Could the Secular Forum debate explore whether Bretton Woods II is becoming too large to be sustained?
Dialynas: Partly because of China’s reluctance to move on currency policy, imbalances will grow and increase the scope of Bretton Woods II. At some point the construct of Bretton Woods II itself starts to become more of a threat – this is increasingly part of the secular debate. The natural assumption is that the longer the game is played, the more independent China becomes and the more dependent the U.S. becomes. At some point, the only recourse that U.S. policymakers would have is to move toward trade restrictions. The debate, then, will be about whether regulatory intervention is a realistic and effective measure, and what unintended side effects trade restrictions would cause. So the issue for PIMCO is to determine what the investment objective function is for any one country under Bretton Woods II. But we also have to gauge the utility function for each country and identify how it will vary over time. If countries stop seeing the utility value of holding so many dollars, they will
