A New World Currency to Replace the Dollar.

China and Russia are proposing a new world reserve currency to replace the dollar. It would be in essence a basket of all major currencies.

This is an old idea, but its recent reintroduction is thought to reflect unease with the US-triggered recession and the US's potentially inflationary response to that recession.

China's central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.

In an essay posted on the People's Bank of China's website, Zhou Xiaochuan, the central bank's governor, said the goal would be to create a reserve currency "that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies".

"This is a clear sign that China, as the largest holder of US dollar financial assets, is concerned about the potential inflationary risk of the US Federal Reserve printing money," said Qu Hongbin, chief China economist for HSBC. . . .

"The outbreak of the [current] crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system," Mr Zhou wrote.

At first glance, it would seem that such a new currency would be very bad for the US, its dollar, and its staggering recent increases in debt.

Whether replacing the dollar as the reserve currency would be bad for the rest of the world is hard to say. Despite President Obama's being a strong internationalist, I doubt that he will be significantly more positive about the prospect of a new world currency than Geithner and Bernanke are -- and both of them are negative on the idea.

This possibility is yet one more reason why the US Treasury should be issuing lots of 30, 50, and 100-year bonds while interest rates are still low. And then we need to stop the Federal Reserve from buying them!

Related Posts (on one page):

  1. Mixed Signals on a New World Currency.
  2. A New World Currency to Replace the Dollar.

Mixed Signals on a New World Currency.

The Obama Administration has been strangely noncommital on the prospect floated by the Chinese and the Russians of Special Drawing Rights based on a basket of currencies to replace the US dollar as the world's reserve currency.

Both Austan Goolsbee and Timothy Geithner refused to rule it out when asked about it. Geithner said, "We're actually quite open to that suggestion," though he viewed the proposal as merely "evolutionary." Like the President, they expressed the view that the dollar was doing fine, but they didn't actually express opposition to the proposal.

When I first heard of the proposal, I thought several things:

(1) Whether it was a good or bad idea for the world, at first glance it would seem to be a very bad idea for the US, because we need people to hold dollars, especially with our exploding national debt. (Of course, if it were really good for other countries' economies, that might accrue to the US's benefit in the long run. I haven't yet seen a careful analysis of the issue.)

(2) The likeliest knee-jerk reaction of any US official -- in public at least -- would be to dismiss the proposal out-of-hand. Any other position might weaken the dollar and the US's bargaining position.

(3) This might nicely raise a dilemma that some of us noted in the campaign. I think that Obama loves the US above all other countries, but by personality he would find it natural to be an honest broker in a dispute between US interests and those of other countries. This might be a perfect example of an instance where US and foreign interests might conflict, but where both sides would have reasonable positions. Will the Obama Administration vigorously push the US's interests or will it instead act as an honest broker between US and foreign interests?

My guess on the last issue is the same one as I gave a few days ago, that US interests will ultimately be pushed by the President, but the failure of both Geithner and Goolsbee to speak out more forcefully against the Chinese proposal suggests that the Administration's position may be as yet undetermined, that Geithner was telling the truth when he said that we are open to the proposal.

Related Posts (on one page):

  1. Mixed Signals on a New World Currency.
  2. A New World Currency to Replace the Dollar.