Thank you very much. It's an absolute honor and privilege and a delight to be with you. When I see the phrase Bund, like many other people from the rest of the world, I'm sure it makes me slightly sad that in addition to sitting there with you all in the auditorium, I would not have the opportunity to walk down the wonderful Bund itself, and experience that very special, wonderful, unique feeling that gives one every time you have a visit to Shanghai. And I look forward to the moments when we find better treatments and the right vaccines so that we can all return to at least the better parts of pre-COVID life. Let me give my thanks to Mr. Chen Yuan, and the whole of the Organizing Committee and the CF40 for inviting me, and in advance of my brief comments to all the technical and support staff, making it so efficient.
I've been asked to talk about different things in the two previous speakers that I both had the privilege of listening to with their very persuasive evidence about the battle to combat climate change. And I have to say, I continue to believe that China is playing one of the most trusted roles in this remarkable challenge that faces the world whatever happens with COVID in the near future. I've been specifically asked to talk about two related things: why is the potential structural and cyclical factors that could affect the trend of the dollar; and secondly, the challenges facing the larger emerging market nations or so called emerging market countries, and issues involving international cooperation involving them.
Obviously, I could spend hours on either subjects, but luckily for all of you in the audience, and for people that are following me on the schedule, I've been given only 15 minutes. And I've already taken up two minutes of that. So let me quickly move on to my comments.
First of all, with respect to the dollar. And I have to start by repeating a joke that I've said on many occasions since I left Goldman Sachs, which is now getting on for eight years ago.Having spent so much of my earlier career at Goldman and before, trying to be a guru about the foreign exchange markets, but now not having the responsibility of having to stick by anything I ever say about the dollar or the currencies, my most confident prediction to you is that the dollar in the future will go up and down, unless it goes down and up first. And that's my way of saying ahead of the rest of this part of my comments. One of the things I've learned from following the dollar and foreign exchange markets for nearly 40 years, is that basically, it is impossible to really know. And I have learned many, many tricks that others have too, and no doubt some more. And it is definitely the case that the famous Andy Warhol phrase of 15 minutes of fame is definitely applicable to the remarkable world of the foreign exchange market, which, let me remind people, if you're not so familiar with it, in many ways, is like the world's biggest fruits and vegetables store, because it is very big, and it's very open to many participants.
With that in mind, let me now try to have a bit more substance than my opening comments. And, and the key thing I would say at the start is that I think there is always a difference between the cyclical outlook and the structural outlook, which is stating the obvious, but many often times, a lot of commentators and observers confuse the two. And what makes it difficult is of course, there can be, not often, but there can be a relationship between some event that is so important that it affects both the cycle, as well as the long term structural outlook. But frequently, they are separate questions. And indeed, something that helps the performance of the dollar in terms of its cyclical performance, actually might damage the longer term structural outlook, and for that matter, vice versa.
And in that sense, I give you two of many examples that have happened under the near four years now that we've had President Trump in the United States, where by and large, the dollar, yet again, in terms of long term beliefs, has surprised many people and risen against many currencies. But that in itself, and partly because of some of the circumstances and particular aspects of the use of the dollar in terms of international diplomacy, it has directly contributed by some participants in the foreign exchange market. In this case, sovereign countries, and I'm thinking specifically of Russia, to actually reduce the use of the dollar significantly in their foreign exchange reserves holdings, and in terms of transactions.
And secondly, in the same regard, of course, the ongoing technological developments, involving many parts of our life. But certainly, the world of digital currencies, as many of you know, better than I, in China, is having a big influence over what may be emerging as a different way of transacting different currencies around the world, including the RMB.
With that in mind, let me now turn to how I currently approach what I'd call the cyclical outlook for the dollar. And I'll come back to talk about the structural outlook after another two or three minutes.
So my experience, notwithstanding my comments about Andy Warhol, 15 minutes of fame, the cyclical outlook for any currency, but especially the dollar, is primarily best driven by thinking of some kind of estimates of valuation. Many decades ago, the best academic and pragmatic analysts would use simply purchasing power policy to undertake this approach. About 30 years ago, I was persuaded by some of the stronger academic evidence that was emerging, including some of the work of a British academic that was at the Institute of International Economics at the time, John Williamson, that actually tried to estimate the so called real exchange rates, which is, in a way purchasing power parity adjusted for productivity changes, in which you try to also estimates the simultaneous equilibrium levels of employments and balance of payments equilibrium would be superior to purchasing power parity, and I developed my own model that became known at Goldman Sachs as GSDEER, and I call it dynamic equilibrium, real exchange rates.
And if you look at such models today, the dollar’s value is overvalued against many currencies. But let me say that it is not particularly dramatic, with the exception of a few, notably some important emerging market currencies, the Brazilian real, for example, would be one that I would highlight, to a modest degree, the Chinese RMB, and then within the more developed world, not really dramatic deviation from fair value at all, and certainly nothing by the standards of the 1980s and the circumstances when we had the so called Louvre Accord. All in all, I would suggest such an approach today would suggest the dollar is overvalued by something in the vicinity of between 5%-10% on a trade weighted basis.
And then the second thing that I look at is what may be causing that relative overvaluation. And then I look at specific cyclical forces, such as the relative performance of GDP, and especially the relative position of monetary policy in various competing and alternative economies, and use various measures of interest rates, particularly short term interest rates, and bond yields adjusted for inflation, to come up with what I would call an adjusted equilibrium.
