Contre les taux de change fixes
Without doubt, we need a new approach to monetary policy and a greater degree of co-operation between currency blocs. But before leaping back into a reincarnated Bretton Woods framework, we should check our history books. The defining element of the Bretton Woods agreement was a system of fixed exchange rates. In the years immediately after the war, these currency pegs initially worked well, but as the relative trade positions of the major economies diverged, with Japanese and European reindustrialisation, the fixed exchange rates promoted what proved to be unsustainable US deficits. Bretton Woods I ended in ignominious failure in 1971 when President Richard Nixon was forced to abandon the gold peg and devalue the US dollar.
More recently, the arrangement of pegging emerging market currencies to the US dollar has been accurately referred to as the Bretton Woods II framework. This system also promoted the accumulation of unsustainable US deficits through the recycling of trade surpluses back into American dollar-denominated debt. Today’s crisis can, in large part, be attributed to America having accumulated an unsustainable debt load thanks to the fixed exchange rates of Bretton Woods II. We do need a new strategy for managing our monetary system, but the last thing we need is a Bretton Woods III with fixed exchange rates.
Trois erreurs à ne plus commettre
Before we draw up the new monetary architecture, we should step back and consider what went wrong. Our first mistake was to give our central banks the wrong objective. We have asked them to control consumer price inflation - the price of goods and services - while allowing them to ignore asset price inflation : houses and stock markets. As cheap goods flooded into our economies from the newly industrialising nations, our central banks felt obliged to lower interest rates, which generated higher inflation. The resulting easy credit triggered enormous house price inflation and the accumulation of an unsustainable level of debt.
Our second mistake was to ask our central banks to prevent recessions. Interest rates were cut pre-emptively to head off any and all economic downturns. This prevented the economy from learning from its mistakes ; like a doting parent repeatedly paying off a child’s credit card, the bills just kept getting bigger.
Our third mistake was to split the role of bank supervision from that of monetary policy. The raison d’être of central banking is to maintain the stability of the monetary system, a vital part of which is to ensure that the private sector banking system does not abuse the central bank’s lender-of-last-resort facility. Bank supervision should always be an integral part of monetary policy. In Britain, we made the mistake of stripping this function away from the Bank of England.
What to do ? We are now faced with a classic debt deflation trap of the type that gripped the American economy in the 1930s and still grips the Japanese economy today. We now have
little option but to inflate our way out of this debt. Thereafter, we should acknowledge that this inflation represents the wholesale failure of recent monetary policy and enact a radical overhaul of central bank policy.
