IT Revolution: A “New Economy”?IT Revolution: A Critical Juncture?

•Superstar economy•Heightened income inequality•Global elite…the 1 % …the 0.1 %

•Heightened spatial inequality•Networks economies/agglomeration economies

•Conquest of geography?•Ubiquitous progress

•Financial innovations•Fragility and crisis•A new international monetary architecture?

International Monetary Regimes• Classical gold standard

$22/oz. $4.86/£ 4.2 M/$ 20.4 M/£

• The Great War (WWI) Suspension• Interwar instability– Hyperinflation– Restoration: Gold – Exchange Standard– Depression Golden Fetters– Reflation – Recovery

• WWII Aftermath: Bretton Woods System– Adjustable pegs to $• Fundamental disequilibrium

– IMF Support – IMF Conditionality

Bretton Woods System: Stability and Its Discontents• The Golden Age/The Age of Keynes: 1946 – 1973(?)

• Dollar Dominance• Triffin Dilemma:

Buildup of $ reserves threat to credibility• Stop $ outflow squeeze world trade• Continue $ investments “bank run”

Bretton Woods System Self – Destructs• Vietnam War $ Glut– de Gaulle theatrics– Nixon Economic Plan (NEP) ~ an end to Bretton Woods

• Close gold window• 10% import surtax• Wage – Price Controls

Floating and Its Discontents• The theory: no intervention no need for reserves• The practice: intervention $ reserves $ privilege– The $: vehicle currency for trade– The $: thick financial markets Liquid $ assets – Stabilize rates against $ Stabilize cross-rates

• Currency misalignments Currency crises– Latin America’s “Lost Decade”– Tequila/East Asia

• Global demand for $s Capital inflows to USUS International Debt Threat of “Bank Run”

• The US Housing Bubble (Developed) World in a Slump

Dysfunctional US Finance/Dysfunctional US Politics

A New International Monetary Architecture???

The Euro: An Alternative?Why a €?• Euro economics– Transactions costs– EU Common Agricultural Policy• CAP requires fixed rates across EU currencies

Fluctuations Arbitrage opportunities• Fixed rates (snake in tunnel/worm in snake) common currency

– Import German Discipline– Seats @ BUBA’s Table

• Euro politics– Integration Peace– Tie Germany to West Europe: The German-French Condominium

Springtime of the Euro• German wage discipline

German competitiveness Current account surpluses• Capital inflows to peripheral countries

Financial bubbles/Housing bubbles/Fiscal bubbles– Iceland– Cyprus– Ireland– Spain– UK– Greece– Italy– Portugal

The $ PrevailsMeasures of dominance• 75% of non-US trade invoiced in $s• 85% of foreign exchange transactions in $s• 45% of international bonds in $s• 61% of reported reserves in $s (and Bank of China doesn’t report)• Oil and other commodities priced in $s

Reasons for dominance• World’s largest economy/largest financial markets• Incumbency

– Quote prices in same currency as competitors use– Hedge with $ derivative contracts– Sell international bonds in thickest market– Shadow the currency others shadow stable cross-rates– Hold $ reserves for intervention…Hold liquid US Treasuries– Peg to low ‘flation country

• English: the world’s language– US Business Schools Economics/Finance Texts

Credible Alternatives to $???• UK, CH, CND too small/too little debt to be held for reserves• Japan unwilling: overvalued currency not welcome

• Euro: has the size, debt securities, volume of trade, etc.– BUT

• Fiscal incoherence• Policy incoherence• No government No bonds No guarantees

• Emerging Markets…BRICS???– Strength to lead?

• Convertible currency? Thick market in government bonds?

– Credibility to lead?• Regulatory framework? Rule of law?

– Willingness to lead?• Bear the “burden” of an overvalued currency?