Is It 1958 or 1968? Three Notes on the Longevity of the Revived Bretton Woods System

It is now widely accepted that the broad outlines of the current international monetary system are as we described them almost two years ago and labeled "the Revived Bretton Woods system." This system's main features are

• — the emergence of a macroeconomically important group of economies that manage their currencies vis-à-vis the dollar to support export-driven growth

• — the United States as center and reserve currency country, providing financial intermediation services for foreign, and particularly Asian, saving through its national balance sheet, and willing to accept large current account imbalances

• — a group of poorer economies implementing export-led development policies and exporting large amounts of capital to richer economies, mostly the United States

• — unusually low and even falling short- and long-term real interest rates as a result of this glut of mobile global savings, and

• — a group of industrial and emerging economies with floating exchange rates, whose currencies are under incessant pressure to appreciate.

Not agreed and under vigorous discussion is how long this system can last. Will it be a meteoric flash with a spectacular end soon to come? Or will it last for the reasonably foreseeable future? We package these questions here in an analogous question: Is the Revived Bretton Woods system at the point in its development where the original Bretton Woods was in 1958 or 1968 or 1971?

In a series of publications we have provided a fundamental underpinning for why we believe the system will last—that the situation today is more like 1958.¹ We argue that the gains to the players from continuing their actions outweigh the costs that many have argued will arise in an endgame asset price shift or in unexploited benefits of portfolio diversification. Rather than characterize the situation with geopolitically charged rhetoric like "balance of financial terror,"² we think it more valid to think in the familiar economic terms of "mutually beneficial gains from trade," such as might exist between any borrower and lender or between any purveyor of goods and its customer.

Here we further develop our argument in the form of three notes addressing particular issues that have cropped up in critiques of the Revived Bretton Woods view. These notes both respond to the critiques and continue to expand our ideas. The first note explains how we think about what is driving capital flows to the United States and keeping interest rates low. We view the fact of unusually low long-term real interest rates for this stage of the business cycle as a direct challenge to those who, exaggerating the importance of rumors about central bank reserve management practices, claim that the end is near.

The second note seeks to provide some information about the experience of those emerging economies with chronic current account surpluses since the breakdown of the first Bretton Woods system. A very large empirical literature evaluates the experience of emerging economies that have run chronic deficits, and the costs and frequency of associated financial crises. But we are not aware of any similar evaluations of the durability and stability of those foreign exchange regimes that have resulted in unusual sequences of current account surpluses and accumulations of international reserves. The widespread view that the surplus regimes at the core of the Revived Bretton Woods system will come to a quick and costly end has likely been inferred in part from the recent experience of debtor emerging economies. Our interpretation of the experience of these surplus regimes is that they have been and may well remain durable and immune from financial crises.

The third note addresses an issue that has been raised frequently in criticisms of our comparing the current system to the Bretton Woods system, namely, that the United States is running large current account deficits now, but it was not then. Of course, many aspects of the current system are different from what they were in the heyday of Bretton Woods: Konrad Adenauer is no longer chancellor of Germany, Charles de Gaulle is dead, the United States no longer guarantees gold...