Commercial Times: World takes beating due to PIGS
Global stock and currency markets have taken a beating as investors worry about the debt crisis in Portugal, Italy, Greece and Spain, known now by the acronym PIGS.
People are joking that the world is suffering because of the PIGS, but their woes have actually had major significance because of their fast and immediate impact on world financial stability due to globalization.
We should also more cautiously examine the existing financial system to see if it contains inherently uncertain factors that have enabled the financial crisis of 2008, the Dubai crisis and the credit crisis of the PIGS to deliver swift and strong blows to global financial markets.
From the perspective of economic theory, the huge double deficit of the United States (its fiscal deficit and international trade deficit) should hurt the U.S. dollar and cause it to depreciate in a major financial crisis, but the truth is just the opposite.
In other words, since the collapse of the Bretton Woods fixed exchange rate system in 1971, the greenback is no longer the world’s official settlement currency, but in practice, it remains a major reserve currency for international finance and trade.
Being the dominant international reserve currency allows the United States to print money in exchange for the real resources of other countries, which obviously leads to an unfair distribution of international resources.
The weak U.S. dollar is the currency of choice among money to finance the carry trade, with the federal funds rate sitting consistently between 0-0.25 percent. But the dollar tends to rise in times of financial crisis because of its status as a safe haven. This double-edged role is a fundamental problem in international finance.
Maybe the issue has become too big to deal with, but if major countries do not address it and seek a basic solution, then international financial volatility will be hard to bring under control and could even grow more turbulent. (Feb. 8, 2010) (By Lilian Wu)
More Info: http://www.taiwanheadlines.gov.tw/ct.asp?xItem=179528&CtNode=39
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