GLOBAL TURMOIL: THE
INTERNATIONAL MONETARY
SYSTEM TODAY
Benjamin J. Cohen
University of California, Santa Barbara
Remarks prepared for presentation at a Conference on the
BRICS and Asia, Currency Internationalization, and
International Monetary Reform, Hong Kong, December 1011, 2012
LIVING WITH TURMOIL
 The int’l monetary system faces multiple threats
 Europe’s sovereign debt crisis
 Weakening US dollar
 Dimming growth prospects
 “Currency wars”
 Volatile capital flows
 Is worse to come? In my opinion, No. Governments
will muddle through. Modest reforms are possible –
but not more.
 Outlook: We have to learn to live with a certain
amount of monetary turmoil.
OUTLINE OF MY REMARKS
 1. The central challenge: governance
 2. The four key elements of global
monetary governance



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Adjustment
Liquidity
Confidence
Leadership
 3. Implications for the BRICS and
Asia
THE CENTRAL CHALLENGE:
GOVERNANCE
 Governance: arrangements for the
formulation, implementation, and
enforcement of the “rules of the
game”
 In short, who’s in charge?
GLOBAL MONETARY GOVERNANCE
 “Governance without government”
 No central authority: governance must
rely on cooperation among sovereign
governments
 Two problems
 Compromises are inevitable; the rules will
always be sub-optimal
 Violations are likely: behavior will be
imperfect, too
GLOBAL MONETARY GOVERNANCE
 Four critical elements:
 Adjustment: management of exchange
rates
 Liquidity: management of the supply of
balance-of-payments financing
 Confidence: maintenance of trust in
principal instruments of liquidity
 Leadership: exercise of power for the
common good
BRETTON WOODS SYSTEM
 Design was state-centric: key decisions to
be made by governments or their agents
(IMF). Rules were clear and transparent




Adjustment: par-value system
Liquidity: International Monetary Fund
Confidence: US dollar was “as good as gold”
Leadership: the United States
THE SYSTEM TODAY
 Two major changes
 Revival of global financial markets
 Exchange rates now determined by markets
 Financing is also market-determined
 Greater risk of destabilizing shifts of confidence
among major currencies
 Result: a sharper risk of systemic crises
 Diffusion of power among states
 Deadlocked leadership
 Can matters be improved?
ADJUSTMENT
 Amendment of IMF charter (1978)
 Exchange rates free to float
 Subject to IMF surveillance
 But surveillance has been ineffective
 States have been free to do what they want
 Result: risk of “currency wars”
 Reason: Demands of national sovereignty
 Unlikely to change
LIQUIDITY
 With revival of financial markets, liquidity supply has
become hostage to investor sentiment
 Behavior is often pro-cyclical
 Thus tendency toward repeated crises
 Failed responses by governments
 Repeated promises to strengthen rules
 In practice, little accomplished
 Example: Europe’s sovereign debt crisis
 Reason: again, demands of national sovereignty
 Again, unlikely to change
CONFIDENCE
 Toward a “leaderless” currency system
 Dollar’s dominance is weakening
 But there is no obvious alternative
 Heightened risk of sudden shifts of confidence –
destabilizing capital movements
 Good or bad?
 Good? Greater discipline on the US – no more
“exorbitant privilege”
 Bad? Others will also seek to enjoy an
exorbitant privilege
LEADERSHIP
 Effective leadership rests on two critical
factors:
 Consensus on basic principles
 Concentration of power
 Most conspicuous today by their absence.
 Consensus has broken down
 Power is more diffused (especially autonomy)
IMPLICATIONS FOR BRICS AND
ASIA
 Revival of global financial markets
 Advantage: ready access to finance
 Disadvantage: vulnerability
 Policy option: capital controls?
 Diffusion of power among states



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Gain to date: autonomy
Potential gain: influence
Policy option: build a “winning coalition”?
Problem: still no consensus on what is needed
AGENDA FOR BRICS AND ASIA
 Adjustment: prepared to accept IMF
surveillance?
 Liquidity: prepared to submit
domestic finances to int’l rules?
 Confidence: prepared to forego an
“exorbitant privilege”?
 Leadership: prepared to share the
responsibilities of governance?