The G20 circus has become an item (in the non-Bollywood sense) of the global furniture. But we now know not to expect too much of it. What is more important is that the various fora?IMF meetings, G7 and G20 finance ministers meetings, G20 heads of government meetings?now afford a timetable to thrash out an issue that is troublesome.
Once the Brazilian finance minister aired his complaint about exchange rate wars in the summer, it was clear that the RMB was of concern not only to the Americans. The Japanese began intervening heavily in their own currency to prevent its appreciation against the dollar, it became a G20 issue. The IMF meetings are too formal so the debate has rumbled on since early October.
The American elections have made it clear that we can kiss fiscal activism goodbye. Anti-China rhetoric fuelled much of the election on both sides as Obama competed against China as the most hated topic. Now with the Republican majority in the House, anti-China rhetoric will continue.
Of course, it is all economic nonsense. Americans cannot see their own fiscal diarrhoea and the damage it causes to the global economy. It must all be blamed on China?s RMB. But the real exchange rate for RMB has appreciated much faster than the nominal rate and so China has a perfect alibi. And then the day after the American elections, the Fed started another bout of QE. This guarantees a weaker dollar. So are we looking at a dollar depreciation or an RMB non-appreciation?
The problem is that there is no constant standard against which one can measure depreciation or appreciation. In the nineteenth century, we had the Gold Standard when for the three hundred years previously the price of an ounce of gold had been fixed by Isaac Newton at ?3. 17s. 9d. This provided a solid standard against which currencies had to define themselves. The Bank of England was ready to buy and sell gold at that price. Gold was a standard of value and a means of payment as well as a store of value.
In the aftermath of the First World War and the breakdown of the Gold Standard in the inter-War period, Bretton Woods re-established a new standard at $35 per ounce of gold and the American Treasury stood ready to do what the Bank of England had done. Alas, the Americans reneged on that promise on August 15, 1971 (a day that will live in infamy). Since then, the Americans have let the dollar be the world?s problem and their currency. The European Monetary System has been a long struggle for a fixed exchange rate system to be revived and the Euro I its latest avatar.
Now we are all at sea again. The financial imbalances have persisted and as the developed debtor countries try to reflate themselves in the short run and become savers in the medium run, the developing countries need to do the opposite. But there is no neutral umpire who can adjudicate. The IMF should have been such an umpire but with the end of the Bretton Woods exchange rate regime, it lost its authority. The G20 in London resolved to make the IMF powerful again by increasing its lending capacity by $500 billion but all the money has not yet all been got.
One way to deal with the financial imbalances would be to boost the SDR as a super currency in which countries could park their reserves. The IMF could swap SDRs for financial surpluses and then lend them out. But for this to happen, SDRs have to be means of payment and store of value, not just units of account. For the moment, the dollar, as bad as it is, is the currency of choice for the surplus countries to park their balances in. The euro is a mild alternative but not a close substitute.
This is why we hear talk of a super SDR. It has been obvious to me for two years now that we need a gold-plated SDR. The SDR should be a mix not just of the main currencies, which madly fluctuate against each other, but also of commodities, including gold. A currency and commodity portfolio for an international reserve currency is an idea that has been around ever since the Bretton Woods system collapsed. Nicholas Kaldor and Albert Hart worked on these proposals in the 1970s. Time has now come to revive those ideas. This is why Zoellick endorsing a gold-lined SDR is so important. We have in gold not an invariant but a slowly fluctuating standard against which all the currencies can be measured.
The time has come to get serious about a gold-plated SDR if we are to stop the Americans and Chinese from behaving like fishwives.
The author is a prominent economist and Labour peer