Thursday, January 28, 2010

Sarkozy accuses the US of "monetary dumping"

From today's FT:
President Nicolas Sarkozy on Wednesday stepped up his calls for a new Bretton Woods system to stabilise global exchange rates, promising proposals for reform of the international monetary system when France takes over the presidency of the G8 and G20 next year. 

“The prosperity of the postwar era owned much to Bretton Woods … we need a new Bretton Woods,” he told the World Economic Forum in Davos. “We cannot preach free trade and tolerate monetary dumping. France, which will chair G20 in 2011, will place reform of the monetary system on the agenda.”

Translation: The US, as the global monetary hegemon, should not be allowed to debase its currency ("monetary dumping"). From a moral perspective, he is right. But from a practical perspective, he is heading out to sea. 

This sterile debate is now almost 40 years old. The Europeans criticize the US, which does nothing because the Europeans have no leverage in this arena. The dollar is the reserve currency of choice because of its liquidity, not because the US forced foreign central banks to buy it. 

Sarkozy is essentially calling on the Fed to peg to the euro, thus surrendering US monetary sovereignty to Trichet and his deflationist accomplices at the ECB. US monetary policy would thus shift from targeting price stability to targeting the value of the dollar in euros. This is never going to happen. 

However, there is nothing to prevent the ECB from pegging the euro to the dollar, which is what in my opinion they should do. But this would mean that the eurozone would surrender its monetary sovereignty to the Fed, which would be anathema to the Germans. 

So this whole discussion is a complete waste of everyone's time, which is entirely appropriate for the G-8 and G-20 gabfests. "It's our currency, but it's your problem."

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