What will Bretton Woods 3.0 look like?
Nigel, a loyal MR reader, asks me:
Is it possible for the US to abuse the dollar’s privileged position, and do you expect a monetary conference to take place in the future that would alter the post-Bretton Woods arrangement in ways less favorable to the US?
A good question, but at current margins I don’t see many directions for movement. I don’t know whether such a monetary conference will take place, but it is unlikely to be a decisive event for shaping actual outcomes. I see these as the relevant questions:
1. Will China move to a true “free float”? And if so, what is the collateral damage along the way?
2. Will some countries leave the eurozone? (and if they do, it is a big deal for them, but probably not a big deal for the global monetary order, unless it is Italy or France)
3. Will more countries attach to the euro (Iceland?) or to the U.S. dollar (additional parts of Latin America?)
4. How many additional countries will institute capital controls?
For the most part, those questions will be decided at the national level, although for potential euro leavers the nature of the proposed EU alternative (another bailout?) will be significant.
The most likely outcome is that more countries will institute partial capital controls, and in that regard we will move closer to some aspects of the initial Bretton Woods 1.0, in which capital controls were an integral feature. Capital controls may come to keep a euro peg (already happened in Cyprus), to try to keep domestic jobs (ha, but recall Trump and Carrier), to prevent an imminent explosive capital outflow (China), to strengthen or preserve a banking system, to limit wild currency swings, or simply because governments will try all kinds of policies before admitting they have failed. Other forms of “capital controls” may come through tax reforms and regulatory barriers designed to keep capital at home.
My best guess on China is that capital outflow pressures eventually will force a free float, but only briefly, and then they will return to capital controls in some form.
So my forecast for the future is much more in the way of capital controls, but without the hegemonic/cooperative international architecture that characterized Bretton Woods 1.0.