Financial Wealth Creation Via Currency Unification

1
Financial Wealth Creation Via Currency Unification

• John C. Edmunds
• John E. Marthinsen
• Bretton Woods, July 9, 2004

2
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 worlds capital stock.
  

3
The Worlds 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.

4
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.

5
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.

6
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.

7
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.

8
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.

9
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.

10
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.

11
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.