The Bretton Woods system of managed currencies unraveled in the early 1970s, leaving a decade of economic trouble in its wake. In recent years there’s been a lot of talk of Bretton Woods II, the informal setup in which emerging market countries link their currencies to the dollar. That arrangement is of course under a lot of pressure. There’s been lots of debate about whether China, the Persian Gulf countries, and others will keep buying U.S. assets to fend off a big rise in the value of their currencies vs. the dollar. Now Nouriel Roubini has written an epic post (you have to register to read the whole thing) arguing that this discussion becoming irrelevant:
[E]ven if the BW2 economies were to resist further their currency appreciation and desperately hold on BW2 – as the rate of accelerated forex accumulation in 2008 so far suggests – the result, like the demise of BW1 shows, would be a rise in global inflation that would – at some point – destroy BW2 as rising inflation would erode the competitiveness of the BW2 club. Thus, either way we are now closer to the end game of BW2: formally BW2 is still alive and well as the reserve accumulation is as aggressive as ever or even more aggressive than in 2006-2007 among many – but not all – members of the BW2 club. But continuing with BW2 is leading now – with certainty – to inflation becoming so unhinged in the BW2 club that the basis of undervalued currencies and export-led growth will be destroyed by the real appreciation that a rise in inflation induces.
I’m not entirely sure what this means. But I think it’s bad news for Wal-Mart.