View Full Version : World Bank Calls for Overhaul of Monetary System

02-20-2011, 05:37 AM

World Bank's Zoellick Calls For Overhaul Of Monetary System, Says Yuan Should Get Prominent Role
Tyler Durden's picture
Submitted by Tyler Durden on 02/19/2011 13:54 -0500

World Bank's Robert Zoellick, who has recently been on a truth-telling roll, suggesting a return to the gold standard, and also highlighting that surging food prices have suddenly pushed 44 million to extreme hunger around the world raising the likelihood for many more revolutions, penned an oped in yesterday's FT, sharing his vision for a "monetary regime for a multipolar world" in which, not surprisingly he warned that the current monetary system is perilous, and that China's Yuan should be added to the SDR, as well as other currencies "over time." This is yet another dig at the dollar's status as a reserve currency, yet without China taking proactive steps to indicate its interest at becoming the new de facto world currency, the status quo may be stuck with the greenback. Essentially, China is waiting until the right moment emerges, a time when it has stockpiled enough resources, when it can, unilaterally, or in collaboration with Russia and potentially a post-EUR Europe, make an announcement that the Yuan is the new reserve currency, backed by a basket of commodities. This is precisely the step-change that Zoellick is trying to avoid: "A framework to manage a monetary system in transition may be less headline-grabbing than sudden regime change, but it is a lot more realistic. Modernising the management of international monetary affairs could prove an important contribution to future growth. The time of powerful kings is long gone. But today’s leaders still have the chance to stamp their mark on the monetary framework of tomorrow." Unfortunately, the possibility of a gradual transition in which the US willingly cedes ever increasingly more of its reserve status is unthinkable: after all the bulk of the Fed's disastrous policy is dictated that no matter what the Chair does, the world has no choice but to continue using dollars. Which will work until it doesn't (and with total US debt at almost 100% of GDP, the "doesn't" part is approaching.

Some more thoughts from Reuters on Zoellick's op-ed:

Zoellick said countries participating in the SDR should review monetary and currency issues in an SDR forum.

"This group should offer China the incentive to join the forum and eventually the SDR after it takes steps to internationalise the renminbi and moves towards an open capital account."

Zoellick said over time other major internationalised currencies could be added to the SDR basket.

"Leading powers are not going to accept the SDR as a new global reserve currency, nor the IMF as a global central bank," Zoellick said.

He added, however, that the IMF would act as a referee, "able to blow the whistle on the appropriateness of external policies but not to impose penalties" in order to support a healthy global economy.

And naturally Zoellick once again invokes the status of gold as the ultimate monetary arbiter:

Within this new framework, the IMF should be a referee, able to blow the whistle on the appropriateness of external policies but not to impose penalties. The IMF should be directed to sharpen the multilateral review of “capital account” policies, as part of the G20’s new mutual assessment process (MAP). This review should compare national policies with international information indicators, including commodity prices such as gold. The IMF’s involvement, with its 187 shareholders, offers the G20 the incentive of greater legitimacy and the support of an institution with financial resources.

All these suggestions are great. Too bad that just like with the SEC's trivial inversion of cause and effect in the flash crash and its precipitating factor, High Frequency Trading (circuit breakers do nothing to handle the reasons for a market crash: they merely moderate the symptoms), so all of Zoellick and Strauss-Khan's warnings that it is time to move to an SDR regime will not be heeded until it is too late.

Full Op-Ed link.