And if you do that today, because the US economy for much of the past few years, has performed stronger than, of course, many other so called developed economies. That explains most of the dollars overvalued, modest overvaluation, because the US economy has grown faster than the Eurozone, generally has grown faster than Japan, and most other developed countries, and with it today, despite the accommodation of the Federal Reserve Board, actually still has higher bond yields than many of those other countries. So all in all, contrary to what I read in here, many other so called experts talk about, I don't see any evidence that the dollar is particularly dramatically overvalued, let me say, I emphasize to the relative cyclical forces that are going on in many economies, with the exception of some important emerging currencies, such as the Brazilian real, the South African rand, and a number of others, if I had time to expand. If I now turn quickly to talk about the structural outlook. As I said earlier, in my opinion, this is a different question. Although there are some issues that can be relevant for both. And I would suggest you, as has been the case ever since the introduction of the modern monetary system and the developments of the International Monetary Fund, by and large, the role of the dollar over major currency is driven by three forces: the absolute and relative size of the country's GDP, the absolute and relative size it shares in world trade, and the absolute and relative size of its capital markets. And if I go through each of those now, briefly, I come to the conclusion that they explain why the dollar continues to be so dominant in the world's financial markets, irrelevance of its cyclical price performance. But I will end up by saying, relative especially to the current size of US GDP, it is undoubtedly the case that the dollar’s role in international finance is far bigger than the relative share of American GDP .
And if I stick to that first points, again, especially relative to other so-called developed countries, because the US economy has better demographics, and at least the same productivity performance, the two main factors that drive economic growth, it is likely that the US economy over the next 10 to 20 years, will generally grow stronger than that of the Eurozone, Japan, or other most developed countries. And on that basis, I don't see significant challenges to the dollar.
Of course, when one shifts to talking about so-called emerging economies, the situation is different. And especially with the growth prospects for China, and India, in particular, of the emerging world, those two countries, more than any other, depending what happens to the role of trade for China and India, as well as their capital markets, this would be a basis of some further significant challenge to the role of the dollar. Of course, the same thing, should I say, could be said for many other emerging economies, such as Vietnam or Indonesia. But of course, these are economies that remain currently, relatively very small in terms of the next 20 years or so. Maybe when we talk in another hundred years, the situation will be different, but I don't think of the next 20 years.
Shifting to trade, here, I would argue the forces are slightly neutral to negative, and in particular, in this era, and here I suspect this won't be changed too much by the US election, where the US does not appear to want to engage in global trade the same way that it is done in the past, it seems to me that it is inevitably the case that the use of the dollar will become less. And here of course, the scope for the greater use of other currencies, particularly when I come on to the third points, if they allow their currencies to be used more for financial transactions and an international bond, and equity markets, as well as other forms of transactions, the situation could change very quickly, which indeed takes me to the third, and possibly the single most important area when it comes to the structural usage. And that is both the size and role of relative and respective countries capital markets.
And here linked to what I said about something in the cyclical discussion, if the United States were to continue to overly play its diplomatic engagement with the rest of the world with excessive penalistic use of the dollar. Here, I think indirectly, as we may have seen some evidence of in the past two to three years, it will encourage other countries to think about ways of having their own currencies to be used more easily by other countries in terms of capital market transactions. And in this regard, the potential use of digital currencies, I think, is an important development, which will allow for some shift away from the dominance of the dollar.
And all in all, I would say, if I combine these three factors together, the size of economy, the role of share, and trade, and in capital markets, it does seem to me that in coming years, the role of the dollar is likely to become less, although it will still continue to be bigger than its relative share of global trade suggests, until China, India, or perhaps a big change in the Eurozone, where they deliberately encouraged much greater international use of their financial instruments.
Let me now quickly turn to make some concluding comments about the second part, which sadly, I don't really have a large amount of time to, but it relates to against the background of that issues to do with vulnerability, and international cooperation for the emerging world. And it is undoubtedly the case if I follow on immediately from what I've just said, that we live in this peculiar world, where the role of the dollar in global finance and global trade is bigger than is warranted by just the size of the US economy. But until many other countries and in this regard, particularly emerging economies can find a desire to have their own currencies and instruments used by more countries, and crucially, that they can cooperate more effectively than they have done, it is likely that the dollar will continue to play a disproportionate role in international finance.
When I relate this to the current crisis in COVID, which was one of the issues I was asked to focus on. Of course, it is the true case sadly, that many large emerging economies, notably some of the so called BRICS, which I am so personally associated with, have endured a very unfortunate experience in this crisis, and in that regard, both India and Brazil in particular. I would note, and I hope this remains permanently the case. Fortunately, it has not been the case yet with Africa. And one of the few big positive surprises is, of course, Africa so far, has been spared.
But at the end of the day, whether it's because of COVID-19, or any other global crisis, what we really need from emerging countries, and involving emerging countries with major developed countries around the world, in my opinion, is a resurrection of the spirit of the G20. that performed so wonderfully from 2007 through 2009. And I believe that one of the very few really good things to have come out of the great financial crisis was the emergence of the G20 because it gave an important seat at the most important table in the world for large emerging market countries, including all of the BRICS, Brazil, Russia, China, India, and others like Mexico, Indonesia, South Africa and so on.
And it is, despite its size, still, in my opinion, the right forum to do that today. And I sincerely hope that's once we have the US election out of the way in another two weeks. And I suspect it will be different if Biden wins other than if Trump wins, but either way, I urgently call on everybody in China to help bring the G20 back to its rightful place at the center of international affairs, which in itself, could help to, through time orchestrates, a better role for the dollar that reflects the balance of the world's requirements.
And so with that, thank you very much for inviting me to share the stage. And I look forward to seeing you all live at some stage in Shanghai. Thank you very much.
