On the Eve of a New Bretton Woods

Economics, Premium POM

The World is Now Ready to Move Forward without the United States

By JC Collins

So much of the POM thesis has now been proven factual.  Next week we could very well see the anti-climactic end of US economic hegemony and the beginning of massive international monetary reform. This would in essence be the New Bretton Woods which I have extensively written about.  There is a virtual library of information which I have built up on this site in support of what will soon start to unfold.

No other site and analysis has even come close to capturing the scale and complexity of this monetary transition.  The endless hours and effort which I have committed to this endeavor has been worth it.  All previous posts will remain as a reference for those who wish to research and understand after the fact.

The annual meeting of the International Monetary Fund and the World Bank are being held in Lima, Peru next week.  The October 9 – 11 meetings have been previously covered here in the posts Are You Ready for the IMF Governance Crisis and China Gold Deposits to the IMF.

The potential of a Lima Accord leading to the first steps towards a New Bretton Woods is a very real possibility next week.  Much of the framework and macroprudential policies have already been developed, as reviewed here on POM.  The necessary steps which need to be taken from this point will be discussed at these meetings and implementation will begin forthwith.

Yesterday Managing Director of the IMF Christine Lagarde gave an address in which she stated the following:

“It is a great pleasure to “raise the curtain” on the IMF-World Bank Annual Meetings to be held next week in Lima – our first in Latin America in nearly fifty years.”

“The prospect of rising interest rates in the United States and China’s slowdown are contributing to uncertainty and higher market volatility. There has been a sharp deceleration in the growth of global trade. And the rapid drop in commodity prices is posing problems for resource-based economies.”

Most readers will understand the importance of this as we have reviewed and discussed these matters over the last few years in great detail.

“Peru’s Nobel laureate, Mario Vargas Llosa, once said: “Uncertainty is a daisy whose petals are never fully plucked.”

“Policymakers will pluck some of these “petals” in our Meetings in Lima next week.”

This is a clear signal that fundamental change will begin next week.  The failure of the US Congress to ratify the IMF 2010 Quota and Governance Reforms has forced the rest of the world to proceed without America.

Lagarde also talked about the slowdown in China and the effects this will have on the global economy and other countries.

“This will contribute to what could be a prolonged period of low commodity prices – a change that will need to be managed by policymakers, particularly in the large commodity exporters.”

A second transition point which she discusses involved something that has been a hot topic lately, which is the increase of interest rates and overall normalization of monetary policy.  The fact that the Fed did not raise rates two weeks ago does not mean that they will not do so down the road.

As Lagarde states:

“The second major transition concerns the normalization of U.S monetary policy. The Federal Reserve is poised to raise interest rates for the first time in nine years – although the Fed has also clearly indicated that rates are expected to remain low for some time. This transition reflects better economic conditions in the US, which is also good for the global economy.”

“Low interest rates contributed to a search for yield on the part of investors, which supported financial risk-taking and higher valuations of equities, sovereign bonds, and corporate credit. So the Fed also faces a delicate balancing act: to normalize interest rates while minimizing the risk of financial market disruption.”

“Again, there are potential spillovers. The prospect of rising U.S. rates has already contributed to higher financing costs for some borrowers, including emerging and developing economies.”

“This is part of a necessary adjustment in global financial conditions. The process, however, could be complicated by structural changes in fixed-income markets, which have become less liquid and more fragile – a recipe for market overreactions and disruptions.”

“Outside the advanced economies, countries are generally better prepared for higher interest rates than in the past. And yet I am concerned about their capacity to buffer shocks.”

“Why? Because many emerging and developing economies responded to the global financial crisis with bold counter-cyclical fiscal and monetary actions. By using these policy buffers, they were able to lead the global economy in its time of need. And over the past five years, they have accounted for almost 80 percent of global growth.”

“These policy actions generally went together with an increase in financial leverage in the private sector, and many countries have incurred more debt – a significant portion of which is in U.S dollars.”

“So rising U.S. interest rates and a stronger dollar could reveal currency mismatches, leading to corporate defaults – and a vicious cycle between corporates, banks, and sovereigns.”

“The bottom line is that proactive policy management by everyone – and especially the emerging economies – is now more important than ever.”

The challenges involved in this transition are obvious.  It will take tight management.

Lagarde continues by talking about what can be done.  The overview is that the world needs to be more agile, more integrated, and more member focused.  This will be accomplished by:

“I will elaborate further on these “Aims” in my annual address to our 188 member countries next week in Lima. Let me add just one crucial point: the Fund can only be as effective as the support we receive from our members.”

“Therefore, the adoption of the 2010 Quota and Governance reforms is essential to reflect the dynamic changes taking place amongst our membership, and to ensure that the Fund has the resources that are needed to respond to our members’ needs – today and tomorrow. In fact, this is at the heart of the global financial safety net.”

“I continue to urge ratification by the U.S. Congress as quickly as possible.”

“It would be in line with the important role that the United States plays in the IMF – and it is, quite simply, indispensable if the world is to effectively manage the transitions that I have discussed with you here today.”

Previously we have reviewed the timeframe on interim IMF reforms, which would be decided by Sept 30, 2015, and implemented by December 15, 2015.  There interim steps, which are meant to bypass the US, could take the form of de-linking the IMF funding (resources) from the actual board and quota reforms.

This would effectively bypass the American veto and allow for the required funding.  It would also create a separation of IMF membership and the actual quota amounts.  This would allow for the more equitable representation of the emerging markets, such as China and India.

The Indian IMF Executive Director, Rakesh Mohan, recently stated that bypassing the 2010 reforms, as written and agreed upon, is now likely.  Taken all together, it strongly suggests that the rest of the world is on the verge of taking the necessary steps to reform the international monetary system without the support the United States.

From a geopolitical point of view, Russia has effectively taken control of Syria, and by default and agreements with Iraq and Iran on ISIS strategies, has also taken control of the broader Middle East.  How Saudi Arabia and Israel respond to this reality could very well be the violent climax which many have predicted.

Let’s hope sanity wins the day.

The thesis presented here on POM is becoming a reality.  So much of what we have reviewed over the last few years has already been proven.  There will be much more in the coming weeks and months.  – JC