The Uneven Build Up of Global Reserves

The universal, large and uneven build up of international reserves is both a cause and a symptom of fundamental problems in the international financial system. The phenomenon represents several interlinked processes at play, so that "root cause" sorts of arguments must be treated with care. There are broadly two sets of solutions to unwind the status quo, which is also not sustainable. One set deals with the economic imbalances between the US and East Asia. The other, which contains two distinct elements, deals with re-building the multilateral institutional arrangements that govern the provision of international liquidity by [a] reforming the IMF and [b] creating a multilateral facility into which nationally held reserves might be channelled. These proposals complement each other. Addressing the macro-economic imbalances will stem the continuing rise in reserves in East Asia, calls for protection against that region’s exports to the US, and over-heated asset markets in both regions. IMF reform will re-create the global institution that is needed to survey and analyze trends in macro-economic and financial sectors the world over, and meet periodic episodes of illiquidity. It will also enable the creation of an SDR-based facility into which countries may place their reserves, for their own and the global good. Both tackle the phenomenon of excessive self-insurance. An effective international monetary fund is as much a global public good today as it was when considered at Bretton Woods sixty years ago.