Former IMF Deputy Managing Director of Indian Descent Gita Gopinath (Pictured) called on global policymakers to diversify the currency base of global debt and trade. Gopinath opined that the economic research literature showcased limited policy manoeuvrability and huge US policy knock-on effects on the rest of the world. She noted that there was a limited and lagged impact on exports through the depreciation of the currency.
Gopinath citing the literature showcased that since large amounts of trade are invoiced in USD terms. She notes that this is even the case when the US is not either an exporting or importing nation. She notes therefore that trade between Sri Lanka and India would be more impacted by the local currency’s relation to the USD than it is amongst themselves. Gopinath noted that monetary policy-driven economic collapses weren’t based on any underlying economic reality. Gopinath said, “You can end up in a situation where if prices are too high, consumption is too low in comparison to the production cost of those goods. At an individual level, you don’t think of yourself as part of aggregate demand.”
Gopinath was speaking on January 6 at the American Economic Association Meetings. Gopinath actively called for the redrafting of the major textbooks in macroeconomics to reflect the over 60 years of empirical evidence that showcased more nuanced truths about the economy. Two currencies (the USD and Euro) capture over 80% of World Trade.
Consequently, large amounts of economic activity are largely influenced by monetary policy decisions of the European Central Bank and the US Federal Reserve system. Following the collapse of the Bretton Woods system, it has de-facto opened up national Central Banks to huge risks of USD solvency.
USD solvency is subsequently controlled mostly by US entities that thereby can exert a large influence on outcomes in foreign countries. Gopinath added, “The dollar usage in world trade is 4 times the US share of world trade.” She noted that the World has always been dominated by a few currencies. She said, “Before World War 1 it was the British Pound. In the inter-war years, it was the British Pound and the USD. Afterwards, it has been the USD.”
Gopinath explaining the consequences of the heavy US weightage in world trade said, “When the dollar appreciates proportionate to the rest of the currencies in the world then US trade expands but the rest of the world trade collapses.”
This is because trade between countries whose domestic currency is not the USD shall face higher prices.
With the normalization of US interest rates, there will be a large capital flight towards the US thereby causing a strong US dollar and a weakening of trade outside the US. Gopinath said, “For many countries, the strong dollar brought about strong inflationary pressures.”
Gopinath further warned that US-denominated debt caused huge problems for countries as the value of their local currency could fluctuate quite aggressively against the USD thereby causing very volatile changes to the value of their liabilities. Gopinath noted, “The dollar dominates in international borrowing and lending. (TP)
Add new comment