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Revoking America’s Exorbitant Privilege

NEW YORK – The ongoing political stalemate in the United States holds two major implications for the international monetary system. The better-known consequence has been deepening uncertainty about the US dollar, the main global reserve currency, and US Treasury securities, supposedly the world’s “safest” financial asset. Not surprisingly, the major investors in US Treasuries, China and Japan, have expressed alarm. Simply put, the global economy has at its center a dysfunctional political regime that generates recurrent threats of default on the world’s major reserve asset.

The second implication is further postponement of the International Monetary Fund’s 2010 quota and governance reforms, which would double member countries’ contributions and modestly increase major emerging economies’ voting power. Prior to its approval by the IMF Board in December 2010, the reform, agreed at the G-20 Seoul Summit, had been hailed as a “historic” breakthrough. But history has stalled without approval by the US, which has an effective veto over major IMF decisions.

The threat of a US default may well end in a political agreement to raise the US government’s debt ceiling, as occurred in 2011. But, whatever the outcome, the latest episode makes it abundantly clear that our globalized world deserves a better international monetary system than the current “non-system” that evolved in an ad hoc manner after the collapse in the early 1970’s of the initial Bretton Woods arrangements.

The need to overhaul the international monetary and financial system was one of the basic lessons of the global financial crisis. While there have been major, albeit incomplete, reforms of international finance, efforts in 2009 and 2010 to reform the international monetary system – including the proposed changes at the IMF – have led to no significant action.