The Plaza Accord made history not only because it was successful but also because it gave Japan a seat at the international monetary system table. The first meeting of the G20 took place in November 2008; the 2016 iteration would be a perfect place to launch China’s more active role in the world monetary system. In fact two of the summit priorities, breaking a new path for growth and creating a more effective and efficient global economy and finance governance structure, suggest an opportunity.
Given that China is not party to the G7 meetings, the G20 would seem to be the ideal locale to deepen China’s integration into the global monetary system. A 21st Century Plaza Accord could also provide cover for Fed policies that may otherwise prove politically unpalatable. What would it look like? The Fed reverses course, the US Treasury and others actively intervene to drive down the dollar, Germany and the rest of Europe commit to fiscal stimulus, China acts on SOE reform, Japan delays its consumption tax, etc.
What is needed is a weak dollar – the dollar is the global linchpin, the key that can address the negative feedback loops threatening the global economy. How will a weak dollar come about: a new Plaza Accord, a Fed-led policy reversal, a combination of the two? Who among the geo-economic leadership will grasp the nettle? Time will tell, and as noted above, time is not our friend. In the interim, equity rallies should be sold while sovereign bond selloffs should be bought. Rather than wish for the US to rescue the global economy via its consumption, the world should wish Janet Yellen Godspeed and embrace a weak dollar.
Jay Pelosky is principal of J2Z Advisory LLC, an investment advisory boutique providing independent portfolio strategy and global asset allocation advice to institutional clients. This piece was originally published by Itau BBA under its Global Connections product.