Investment Institute

Under pressure: The International Monetary and Financial System

The system is in trouble. And now COVID-19 has brought its fragility into question yet again. Whether by evolution or revolution, change is inevitable. The implications for investors reliant on the system will be immense.
The system is in trouble. And now COVID-19 has brought its fragility into question yet again. Whether by evolution or revolution, change is inevitable. The implications for investors reliant on the system will be immense.

The fast view

  • The International Monetary and Financial System is in trouble. Seen as “the glue that binds national economies together,” it should allow countries to use macroeconomic policies to achieve non-inflationary growth, it should minimise risks to financial stability and it should promote economic growth by channelling resources in an efficient manner over geography and time.
  • History, however, has shown that achieving each of these three objectives at the same time is not possible. So governments have placed different emphasis on each objective for the past 150 years, meanwhile the optical illusion carries on. As Nobel Laureate, Paul Krugman said of this problem back in 1998, “you can’t get everything you want”.
  • And now, in the most recent history, COVID-19 has brought the IMFS’ fragility into question yet again.
  • We ask some dangerous questions in this, the third paper of our Great Shutdown series. Why is the US dollar at the heart of the IMFS, despite the rise of China and increasing importance of emerging markets to the global economy? Why is the current system now considered “untenable” by senior central bankers and why have they not evolved it sooner given their doubts? Is it because a tectonic shift to a new system – one that revolutionises the nature of money via new technology perhaps – is a political decision?
  • Has the level of pressure now built up enough to prompt change?

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A cura di

Russell Silberston

Investment Strategist – Macro-Economic and Policy Research

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All rights reserved. Issued by Ninety One, issued May 2020.