China proposes doing the U.S. a huge favor (by replacing the dollar)
The WSJ reports that People's Bank of China Governor Zhou Xiaochuan has:
called for the creation of a new currency to eventually replace the dollar as the world's standard, proposing a sweeping overhaul of global finance that reflects developing nations' growing unhappiness with the U.S. role in the world economy.
This is not a new idea. In fact, it's what John Maynard Keynes was out to accomplish at the 1944 Bretton Woods conference where the International Monetary Fund was created. Keynes wanted the IMF to issue a new global currency, the bancor. The U.S. thwarted that plan, although the IMF did later create something called "special drawing rights" that amounts to a sort of proto world currency.
Zhou's proposal was treated in the WSJ and the NYT as another Chinese attack on the dollar, and I guess it is. But it also points the way toward a global monetary regime that, in theory at least, would better serve the long-term interests of the U.S. than the current dollar-denominated one.
The advantage of having your country's currency as the world's reserve currency is that you don't really have to play by the rules: You can run big deficits financed by the rest of the world, you can spend more than you earn, and to a certain extent you can escape the consequences of your profligacy by devaluing your currency when you run into trouble. The obvious disadvantages are that running big deficits and spending more than you earn aren't really great long-term economic strategies.
Meanwhile, that thing about escaping the consequences of profligacy by devaluing has its limits. At some point it will presumably stop working: The rest of the world will give up on you and pick another currency to keep its reserves in. Until that day happens, while your currency remains the global standard, you'll struggle with issues of economic competitiveness and overindebtedness—because countries around the world are going to be more interested in buying your currency than anything else you produce. (I'm channeling Joe Stiglitz here, and he says he's channeling Keynes.)
What Zhou is offering is an orderly way out of this quandary:
A super-sovereign reserve currency not only eliminates the inherent risks of credit-based sovereign currency, but also makes it possible to manage global liquidity. A super-sovereign reserve currency managed by a global institution could be used to both create and control the global liquidity. And when a country's currency is no longer used as the yardstick for global trade and as the benchmark for other currencies, the exchange rate policy of the country would be far more effective in adjusting economic imbalances. This will significantly reduce the risks of a future crisis and enhance crisis management capability.
One big issue here, of course, is that by allowing a "super-sovereign" currency to take over the global role of the dollar, the U.S. would be ceding a bit of sovereignty to the IMF. My feeling is that we've already ceded that sovereignty to global financial markets, and giving the IMF the role of global central bank would actually improve our ability to control our destiny over the long run. But I sort of doubt that argument will go over too well in Congress.
Which raises the second big problem with any such global currency regime. The last two such regimes—the gold standard and the Bretton Woods system—collapsed in part because because of the unwillingness of the world's biggest economic power, the U.S., to play by the rules. Who's to say we—or China in a decade or three—will be willing to play by the new IMF rules Zhou is proposing when they don't appear to serve the nation's short-term interests?
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1
The China is worried about its monetary assets held in dollars. It has problem in converting to any other asset for that particular asset price will go through the roof and China will have problem in encashing it back. In fact it was very well known toall concerned that US's huge indebtedness will culminate in cheaper dollar. This is happening after the sub-prime crisis . It would have happened through some other sort of crisis. In fact a strong borrower tends to lighten the burden by whatever means. What China may do is to buy stocks all over the world (equity as well as bonds) and have a minimum three year commitment , in the mean time some ways will be found to have a common world currency or at least supported by world most economies.
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2
My only complaint is there would be no sovereign oversight with this policy. What is being proposed here is something different than the EURO; any NGO that controls currency on a GLOBAL scale would become a target of opportunity and mischief beyond imagination (think Microsoft hacked, exponentially worse). The US Government has a proven track record AND INTEREST in protecting the value of its currency. Counterfeiters and thieves are hunted, fined, and jailed because of every sovereign nation's rights. This NGO would need legal and executive powers shadowing every individual's existence, and I find that extremely scary.
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3
It sounds so easy creating a global currency but try convincing the Brits to get rid of the pound! After all London is still a major financial hub and besides the Europeans are not going to go for it either we just got the Euro. Maybe in a 100 years
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4
Why does not china let its own curreny float in the open market and let it become the currency of choice for the world community.
http://real-politique.blogspot.com
By Sikander Hayat
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5
Hah! I saw "the International", Zhou. You're not going to get me to fall for that one.
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6
"...the exchange rate policy of the country would be far more effective in adjusting economic imbalances."
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Isn't this another way of saying, "China likes to manipulate currency markets, but it doesn't work as well as we would like." Don't free-floating currency markets adjust for trade imbalances? -
7
"the rest of the world will give up on you and pick another currency to keep its reserves in. "
The rest of the world has dollars to net save because of our trade deficits. The only way a currency can be "saved" in is if the issuing nation runs trade deficits. Simple accounting. The world is forced to net save our currency precisely because of this.
Giving up control of your currency is just plain stupid. Look at the EU nations that need to run deficits right now but can't because of their EU membership.
Just a really, really bad column. Embarrassing.
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8
@richwag: One could just as easily say that we are forced to run trade deficits because the rest of the world wants to net save our currency. In fact, this is the direction in which most analysis of global currency flows has headed in the past few years: The desire to save (especially in Asia after the 97-98 currency crises) came first, enabling the overspending and gigantic trade deficits of the U.S.
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9
The world should be grateful to China for leading the way to a Single Global Currency, which necessariy will be managed by a
Global Central Bank within a Global Monetary Union. As China requests, this next global currency will not be the responsibility of just one country. What is needed now is international recognition of those goals, and research and planning toward them.
We are so conditioned to the fluctuations of the values of currencies, and the frequent need to assist currencies in trouble, that we fail to adequately recognize the contribution of such currency risks to the current global financial turmoil. We also fail to recognize how easy it will be to eliminate those problems. For every currency in the world today, we cannot predict a value for next year, next month, or even the next day or next hour. How can a stable globalized financial system be built upon such instability and unpredictability?
The success of the euro shows that monetary union is the best way to ensure monetary stability. It is now commonly recognized that Iceland, Hungary and Poland and other European countries would have had far less of a currency problem this year if those countries have been part of the eurozone. The primary problem with the euro and currencies of other monetary unions is that they still must co-exist within the international multi-currency system itself where the value of those common currencies must still fluctuate in value against each other. If 16 countries can use the same currency, why not 192?
In addition to eliminating currency risk, the use of a Single Global Currency would eliminate the current foreign exchange trading expense of $400 billion annually, eliminate current account imbalances, eliminate the need for foreign exchange reserves (now totalling more than $3 trillion); and bring other benefits worth trillions.
The Single Global Currency Assn. (www.singleglobalcurrency.org) promotes the implementation of a Single Global Currency by 2024, the 80th anniversary of the 1944 conference. That's only 16 years away. For perspective, consider that 16 years before the 2002 implementation of the euro in the pockets of Europeans, there was a Berlin Wall, a Soviet Union and a Yugoslavia.
The world is moving toward a Single Global Currency through the
expansion of monetary unions in the Caribbean, Europe and West Africa, and the creation of monetary unions in Africa, Asia, the Middle East, and North and South America. The challenge now is to reach that goal planfully, as soon as possible with as little cost and as few crises as possible.
See the book, "The Single Global Currency - Common Cents for the World."
Morrison Bonpasse
President
Single Global Currency Assn.
Newcastle, Maine, United States
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