Reply #36: Impending dollar crisis — Time for Bretton Woods II [View All]

http://www.thehindubusinessline.com/2006/06/20/stories/2006062002071000.htm

The world is either to witness a global meltdown of the dollar or allow a controlled dollar devaluation. A calibrated multilateral exchange rate adjustment programme may offer a solution. The IMF may be best suited to put this through.


The global trade, finance and investment architecture seems to be fast spiralling out of control. For some time now economists are engaged in the mother of all debates: Whether the US dollar will collapse by as much as 40 per cent of its present value (some are even betting on the dollar going belly-up) or if there will be an orderly devaluation — that is, revaluation of other currencies. In effect, the question that is confronting us is not "whether" but "when" and by "how much."

Consider these facts: The basic structure of the US economy is that the deficit of the government is 4 per cent of GDP and the household sector 6 per cent, which are offset by a domestic savings of 3 per cent, largely from corporates, leaving a substantial national deficit of 7 per cent to be covered by the capital flows from the rest of the world. With its size and in an integrated world, this asymmetry of the US gets translated into a skew in the global economy.

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Surely, the emperor is without clothes. And it may take a currency trader sitting in a remote corner of the world to push the global economy into an abyss through a click of a mouse. We are either to witness a global meltdown of the dollar or allow a controlled dollar devaluation (read revaluation of other currencies). Either way we are damned, experts nevertheless agree that while the former will result in difficult adjustments, the latter may allow for a "soft-landing" of the global economy, if handled adroitly.

Speaking on this subject at the 39th Annual General Meeting of the Asian Development Bank in Hyderabad, the Prime Minister, Dr Manmohan Singh, stated: "The present level of global imbalance cannot be sustained forever. It, therefore, calls for action from both countries having current account surpluses and those having current account deficits. A coordinated effort is necessary to correct the imbalances to prevent a sudden down turn. International financial institutions need to play a proactive role in this regard."

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