Globalization, Finance, and Industry: A Search for Stability

Currency volatility is likely to rise in the immediate future due to the confluence of two new phenomena. First, the euro will be a strong alternative to the dollar as a global money; the bipolar international monetary system will be marked by a massive portfolio diversification in favor of euro-denominated assets away from the presently held dollar assets. Second, the current episode of financial globalization is distinguished by international capital flows that are penetrating ever deeply into national equity markets of several countries. Stock prices are well known for their wide fluctuations. These two features, when combined, will make the world’s key currencies ever more unstable, at least during the long transition period that lies ahead. The international monetary system faces three distinct problems: currency volatility, exchange rate misalignment, and abrupt capital flows. No single measure can address all these issues. Neither the advice for banning currency trading, that has been offered by the premier of a southeast Asian country among others, is practical or warranted. Stabilization of currencies will require, in addition to other macroeconomic policies, a two-fold approach that deals with the stockmarket as well as the currency market. This paper proves that both the markets necessarily display chaos. A unified proposal is presented here for their stabilization.