Word on the street is that soon, it won’t just be rap stars and Pip Diddy sporting ’em shiny, yellow bling-bling!
Because as the global economy struggles with talks of currency wars, one solution economic gurus offer G20 leaders is the age-old Olympic mantra, “go for the gold.”
World Bank President Robert Zoellick proposed a new international monetary system in order to reduce external imbalances in economies. This “cooperative monetary system” will likely include the dollar, euro, yen, yuan, and last but certainly not the least, gold.
If you know your forex history well, you probably remember that before our current international monetary system, made up of freely floating exchange rates, gold was the bomb!
The Bretton Woods Agreement in 1944 put the gold standard system into play but it broke down during World War I and was completely abandoned in the 1970s.
Those calling for the return of the gold standard believe that gold should serve as a reference point for future currency value and inflation. “Let bling lead the way!” they say.
The problem they have with the current system in place is that the U.S.’s monetary policies tend to have a wide, rippling effect on the world economy.Because of this, the Fed’s decisions, though they may be appropriate for the U.S., may also have negative side effects on the world economy given the dollar’s status as the world reserve currency.
Adding to that, they say the dollar’s recent volatility has been shaking world markets and is threatening global financial stability.
In the opposing corner, those who are against the gold standard argue that having a new reserve currency under the direction of the IMF won’t change anything. According to those opposed, it doesn’t matter whether currencies are pegged to the dollar or to gold.
The act of pegging currencies to a single standard causes individual countries to lose their ability to use independent monetary policies effectively.
So does this proposed gold standard spell the end of the forex world? *Gasp*
Now, now, calm down. Nothing is set in stone yet, so don’t panic. In fact, this global currency debate has been going on and on for years already but nothing has changed.
Finance moguls at the IMF and the G20 economic hotshots just can’t seem to reach an agreement and come up with concrete plans of establishing a new reserve standard.
Of course, there are some countries, particularly the emerging economies, who aren’t so gung-ho about giving up control over their exchange rates. And then there are other countries who probably wouldn’t be able to diversify their reserves fast enough.
It seems that switching to a new reserve standard is far too complicated, if not impossible, that they’d rather stick with the status quo.
For now, as long as the calls for a new reserve standard persist, the U.S. dollar could be under heavy selling pressure.
But until the blueprint for a modified standard is laid out, and while the plans are still met with heavy opposition, the current system is likely to stay intact.
