Updated: May 26
Remarks by Secretary of the Treasury Janet L. Yellen on International Priorities to The Chicago Council on Global Affairs
On 5th April, Treasury Secretary Janet Yellen made her most significant speech since her appointment. In the speech, she set out the economic agenda for the Biden administration which underlined the direction they plan to take. As one might expect, all the main issues de jour were addressed such as climate change, inequality and the US status as the leader of the world order. However, it was the concluding remarks that contained the most important information where Yellen made a direct comparison between current discussions at the IMF to the post WWII meeting at Bretton Woods which set the framework for the rules of international trade once peace had been established.
“As I prepare to meet with my colleagues from around the world this week at the IMF and World Bank Spring Meetings, I find myself thinking back to the policymakers who gathered in Bretton Woods a year before I was born to define our post-war order. Though it was a different time, I empathize with the enormous weight they faced; the pressure to come together after a global catastrophe in building an enduring and interconnected system aimed at promoting peace and prosperity throughout the world. Our current juncture is no less significant—what we do in the coming months and years will have profound impacts on the trajectory of our country and on the global economic order.”
If Janet Yellen is hell-bent on a shake-up of Bretton Woods proportions, investors ought to be paying close attention. The thrust of Yellen’s comments was that while the previous system worked well for the US and others in terms of ushering in a multi-decade period peace and prosperity, it came with several negative externalities which have gotten worse over time to the point that the current system no longer fit for purpose. “But over the years, new problems developed that were not properly addressed. In the push to grow our economies, we neglected our environment. As we embraced new technologies, we didn’t do enough to prepare our workers and our education systems for the changes underway. While we embraced trade as an engine for growth, we neglected those who did not benefit.”.
Bretton Woods is synonymous with the global currency system and how global trade functions. By making the direct analogy to the current situation, Yellen is making it perfectly clear that once again the terms of global trade and exchange need to be re-established. The question is: into what? Economists from Keynes to Tobin have wrestled with this issue in the past and found that the options are few and far between. It is unlikely the US dollar is going anywhere, nor is it likely to be replaced by another sovereign’s fiat currency. However, politics now dictates that the heliocentric currency system, with the dollar as the sun, is also no longer viable.