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Nobel laureate Mundell predicts dollar crisis
http://archive.gulfnews.com/articles/08/06/04/10218232.html

06/04/2008 08:08 PM | Reuters

Valencia: A major dollar crisis could come within five years and China is discussing reforms to the global monetary system to protect its $1.6 trillion reserves pile, says Nobel Prize-winning economist Robert Mundell.

Mundell, who has regular contacts with Beijing officials, said they are considering proposing ways to fix major currencies including the dollar and the euro, in a system similar to the one which operated under the Bretton Woods agreement from the end of Second World War until the 1970s.

"There's no doubt about it that inside the Chinese government there's a lot of discussion going on. I'm not sure how they're doing it but I know they're going to get an input from me," Mundell told Reuters in an interview.

Without reform, the global monetary system is headed for a dollar crisis within years, Mundell believes. However, he thinks the United States will avoid a technical recession during the current downturn and that the weak dollar will help it to make a recovery around autumn of this year.

But its growing liabilities accumulated by its current account deficit means that it will eventually pay a high price if the current monetary set-up continues, he said. "I see the problem coming maybe in the next recession," he said. "There could be a real dollar crisis in five years."

China is worried about its pile of about $1.6 trillion in foreign reserves, built up during years of US trade deficits, which loses value as the greenback depreciates.

"What you need to have is an International Monetary Fund that's going to take some of these excess dollars, put them into a substitution account inside the IMF or some other institution and then use that and create what is a new international currency," said Mundell. "This kind of proposal would be very acceptable inside China. The Chinese are thinking in terms of this," he said.

Mundell, awarded the Nobel Prize for Economics in 1999 for his work on exchange rates and optimum currency areas, travels regularly to China, where he has advised senior government officials.

For years, China has come under pressure from US and European authorities to allow its currency, the yuan, to appreciate, in order to make Western goods more competitive. But Beijing has resisted.

"They don't have many pre-conceptions. They don't have a belief obviously that floating is a good idea, whereas the European Central Bank and the Americans think that floating is the best of all possible worlds," Mundell said.

Fixing exchange rates would favour the euro zone, which is now battling with a euro at around record highs against the dollar, said Mundell, who has often been referred to as one of the intellectual fathers of the single European currency.


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