The future of the global financial system seems to be unclear. Most economies around the globe are currently suffering from multiple shocks, which may result in a doomsday scenario.
What can happen to the global financial system? Is there a way out of the crisis? Robert Mundell, is a Nobel Prize-winning Canadian economist, seems to have found a solution.
Robert Mundell on Global Currency System
Central banks around the globe keep cut interest rates down to record-low levels while expanding their money supplies through continuous money printing. While the aftershocks in the form of major inflation aren’t still there, most financiers are convinced that it is high time to create a whole new global financial system until it is not too late.
As for Robert Mundell, he believes that in order to start something new, first it is vital to learn a lesson from the past.
The development and evolution of a global financial system is a complicated and controversial process, Mr. Mundell reminds. The Bretton Woods system should have resolved the issue as at that time all the currencies was pegged to gold and could be converted to it. However, the system collapsed in the 1970s, a couple of decades after it was created. The Bretton Woods system was followed by a system of floating exchange rates, which is determined by the market.
At this point, economists around the globe are trying to make exchange rates more controllable. Still, the existing system cannot work properly all the time. The IMF’s supervision system has failed to take the situation under control. Therefore, there is still an urgent need in tough fiscal coordination.
As there is still no unified global currency system, the issue is especially burning these days amid global economic weakness and uncertainty. Even under the Gold Standard, there was no currency exchange coordination. After World War I, most countries faced hyperinflation as the result of excessive money printing. Some economies started switching to the US Dollar.
Mr. Mundell thinks that this was a big mistake for global finances:
· There emerged a gold deficit as the result of higher demand.
· That caused deflation in the USA in the 1930s, which eventually resulted in the great Depression.
· In the 1970-80s economic crises broke out. S a result, Europe felt like creating an alternative to the US Dollar. This was the birth of the common European currency.
However, the creation of the eurozone might be attended by gross errors, which could naturally result in today’s eurozone crisis. Mr. Mundell backed the idea of introducing a common currency at that time. However, this should have been a gradual process of switching from national currencies to the common one. However, the process took less time as all the eurozone members were obliged to get rid of their national currencies in 1999. This happened without establishing common financial and budgetary discipline, which was another big mistake and a major threat to the future financial security of the eurozone.
Moreover, these days there are much more controversial issues:
European economies have to move towards a budgetary union and look for a common financial equivalent to the US Dollar, the Euro have partially played this role. However, the US dollar is used as a reserve currency all around the world, minor currencies experience severe pressure.
A big share of the global economy (some 40%) is located in the pegged exchange rate area. China strives to join it, thereby making the area much wider by pegging the Renminbi (the Chinese Yuan) to the US Dollar. Moreover, China wants to reach an agreement with the USA on the balance of foreign payments.
New Global Currency
As the Euro, the Japanese Yen, the US Dollar and other major currencies are suffering from multiple problems, it is time to think about alternatives. Another attempt to create a stable global financial system based on multiple currencies will most likely fail again.
Mr. Mundell is convinced that a new currency should belong to the entire world instead of a single superpower like the USA.
The new currency may be virtual and based on other major currencies. It should be easily convertible. Mr. Mundell conventionally called it the “device”.
Moreover, it is necessary to determine the central bank and the emitter of the new currency. Still, the “device” plan may fail due to possible financial disintegration.
Robert Mundell says that the probability of creating such a currency within the next 5 years is only 30%. He also concedes that Asia may create a common Asian currency within the next couple of years.
