Increasing World Liquidity

While the return to the gold standard or the adoption of flexible exchange rates would increase the speed with which balance of payments, are eliminated by automatizing responses to the balance of payments.

Various plans would leave the adjustment mechanism largely unaffected.

They would instead increase the available supply of liquidity, say, of reserves and borrowing power, and hence the period of time over which balance of payments adjustment can be made.

By increasing the amount of reserves available to a deficit country, it may be enabled to ride out its deficit, without making price and income changes--- the disequilibrium may not be fundamental and may reverse itself in time.

At the very least, if price and income changes prove necessary, the extra reserves will make those changes relatively less painful by stretching them out over a longer period of time.

Most of the innovations introduced into the Bretton Woods system have been along these lines such as liquidity increasing.

For example, currency swaps and lending by the Group of Ten are means of temporarily placing additional reserves into the hands of deficit countries. But there is opposition to liquidity increasing schemes.

One school argued that all things considered the existing system has worked quite well. This school maintains that the existing system can cope with future liquidity problems.

Not surprisingly this tends to be the position of IMF officials and staff. Others argue that the creation of excess liquidity as a substitute for a more efficient adjustment mechanism is dangerous.

Excess reserves are said simply to delay crises, and to make them worse when they finally arrive. This type of criticism is most often offered by supporters of flexible exchange rates whose main focus is on adjustment rather than liquidity.

And some reform would seem to be inevitable. Thus, assuming that the present 'adjustable peg' exchange rate system will continue largely as it is, with less rather than more adjustments in exchange rates, some other change in the present system is necessary to remedy its increasing operational deficiencies.

Two deficiencies receive particular attention by those who would increase reserves.

First, are the reserve currency countries run a deficit, but running persistent deficits undermines confidence in the quality of the (reserve) currency.

But when the deficit is eliminated, slower growth in world reserves, and perhaps reserves scarcity results. Of such dilemma are international monetary crisis spawned.

Second, without a new source of reserve growth, future reserve inadequacy will increase the pressure for more restrictive measures against free trade and capital flows or for more drastic income and price adjustments when paced, orderly adjustments are needed.

In this competitive financial market you can also buy health insurance quotes for the same reason you buy other kinds of insurance, to protect yourself financially.