The Washington-based Institute for International Finance has warned of a crash in the dollar as a result of the Federal Reserve’s expected policy of further monetary stimulus. In a report, the IIF calls on the Fed to pursue a monetary policy that supports foreign demand for US goods. To avert the danger, the IIF has called on the world’s leading nationals to agree a currency pact, or face the risk of protectionism.
“The threats now posed by slowing growth in mature economies, the risk of deflation, global imbalances and regulatory fragmentation may not be as dramatic or immediate as those faced by policymakers during the crisis, but they are equally compelling – and much more intractable.”
Charles H. Dallara
Charles Dallara, Managing Director of the IIF, calls for urgent action by a core group of the world’s major economies to broker agreements on critical macroeconomic and exchange rate issues. Without timely and resolute action from the world’s leading governments these threats will sap the economic recovery and further undermine market confidence, the IIF chief writes in a letter to finance ministers and central bank governors.
“We are approaching a juncture in the world economy as critical as that faced by global leaders ahead of the 2009 London Summit. As countries struggle to cope individually with the lack of upward momentum in global growth – and in many cases unacceptably high unemployment – urgent action is needed to arrest the disturbing trend towards unilateral moves on macroeconomic, trade and currency issues. Even in the regulatory arena, where considerable progress has been made on internationally coordinated reform measures, renewed signs of fragmentation can be seen. The challenge for global leaders is to recapture the political commitment to decisive, coordinated action that made the London Summit so successful in restoring confidence battered by the crisis – and to use that commitment to take immediate and concerted policy measures within a multilateral framework,” Mr. Dallara writes in the letter, dated 10042010.
And he cotinues: “The threats now posed by slowing growth in mature economies, the risk of deflation, global imbalances and regulatory fragmentation may not be as dramatic or immediate as those faced by policymakers during the crisis, but they are equally compelling—and much more intractable. Without timely and resolute action from the world’s leading governments—action that transcends purely domestic short-term concerns—these threats will sap the economic recovery and further undermine market confidence. Sustaining growth and restoring confidence will require not only astute domestic policymaking, but an unprecedented level of multilateral coordination.”
“Recent evidence suggests that momentum for policy coordination has faltered in the post-crisis environment.”
To achieve this kind of coordination, a core group of the world’s major economies should convene urgently to broker agreement on a number of sensitive macroeconomic and exchange rate issues, leading to the broader support and engagement of the G-20 at the Seoul Summit in November, according to IIF.
Market participants need to be convinced that the leaders of these major economies recognize their individual and collective responsibilities to work towards the goal of balanced and sustainable global growth.
The IIF says that this core group should agree on action to:
- Address the renewed widening of global macroeconomic imbalances.
- Develop specific and politically feasible plans for medium-term fiscal consolidation by the governments of major countries with worrying fiscal positions.
In addition, the G-20 leadership needs to agree unanimously to act on:
- Implementing balanced regulatory reforms on a global basis.
“Recent evidence suggests that momentum for policy coordination has faltered in the post-crisis environment, allowing a worrying trend towards uncoordinated, unilateral policy actions to emerge. With the tentative economic recovery of the first half of 2010 decelerating, and an even weaker outlook for 2011, it is critical that all possible measures be taken to foster balanced and sustainable growth while undertaking necessary fiscal consolidation. The challenge to policymakers is to engage seriously in multilateral negotiation to deliver a set of consistent and mutually-reinforcing measures to address the problems – a communiqué of platitudes risks further undermining market confidence,” Charles H. Dallara, managing director at the Institute forr International Finance concludes.
Here’s a copy of the research report; Capital Flows to Emerging Market Economies
Cash World War Coming?
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