Barry Eichengreen and Michael Dooley understand the current international monetary and financial system as “new Bretton Woods System.” Global imbalances such as the expanding US current account deficit in combination with a stable US Dollar exchange rate imply that Asia central banks are storing large amounts of US dollars in their international reserve portfolios. It follows a comparison of the new system with the old Bretton Woods framework relating the findings to arising potential for international political conflicts.
Table of Contents
1. Task
2. The Historical Bretton Woods System
3. The Emergence of Bretton Woods II
4. Current Risks and Economic Vulnerabilities
5. Potential Global Implications and Conflicts
Objectives and Themes
The assignment examines the theoretical and practical parallels between the historical Bretton Woods system and the contemporary "Bretton Woods II" arrangement, focusing on how global imbalances and currency pegging strategies create systemic economic risks and geopolitical tensions.
- The role of the US Dollar as a global reserve currency.
- Mechanisms of currency pegging in Asian emerging markets.
- Economic consequences of the US current account deficit.
- Financial fragility and the risk of a "hard landing" for the US Dollar.
- Geopolitical implications of global trade and currency instability.
Excerpt from the Book
The Emergence of Bretton Woods II
Nowadays, we can discover a quite similar financial system of fixed exchange rates, which is analogically described as Bretton Woods II by various scholars. But these days it is particularly Asian emerging markets (China until 2005 – Remsperger 2006, p. 12), that (partly informally) peg their currencies – this time to the dollar as anchor (Eichengreen 2004b, p. 2). And like the Europeans in the 1950s and 1960s, they keep their currencies low and undervalued by accumulating large amounts of US dollar reserves, and thus continue to run their export-oriented economies competitive (Eichengreen 2004a, p. 42).
In the meantime, the USA shows a remarkable current account deficit of more than 850 billion USD or almost 7 % of GDP in 2006 (Bergsten 2007), as the country once again lives “beyond its means” (Eichengreen 2004b, p. 2). And once again, the dollar seems to be quite stable, like in the early days of Bretton Woods. But this time the issuance of additional dollar-denominated securities bought by Asian central banks results in less dollar appreciation and less imported inflation than formerly, which in turn means less pressure on the Fed to raise interest rates (see Eichengreen 2004a, p. 42, 2004b, p. 4).
Nevertheless, the maintenance of huge dollar reserves under a kind of fixed exchange rate system poses several considerable risks to the international economic and political stage: Globalization has substantially changed the international economy: international trade and capital transactions have increased to an unforeseen extent. On this account, states are pressured to hold enough reserves, and therefore must adhere strictly to a cautious monetary policy to keep the confidence of capital markets into the regime (see Eichengreen 2004, p. 43). Otherwise the peg can fail.
Summary of Chapters
1. Task: Outlines the core analytical challenge of comparing the original Bretton Woods framework with the current "Bretton Woods II" system and its political implications.
2. The Historical Bretton Woods System: Details the post-WWII establishment of fixed exchange rates anchored by gold and the subsequent collapse due to US monetary inflation.
3. The Emergence of Bretton Woods II: Describes how modern Asian economies mirror past European strategies by pegging currencies to the Dollar to maintain export competitiveness.
4. Current Risks and Economic Vulnerabilities: Analyzes the dangers posed by the US current account deficit, low savings rates, and the volatility of capital markets.
5. Potential Global Implications and Conflicts: Explores the catastrophic scenarios of a dollar collapse, including recession, unemployment, and potential international trade conflicts.
Keywords
Bretton Woods, US Dollar, Current Account Deficit, Exchange Rate, Globalization, Capital Markets, Emerging Markets, Monetary Policy, Global Imbalances, Currency Peg, Export Competitiveness, Financial Fragility, Recession, Inflation, Economic Conflict
Frequently Asked Questions
What is the central focus of this assignment?
The work examines the structural similarities between the historical post-WWII Bretton Woods system and the contemporary global financial arrangement often termed "Bretton Woods II."
What are the primary themes discussed?
Central themes include the US current account deficit, the role of Asian central banks in maintaining currency pegs, the impact of globalization on capital markets, and the risks of a potential dollar depreciation.
What is the main objective of the analysis?
The primary objective is to compare the new system with the old Bretton Woods framework to understand the resulting risks for international economic stability and political conflicts.
Which scientific method is applied?
The author uses a comparative approach, utilizing economic literature and historical data to draw analogies between 20th-century monetary policy and 21st-century global imbalances.
What topics are covered in the main section?
The main section covers the history of the gold-dollar standard, the mechanism of modern currency undervaluation, the causes of US debt sustainability issues, and potential geopolitical outcomes of a dollar crisis.
Which keywords define the work?
Keywords include Bretton Woods, global imbalances, currency pegs, US Dollar, capital markets, and financial fragility.
How does the low US savings rate affect the global financial system?
A savings rate below 1% is viewed as a precarious premise for debt sustainability, which may lead to financial fragility and a loss of confidence in the dollar by international creditors.
What are the potential geopolitical risks of a "worthless" dollar?
A significant depreciation could trigger massive unemployment, trade wars, distributional struggles for resources, and intensified disputes with oil-exporting nations and the European Union.
- Quote paper
- Natalie Züfle (Author), 2008, The new Bretton Woods system, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/180110
