I want to briefly highlight two recent pieces on international monetary policy by Barry Eichengreen, who is always worth reading on the topic. The first highlights similarities between the current international monetary system and that of the 1960s, which ultimately culminated in the collapse of the Bretton Woods regime. It's a nice short article, and succinctly summarizes the positions of the major players. The gist: it's hard for trade-surplus countries to continue to hold down their nominal exchange rates while large deficit countries -- i.e. the U.S. -- pursue an expansionist monetary policy, as that creates high domestic inflation in the surplus countries. Dr. Oatley once referred to the U.S. Fed's policy of "smoking out China's yuan undervaluation", and I think that puts it nicely. A similar confrontation broke Bretton Woods I, and this could break Bretton Woods II.
The second previews Eichengreen's new book, on the role of the dollar as the world's reserve currency, and why it isn't going to change any time soon. He runs down the list of likely contenders and finds them all seriously wanting. He doesn't mention path-dependence, but that is another contributing factor. He also sounds a warning, that U.S. fiscal rectitude is needed to maintain stability in the global economy. Because if the dollar goes down, everything goes down with it.
With exorbitant privilege comes exorbitant responsibility. Responsibility for preventing the international monetary and financial system from descending into chaos rests with the United States. How much time does it have? Currency crises generally occur right before or after elections. Can you say November 2012?