One of the most interest reads of the day comes from Bank of Canada chief Mark Carney (via PragCap), who warns of challenges facing all the countries determined their currencies linked to the dollar:With currency tensions rising, some fear a repeat of the competitive devaluations of the Great Depression. However, the current situation is actually more perverse. In the 1930s, countries left the gold standard in order to ease monetary policy, and the system became more flexible.
Today, the process is working in reverse. The international monetary system is sliding towards a massive dollar block. Over a dozen countries are now accumulating reserves at double digit annual rates, and countries representing over 40 per cent of the U.S.-dollar trade weight are now managing their currencies.
Got it? Countries aren’t unshackling their currencies. They’re aggressively linking their currencies to the buck (China being the most glaring example).
This death grip on the U.S. dollar is reducing the prospects for rebalancing global demand. As the Bank of Canada has argued elsewhere, the potential costs are huge–up to $7 trillion in lost global output by 2015.
Ultimately, excessive reserve accumulation will prove futile. Structural changes in the global economy will yield important adjustments in real exchange rates. If nominal exchange rates do not change, the adjustment will come through inflation in emerging economies and disinflation in major advanced economies.
This is a call for the world to unshackle itself from the “dollar standard” and it’s something that Bernanke actually agrees with, as he stated in a speech last month
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