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A leading economist today in The London Daily News has rejected the initial optimism of the G20 Communique, George Hatjoullis sends a warning to the leaders of the global financial institutions to take the lessons from the 1930s
George Hatjoullis
The end of the G20 produced a show of unity that is not reflected in actual policy measures. The USA, UK and Japan seemed haunted by the ghosts of 1932 and depression and deflation. The Euro area, as represented by the monetary policy of the ECB (European Central Bank), is haunted by 1923 and the Weimar republic. This should not come as any surprise to anyone familiar with the genesis of the ECB and the influence that the German central bank exerted in its formation. However, it seems to baffle the economics ‘profession’, which overwhelmingly overestimated (yet again) the willingness of the ECB to take risks with inflation. Yesterday, the ECB cut its benchmark rate by only 25bp and not the 50bp widely predicted. More important there was no mention of ‘ quantitative easing’ or any desire to stimulate money growth.
The Weimar republic of Germany entered a hyperinflation as a result of the government embarking on a dramatic quantitative easing and expansion of the money supply. The USA slumped into the great depression as a result, at least in part, of failure of the US Federal Reserve to offset a contraction in the money supply. Today the USA is moving in the direction of Weimar whereas the Euro area resembles the US Federal Reserve of the 1930s. Which is correct?
There is no definitive answer. However, there is one important implication that needs to be noted. The fault line in this clash of tectonic plates is the EUR USD exchange rate. The USA is printing dollars but the ECB is not printing Euros. Of course, given the dollar has reserve currency status the demand for dollars may remain high in these turbulent times. But then again, the dollar’s reserve currency status is coming under strain.
Russia and China expressed an interest in the development of a global reserve currency. Most significantly, the G20 increased the IMFs SDR allocation by $250bn. The SDR is defined as a basket of major currencies (USD, Euro, JPY and GBP) and serves as a quasi-global reserve currency. The IMF allocates the SDR rights to members and can ask balance of payments surplus countries to purchase allocations from deficit countries in exchange for usable currencies such as dollars and Euros. This increase in the global reserve currency may the beginning of the end of the dollar’s role as the sole reserve currency. It may also signal a promising future for the Euro.
PHOTO CREDIT: LONDON DAILY NEWS - THIS PHOTO IS COPYRIGHT MATERIAL AND CANNOT BE USED WITHOUT PRIOR CONSENT
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