World News: The Wall Street JournalA Commission for the Fed's Next 100 Years
As the Federal Reserve approaches its 100th anniversary in December, the focus of monetary reform centers on a bill called the Centennial Monetary Commission Act. Introduced this month in the House of Representatives by Chairman of the Joint Economic Committee Kevin Brady, the bill would "establish a commission to examine the United States monetary policy, evaluate alternative monetary regimes, and recommend a course for monetary policy going forward." Mr. Brady's bill is not the kind of direct attack on the Fed that has been launched by, say, Rep. Ron Paul, who has called for eliminating the central bank altogether. But the bill—noting that a National Monetary Commission, established after the panic of 1907, led to the Fed's creation on Dec. 23, 1913—would set up a new commission at the start of the Fed's second century. The Centennial Monetary Commission would start with a formal review of the Fed's performance across the decades, including how its policies have affected the economy in terms of "output, employment, prices and financial stability over time." The commission would also evaluate a range of regimes, including, in the bill's language, price-level targeting, inflation-rate targeting, nominal gross-domestic-product targeting, the use of monetary policy rules, and the gold standard. Mr. Brady proposes a 14-member, bipartisan commission, led by the chairman and ranking minority member of the Joint Economic Committee. The commission would be tasked with making recommendations. The group's composition would make it more balanced than President Reagan's 1981 Gold Commission—an important body, but one stacked with partisans of fiat money, i.e., a currency backed by nothing other than government decree. That commission is remembered primarily for its dissent, written by Rep. Paul and another commission member, Lewis Lehrman, a businessman and scholar, calling for a restoration of gold-based money. Yuan Flows More Freely as China Relaxes Controls
The use of China's yuan abroad is rising as Beijing slowly loosens its grip and allows a wider group of investors to buy the nation's currency, stocks and bonds. The offshore yuan in Hong Kong, where the currency is freely traded, is near the highest in a month partly because investors are taking advantage of a slight relaxation in rules on its capital markets. Last week, Beijing allowed Hong Kong units of Chinese banks and insurers, as well as Hong Kong-registered financial institutions, to invest in China's stocks and bonds for the first time with yuan raised offshore. This "could be a game-changer this time," said Li-gang Liu, ANZ's chief economist for Greater China. "While lots of restrictions are removed, the broader access to the onshore capital market will spur foreign investors' enthusiasm to hold assets denominated in renminbi," the currency's official name. The yuan traded in mainland China is tightly controlled and can only trade 1% above or below the guidance set by the central bank every day. By contrast Hong Kong is the leading offshore center where the yuan is trade freely, although China is keen to develop others and last week doubled a currency-swap agreement with Singapore to 300 billion yuan (US$48.3 billion) to help grow the market there. Governing Change at China's Central Bank
Central banks in Japan and the U.K. have turned to a new guard for a change of direction. But China's sticking with an old hand to address new policy challenges. Zhou Xiaochuan's been China's central bank governor since 2002 and may stay longer. The defining feature of his first decade at the helm of monetary policy was a burgeoning current-account surplus—that peaked at 10.1% of gross domestic product in 2007. The central bank's job was to soak up those inflows to prevent inflation and asset-price bubbles. Central bank liabilities swelled to 29.5 trillion yuan ($4.7 trillion) in 2012—equivalent to 56.7% of GDP and up from 5.1 trillion yuan in 2002. Fears of speculative inflows limited the scope for raising interest rates—the main tool of western monetary policy. The situation has changed. China's current-account surplus shrank to 2.6% of GDP in 2012 and its financial account has swung into deficit as funds flow out of the country. The yuan's pronounced rise against the dollar—a central bank initiative—has been key. Smaller inflows make mopping up liquidity less important. The central bank has more flexibility to shift interest rates and allow the yuan to float more freely. Why There Will Be No New Bretton Woods
China, Japan and South Korea agree on little these days. Yet they seem increasingly united in the belief that their economic sovereignty—their ability to control inflows and outflows of capital, and the consequences for their economies—is hostage to imprudent policy innovations coming from the U.S. Federal Reserve. In December, Japanese Prime Minister Shinzo Abe observed critically that "Central banks around the world are printing money. . . . America is the prime example. If it goes on like this, the yen will inevitably strengthen. It's vital to resist this." Speaking from Beijing in September, Bank of Korea Governor Kim Choong-soo said that "Korea and China need to make concerted efforts to minimize the negative spillover effect arising from the monetary policies of advanced nations," namely the United States. The root of the problem, as People's Bank of China Governor Zhou Xiaochuan explained in a November 2010 speech, is that whereas U.S. monetary policy "may be optimal for the U.S. alone . . . it is not necessarily optimal for the world. There is a conflict between the U.S. dollar's domestic role and its international settlement role." This conflict is a leftover defect of "the Bretton Woods system," he said, referring to the historic 1944 conference that anointed the dollar a unique surrogate for gold at the foundation of the global monetary system. By 1961, when the first nine European countries met the requirement that their currencies be convertible into dollars, this system was already coming under strain owing to a deteriorating U.S. balance of payments and corresponding loss of gold reserves. It collapsed 10 years later when President Nixon suspended the dollar's convertibility into gold in order to prevent the depletion of America's gold stock. But a lack of alternatives meant that the dollar remained the world's dominant reserve and trade currency, Mr. Zho noted, despite "the frequency and increasing intensity of financial crises" after 1971. Why the Euro Crisis Isn't Over
Seventeen years ago, Bernard Connolly foretold the misery that awaited the European Union. Given that he was an instrumental figure in the EU bureaucracy and publicly expressed his doubts in a book called "The Rotten Heart of Europe," he was promptly fired. Mr. Connolly takes no pleasure now in having seen his prediction come true. And he takes no comfort in the view, prevalent in many quarters, that the EU has passed through the worst of its crisis and is on the cusp of revival. As far as Mr. Connolly is concerned, Europe's heart is still rotting away. The European political class, he says, believes that the crisis "hit its high point" last summer, "because that was when there was an imminent danger, from their point of view, that their wonderful dream would disappear." But from the perspective "of real live people, and families and firms and economies," he says, the situation "is just getting worse and worse." Last week, the EU reported that the euro-zone economy shrank by 0.9% in the fourth quarter of 2012. For the full year, gross domestic product fell 0.5% in the euro zone. Two immediate solutions present themselves, Mr. Connolly says, neither appetizing. Either Germany pays "something like 10% of German GDP a year, every year, forever" to the crisis-hit countries to keep them in the euro. Or the economy gets so bad in Greece or Spain or elsewhere that voters finally say, " 'Well, we'll chuck the whole lot of you out.' Now, that's not a very pleasant prospect." He's thinking specifically, in the chuck-'em-out scenario, about the rise of neo-fascists like the Golden Dawn faction in Greece. |
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