Interviews
'Free wheeling dollar root cause of crisis' - Research Expert
17 Dec '08
3 min read
Addressing the Chinese Annual Meeting of Finance – 2009, Wu Jinglian, a senior research fellow at the Development Research Center of the State Council and a professor at the Graduate School of the Chinese Academy of Social Sciences and China Europe International Business School expressed his views on the current economic crisis affecting China and the world at large.
He said that “Financial crisis is a crisis in the world financial system, but its source arrives from the formation of a new world monetary system after the collapse of the Bretton Woods system in 1976. The new system is characterized by making the unfettered U.S. dollar as the center of the monetary system.
In the Bretton Woods system, national currencies were pegged to the dollar and the dollar linked to gold, but under the new dispensation, the U.S. dollar is not linked to the gold, so it is a free-wheeling world currency.
There is the problem of low savings rate within the United States. The US is dependent on the status of U.S. dollar to borrow money globally and issues a variety of derivative tools for the same. The US maintains an efficient operation by using its currency and a wide range of financial instruments to borrow money from the world.
In this way, a virtual bubble waiting to be burst has been created not just in the US but across the world. But now the bubble has burst, leading to a sudden evaporation of virtual wealth, which turns a country from short-term liquidity surplus to a state of liquidity shortage. This is the source of the crisis.
Second, China's own financial system has huge flaws. There is a crisis of excessive savings and over-investment and the root cause of financial system defects are caused by excessive investment. China has maintained large-scale exports to support China's economic growth by introducing a set of policies to encourage exports.
It was successful in the 1990s. But after these many years these export-oriented policies have significantly increased foreign exchange reserves of China, which has led to China's economy and the U.S. economy complementing each others economies. It has also been proposed to establish a new monetary system, but we cannot quickly establish a monetary system in the short term that does not focus on U.S. dollar.
If we want to change the situation in the future, at least the main issues and status of the U.S dollar should be put under supervision. The biggest problem is that if we do this, Americans must change their way of life by generating high reserves. We need to create a new monetary system, but I am more pessimistic towards reaching a consensus of putting currency issue under supervision system in the near future.
In this case, China must change current growth pattern by relying more on domestic sales rather than exports and we should push the change of GDP development pattern through further reform.”
He said that “Financial crisis is a crisis in the world financial system, but its source arrives from the formation of a new world monetary system after the collapse of the Bretton Woods system in 1976. The new system is characterized by making the unfettered U.S. dollar as the center of the monetary system.
In the Bretton Woods system, national currencies were pegged to the dollar and the dollar linked to gold, but under the new dispensation, the U.S. dollar is not linked to the gold, so it is a free-wheeling world currency.
There is the problem of low savings rate within the United States. The US is dependent on the status of U.S. dollar to borrow money globally and issues a variety of derivative tools for the same. The US maintains an efficient operation by using its currency and a wide range of financial instruments to borrow money from the world.
In this way, a virtual bubble waiting to be burst has been created not just in the US but across the world. But now the bubble has burst, leading to a sudden evaporation of virtual wealth, which turns a country from short-term liquidity surplus to a state of liquidity shortage. This is the source of the crisis.
Second, China's own financial system has huge flaws. There is a crisis of excessive savings and over-investment and the root cause of financial system defects are caused by excessive investment. China has maintained large-scale exports to support China's economic growth by introducing a set of policies to encourage exports.
It was successful in the 1990s. But after these many years these export-oriented policies have significantly increased foreign exchange reserves of China, which has led to China's economy and the U.S. economy complementing each others economies. It has also been proposed to establish a new monetary system, but we cannot quickly establish a monetary system in the short term that does not focus on U.S. dollar.
If we want to change the situation in the future, at least the main issues and status of the U.S dollar should be put under supervision. The biggest problem is that if we do this, Americans must change their way of life by generating high reserves. We need to create a new monetary system, but I am more pessimistic towards reaching a consensus of putting currency issue under supervision system in the near future.
In this case, China must change current growth pattern by relying more on domestic sales rather than exports and we should push the change of GDP development pattern through further reform.”
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