Friday, 30 October 2009

A New Monetary Order

The international pattern of settlements is hardly an issue that is likely to cause a great deal of excitement. And yet we may well become excited by it’s impact. In a thoughtful piece by Buttonwood in The Economist (see article), our attention is drawn to how the international pattern of settlements is changing, and how this will invariably alter the balance of economic and financial power in to world. Buttonwood reminds us that:

“Creditor nations tend to set the rules and the new global monetary system will be unable to operate without the approval of China, a creditor country that has capital controls and a managed currency. It has been assumed that China will have to move towards the Western model. But why not the other way round? Western countries adopted free capital markets, as the British adopted free trade in the 19th century, because it suited them. Will China now be able to call the shots? Uncomfortable as it might be for the West, the next monetary order is more likely to be made in Beijing than in New Hampshire.”

This is moderately discomforting. And yet a study of history would remind us that it is almost like a natural cycle of events. Professor Saul, in Chapters 3 and 4 of his work "Studies in British Overseas Trade 1870-1914" outlines the way in which Britain went from being a creditor nation to being a debtor nation between 1870 and 1914. The impact of the First World War saw the loss of London’s pre-eminence as a financial centre to New York, instigating the long decline of the British Empire. Reflective Americans would take note of this and draw a direct parallel with the British experience.

As a futurist, the decline of the US Dollar has been in my mind for some time. However, it has never been sufficiently pressing for me to do something about it. Perhaps now is the time to start to give some consideration to how a New Monetary Order might play out. The stock in trade view is that the Chinese Yuan will replace the US Dollar as the dominant currency. This contention needs to be given a serious review because there are a number of arguments against it that have not been stated.

If the Yuan doesn’t replace the Dollar, what will? This is another area that needs to be given some thought. In many respects, this could be the key question over the next couple of decades. A new monetary order is likely to reflect a new geopolitical order, and a view of the one without a view of the other is likely to be inconsistent. There are a number of candidates, such as the Euro, but that line of thought seems to be out of step with a lot of current thinking about our geopolitical futures.

Over the coming months, we shall be thinking aloud about how the new monetary order might develop. We shall be publishing these thoughts throughout our networks, and we welcome feedback and comment.

Buttonwood: Birth pains | The Economist


Hervé Musseau said...

I don't think the euro will become the new currency of reference, at least not for a long while. However, it has become a strong regional currency, and continues to gain sway. A large part of Europe now uses the euro, or has its currency pegged to it, or uses it as a national currency throughout its banking system, or has its econonmy largely tied into it. This influence extends to the south, in North Africa and Africa, is gaining sway in the Middle East (with more influence yet were Turkey to finally join the EU), and to a certain degree in Russia.
Besides Turkey, there are IMO a few key factors that could affect the euro's status.
One would be if a major country, or group of countries, in South America were to join the euro; e.g. Brazil. This isn't as far-fetched as it sounds: several of these countries want to shed the American influence, both politically and economically, are more amenable to Europe's social and economic views, and have strong cultural ties with southern Europe. Besides, the euro is already legal tender in several nearby territories in the Caribbeans and French Guiana.
Likewise, adoption of the euro by an Asian country would be a game changer. It appears less likely, given that the cultural and economic ties are less true, and that political/social composition is less European. However, this could come as a movement of independence from the growing encroachment of China. Japan might go this way, although Korea or Vietnam are also possible candidates.
Russia itself would also alter the equation, but it too is an unlikely candidate. With enough democratization, or Chinese encroachment, or game change in the energy sector, that may change quickly though.
Canada is a wild card.
Arab states (Morocco's currency is already pegged) and/or Israel would have an effect, but mostly to pave the way for the euro's viability outside of Europe, yet insufficient to actually make it into a new global currency.
Hope to hear your thoughts on the subject, Stephen, hopefully better arranged than my quick post.

Stephen Aguilar-Millan said...

Ahh ... the Euro. The Euro is worth a post of its own. About two thirds of the global reserve currencies are in US Dollars. The remaining third is in Euros, with all other currencies not even registering. So the Euro is important.

And yet, is the ECB willing to step up to the mark? One of the reasons why the Euro is not challenging the Dollar is because the ECB will not allow it to do so. To become the global reserve currency is to surrender a degree of monetary sovereignty to the global financial markets.

Europe isn't ready to do that just yet, because that means being prepared to back up the financial play with a more stringent diplomatic - even military - play. Why spend European money on that agenda when the Americans are willing to spend their own money for the benefit of Europe?