REFILE-COLUMN-Global imbalances & the Triffin dilemma-John Kemp

(Refiles to add missing words in 3rd-last paragraph)

-- John Kemp is a Reuters columnist. The opinions expressed are his own --

By John Kemp

LONDON, Jan 13 (Reuters) - For the world monetary system, the financial crisis which erupted in the summer of 2007 is a cataclysmic shift that will prove every bit as significant as the outbreak of the First World War (which heralded sterling's demise as a reserve currency) and the suspension of gold convertibility in 1971 (which marked the end of bullion's monetary role).

The crisis marks the passing of an era in which the U.S. dollar has been the world's undisputed reserve currency for making international payments and storing wealth.

The dollar is not about to lose its reserve status completely. But it is set to become less "special". In future, it will increasingly have to share its reserve status with the euro, the yen and perhaps the currencies of the other advanced economies. In time, it may even have to share its status with China's yuan.

In fact, the whole concept of a single reserve currency (the dollar) and a principal reserve asset (U.S. Treasury bonds) is set to undergo a profound shift. Policymakers, businesses and households will in future think about and hold a whole portfolio of competing reserve currencies and assets. Multipolarity in the world of security and economic relations is set to be matched by a world with multiple reserve currencies.

One positive consequence may be greater stability in a more diversified financial system, once the current crisis is passed. But the price for the United States may be a loss of policy autonomy for Treasury and Federal Reserve officials used to being able to ignore the international dimension when deciding interest rates and budget deficits.

EXTERNAL IMBALANCES

Leading economists agree that global imbalances lie at the root of the current crisis. But opinions are more sharply divided on their origins, which countries are to blame, and what should be done to resolve them.

The Fed's critics argue that cheap money policies in the late 1990s and early 2000s are mainly responsible for fuelling a debt-driven consumer boom, and sucking in record volumes of imports, many from the newly industrialising economies of Asia. Funding all this required issuing huge volumes of debt, much of it securitised against dubious mortgages and consumer debts, and sold to foreigners when domestic savings proved inadequate.

In contrast, Fed Chairman Ben Bernanke and some leading commentators blame China. In their view, China's reliance on export-led growth, refusal to allow the yuan to appreciate, accumulation of foreign reserves, and recycling of surplus foreign exchange back into the market for U.S. government bonds and mortgage-backed securities created a "global savings glut". This glut artificially reduced global interest rates and created the perverse incentives for an unsustainable build up of debt in the United States.

Differing interpretations about the origin of the imbalances lead to the two sides to proffer different solutions. Fed critics argue the solution lies in a long-term tightening of U.S. credit conditions and higher domestic savings. Bernanke and his supporters argue the solution is for China to stimulate domestic demand, appreciate the yuan and reduce reserve accumulation.

In reality, it takes both a lender and a borrower to create a debt crisis; the solution to the crisis lies in balanced adjustments on both sides.

AMERICA CONTRA MUNDUM

While it is tempting to blame China's "mercantilist" trade policies for the crisis, China is only the latest in a long line of countries the United States has blamed for its own trade and financial problems (Germany and France in the 1960s, Japan in the 1970s and 1980s, the Asian Tigers in 1990s).