Academics and politicians have it backwards. Again.
A couple weeks ago there was a conference in Beijing to discuss the world monetary system. To the shock of no one, they recommended a modest change in how the International Monetary Fund is made up. In essence, they suggested that the IMF’s financial structure be tweaked to be less dominated by the US Dollar and Euro and more open to minor currencies.
This is just one step along the path of reduced US dominance. It’s understandable. Ever since the financial crisis, it’s been clear that the US can no longer dominate the global financial landscape. Our financial institutions have been weakened; the growth rate of our economy has slowed; our government is often beset by a 50/50 paralysis. These factors make it hard for the US to lead.
But it’s hard to see who will take our place. Emerging economies have economic growth but lack institutional stability and liquid, open markets. The Euro is currently wracked by concerns as to its long-term viability; and its economic prospects aren’t much better than the US. Japan hasn’t contributed meaningfully to economic growth in over a decade.
In short, there’s no one to pass the baton to. We’re moving from a G-7 or G-20 world to a G-0 world, with nobody in charge. That’s a concern: institutions have a way of dampening volatility when things go wrong. When the cops show up, people calm down. But if the cops don’t have cars, they can’t get to the hot spots.
So even if global growth prospects are good, the future is likely to be volatile. I’ve said it before: hang on; it’s likely to be a bumpy ride.
Douglas R. Tengdin, CFA
Chief Investment Officer
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