The Hindu Business Line/EU-Digest : US Fed needs global watch - by S.Gurumurthy

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US Fed needs global watch - by S.Gurumurthy

As per IMF data (2006) over 65 per cent of global forex reserves, (even 70 per cent plus in non-Euro areas) 41 per cent of global loans and 48 per cent of global deposits are held in dollar terms; 57 per cent of the US Treasury securities are held by Asian nations and 21 per cent by European nations; 53 per cent of US equities are held by Europeans, 26 per cent by Western hemisphere nations, 18 per cent by Asian nations. Bank of International Settlements reveals that 43 per cent of all forex transactions are in dollar terms. Identical is global trade in dollar terms. The OPEC sells oil only in dollars. That the dollar as a currency is more global than a national, and as a central bank US Fed is more a global than a US entity, are manifest in one single fact. Namely out of the dollar stock of $800 billion created by US Fed from its birth in 1913 till now, only less than a third of it circulates in the US and more than two-thirds is exported outside the US. How did the dollar come to play this central role? In 1950s, thanks to the Bretton Woods formula, the greenback officially became the global currency. But, after the formula collapsed in 1971, the dollar lost its official status. But, for lack of an alternative, it became the de facto global tender.Convinced that its model had won finally and egged on by powerful global corporates, the US went gung-ho on globalisation and liberalisation of its economy. It also began exerting pressure on others, by itself and also through WTO, IMF, World Bank and the rest, to liberalize on its terms.

EU-Digest:The global current account deficit of the United States is now larger than it has ever been nearing $800 billion, almost 7 percent of US GDP. To finance both the current account deficit and its own sizable foreign investments, the United States must import about $1 trillion of foreign capital every year or more than $4 billion every working day. The situation is unsustainable in both international financial and domestic political (i.e., trade policy) terms. Correcting it must be the highest priority for US foreign economic policy. The most constructive remedy in the short term is a three-part package that includes credible, sizable reductions in the US budget deficit, expansion of domestic demand in major economies outside the United States, and a gradual but substantial realignment of exchange rates.The foreign exchange value of the dollar has to substantially decline to make a serious dent in the record US current account deficit of nearly $800 billion, almost 7 percent of US GDP. Asian currencies that have not yet appreciated significantly against the dollar, especially the Chinese renminbi, will need to rise sharply. Asian and other central banks must cease intervening in the exchange markets and accumulating massive amounts of dollar reserves to permit the market to begin the needed exchange rate corrections. An Asian Plaza Agreement to coordinate exchange rate realignments in that region may be necessary given the reluctance of the individual countries to appreciate sharply and lose competitiveness.