The world economy is increasingly threatened by volatile market reactions to global imbalances at a time when the IMF has largely lost its original raison d’être as the world’s central monetary institution. These two developments should stimulate the Fund to claim a new purpose as the world’s reserve manager.
In the 1960’s, the IMF managed the problems of all the major economies, and in the 1980’s and 1990’s, it developed as a crisis manager for emerging markets. But that job is much harder now, because of the size of some of the big emerging economies. And, in any case, the focus of financial nervousness is shifting back to the world economy’s core countries, such as the United States, the United Kingdom, and Australia, which are funding large current account deficits with surpluses from much poorer countries.
These surpluses reflect high savings rates, both in the private and the public sector, in oil-producing and emerging Asian economies, which have resulted in their rapid accumulation of foreign reserves. But this is hardly a blessing for these countries. Their reserves have become so large that even the announcement of a small shift in assets – say, from euros to dollars – can move markets and cause disruptions and panics. Like past reserve regimes that offered a choice of assets (for example, the dollar, the pound, and gold in the interwar period), instability is inherent.
The new surplus countries’ attempts to find alternative reserve assets have been problematic. Most of the attention has been fixed on China’s $1 trillion in reserves, and its efforts to maintain the value of those assets. Diversification from US Treasury bills by investing some $3 billion in the Blackstone private equity fund this summer was swiftly followed by an embarrassing collapse in value.