massive speculative inflows in others are being balanced
    by even more massive reserve accumulation in the latter countries


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