Financial Wealth Creation Via Currency Unification John C. Edmunds John E. Marthinsen Bretton Woods, July 9, 2004
Financial Assets and Annual Output • The IMF estimates that world financial assets were worth $106 trillion as of 2002. World GDP for the same year was $32 trillion. • The debate about currency unification has centered on what effect unification would have on current output and employment, not on the effect on the market value of the world’s capital stock.
The World’s Capital Stock • We estimate that the world stock of capital assets is worth, at current market prices, approximately $150 to $200 trillion. These capital assets include real estate, businesses, intellectual property, and mineral resources. • The market values of many capital assets are depressed because of currency risk.
Currency Risk • When the market prices a capital asset, it uses a discount rate. This rate consists of several components. Two of these are to take into account the risk of devaluation and the risk of inflation. • If there is a single global currency, devaluation ceases to be possible, and there would be only one inflation rate for the entire world.
Windfall Gains to Owners of Capital Assets • When the currencies of Europe unified to create the euro, owners of long-term Spanish and Italian government bonds benefited. So did owners of other assets that had quickly became much more valuable. • Windfall gains can happen again.
Windfall Gains, 2 • The possible magnitude of the windfall gains that currency unification can deliver would, according to our calculations, outweigh the costs associated with giving up national monetary autonomy. • For example, GDP of the emerging countries was $7.4 trillion in 2002. The value of financial assets in those countries was only $8.4 trillion. Stock market capitalization of the emerging countries was only $1.5 trillion.
Windfall Gains, 3 • If the emerging countries stopped issuing local currencies and instead adopted a single global currency, the market values of capital assets in those countries would rise, because currency risk would no longer exist. • Those countries could then attract new inflows of financing and their growth rates could rise.
Real Economic Growth • In Wealth by Association, we present a macroeconomic model that links increases in the market prices of stocks and bonds to real economic growth. • According to our analysis, when countries unify their currencies, their real growth rates can rise. Over a period of years the effects on indicators of economic well-being can be large.
Conclusion • Many countries face the challenge of country risk, and are seeking ways of reducing it. • One way of reducing currency risk is to cede monetary authority and adopt a single global currency. • This policy can create gains and stimulate economic growth.
Conclusion, 2 • As the amount of financial assets grows, the negative effects that unilateral, unexpected changes in monetary policy can cause are becoming larger. • Meanwhile the benefits to individual countries of having their own national currencies do not grow as fast.
Conclusion, 3 • We hope that our contribution to the debate about currency unification stimulates discussion and we are pleased to have had this opportunity to present our analytical framework.