McKinnon Lectures (No. 8): The Collapse of the International Monetary System and the New Pattern of Economy

2016-11-27 IMI

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On November 27, McKinnon Lectures (No. 8) was held in Renmin University of China. Xiang Songzuo, deputy director of IMI, was invited as the guest speaker and gave his keynote speech on the collapse of the international monetary system and the new pattern of economy. The lecture was chaired by Su Zhi, professor of School of Statistics and Mathematics of Central University of Finance and Economics.

In his speech, Dr. Xiang elaborated on the expectation and future trend of RMB exchange rate depreciation, and gave his opinions on what the collapse of the international monetary system, floating exchange rates, and the coming era of the dollar standard mean to the global economy. Finally, he discussed the origin, evolution, risks and solutions of the global financial capitalism system.

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Dr. Xiang pointed out that in the era of global financial capitalism, the trend of exchange rates follows “random walk”, and the equilibrium exchange rate simply does not exist. Exchange rate fluctuation of all currencies is basically or even entirely unrelated to the real economy (GDP). Therefore, exchange rate fluctuation cannot be explained by the theory of purchasing power parity or interest rate parity, both of which are based on the so-called equilibrium exchange rate theory. The nature of exchange rate is an adjustment mechanism of balance of payments between countries. It is also one of the components of the adjustment mechanism of economy. An exchange rate is by no means a simple “price”. He summed up monetary policies and principles both at home and abroad, including regimes of exchange rates, money supply, interest rates and inflation-targeting. These four regimes are four strategies of adjustment mechanism in the economy. Dr. Xiang also analyzed the advantages and disadvantages of fixed exchange rates and floating exchange rates. He didn’t think that a sharp, rapid and substantial depreciation of RMB exchange rate would emerge. A bi-directional narrow range of fluctuation is the main trend of the RMB exchange rate. Dr. Xiang believes that due to the strong expectations of depreciation, the macroeconomic sector and monetary authority should release a stronger signal to take more effective means to stabilize the exchange rate expectations. He pointed out that building a bigger and stronger domestic financial market is a crucial step to eliminate the concerns and risks of depreciation and volatility of the exchange rate.

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Dr. Xiang introduced three stages of monetary system in history, and summed up ten patterns of international monetary system’s evolution and ten mechanisms of dollar-standard system. He emphasized that the dollar-standard system has brought almost unlimited benefits to the United States. This system created “super hegemony” and “super interest” by issuing banknotes, creating inflation, creating credits, manipulating the exchange rate and dominating the international monetary system. The root cause of the internal imbalance in the global economic structure is the dramatic change in the internal structure of the global economic system over the past 40 years. That is, the global economy began to change from industrial capitalism to global financial capitalism, and the financial industry continued to grow at a high speed, faster than the growth of the real economy. Many countries in the world adopt a floating exchange rate—this has never happened before in the history of the currency system. Only in the background and framework of floating exchange rates and the dollar standard system, can we understand the trend of RMB exchange rates. The core of RMB internationalization is the internationalization of financial markets, financial institutions and the cross-border inter-bank payment systems (CIPS). In the short term, the international monetary system will be in a disorderly and chaotic “Warring States Period”. The status of the RMB will gradually or even rapidly increase, but for a long time the dollar will still be the major reserve currency in the world. He believes that global financial capitalism will continue to expand, and asset bubbles, financial crises and the economic imbalance will continue to deteriorate until a major turning point appears. When it happens, human beings will restore the economic, financial and monetary order.

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In the Q&A session, Dr. Xiang gave his insights on questions including the reform of the international monetary system, RMB internationalization, digital currency in the future and floating exchange rates, etc.