Russia & China openly call for new World Reserve Currency
Posted by slowsmile March 25, 2009
As reported from the Financial Times(UK), Bloomberg, NY Times and Guardian(UK ) news sources, the governor of China’s central bank - Zhou Xiaochuan - has written an essay explaining the necessity of replacing the dollar with a new and more stable global reserve currency system controlled by the IMF.
Last week - and also before the crucial G20 meet in London soon - Russia made similar proposals.
As I have described in another article - “Dollar Shock!! UN panel says world should ditch the dollar” - the main problem here is that, plainly, the current financial crisis policies of the US Fed in using Quantitative Easing(pump priming and devaluing dollar worth) directly conflicts with foreign countries that hold large quantities of dollars and US Treasuries whose value and yield are likely to erode considerably from these recent and deliberate monetary inflation plays by the US government. But, at the same time, the US govt. desperately needs these countries to buy more and more US Treasuries so that the the US govt. can monetize its debt to create credit in order to avoid further financial collapse of the US markets.
So what can the US govt or the Fed do?
On the one hand, the US Fed is now massively inflating its monetary base to alleviate its current financial deflation problems, but by doing this China and other countries holding US dollars and Treasuries will have to suffer a large erosion of their “savings”. And if China says enough is enough - and starts to sell-off and diversify its dollar holdings into other currencies and assets - then both the dollar value and US economy will be wrecked by high, uncontrollable inflation very quickly.
The NY Times article goes on to say:
In a paper released Monday, Zhou Xiaochuan, governor of the People’s Bank of China, said a new currency reserve system controlled by the International Monetary Fund could prove more stable and economically viable.
A new system is necessary, he said, because the global economic crisis has revealed the “inherent vulnerabilities and systemic risks in the existing international monetary system.”
While few analysts believe that the dollar will be replaced as the world’s dominant foreign exchange reserve anytime soon, the proposal suggests that China is preparing to assume a more influential role in the world. Russia recently made a similar proposal.
China’s bold idea, released more than a week before world leaders are to gather in London for an economic summit meeting, also indicates that Beijing is worried that its huge dollar-denominated foreign reserves could lose significant value in coming years.
China has the world’s largest foreign exchange reserves, valued at nearly $2 trillion, with more than half of those holdings estimated to be made up of United States Treasuries and other dollar-denominated bonds.
On March 13, China’s prime minister, Wen Jiabao, said he was concerned about the safety of those assets, particularly because huge economic stimulus plans could lead to soaring deficits in the United States, which could sink the dollar’s value.
Should China lose its appetite for Treasuries, the United States’ borrowing costs could rise, making it more costly for Washington to carry out economic stimulus packages and for Americans to pay off their mortgages.
Nicholas Lardy, an economist and China specialist at the Peterson Institute in Washington, said that through its proposal, China was indicating that the dollar’s long dominance was unfair, allowing the United States to run huge deficits by borrowing from abroad, and that the risks to holders of Treasuries were growing.
“Chinese are quite concerned that the large U.S. government deficits will eventually lead to inflation, which will erode the purchasing power of the dollar-denominated financial assets which they hold,” Mr. Lardy said. “It is a legitimate concern.”
The timing of the Chinese announcement, analysts said, could also be aimed at giving Beijing more leverage to negotiate with the United States and other nations in London on trade and on proposals about how to stabilize the global economy.
But China is cautious when it discusses buying or selling Treasuries, for fear of sending a signal that could significantly affect currency markets. So in a separate announcement on Monday, China said it would continue to buy Treasuries, something the United States has encouraged.
In Mr. Zhou’s essay, published in English and Chinese on the central bank’s Web site, he said the international community should consider expanding the International Monetary Fund’s Special Drawing Rights.
Such a proposal has been suggested before by developing countries. But the United States has always been wary that this could be inflationary and affect the central role of the dollar.
Special Drawing Rights are based on the value of the dollar, euro, pound and yen, but have been little used except as an accounting entry by international organizations.
Mr. Zhou said the goal of reforming the international monetary system was to “create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run.”
March 25th, 2009 at 2:31 pm
Bill, as you said in an earlier comment, there is a large monetary change underway and you expressed sadness and attributed the problem to US borrowing. As an American, I am not sad because I am ready for the world to not be so dependent on me.
Example the “savings,” really a known and forecasted transfer of wealth from US to China, so US can buy cheap things while losing jobs and for the good of China to creat jobs and savings at expense of our deficit and benefiting the entire world, assuming China honors it’s promise to rise peacefully and reducing unfair trade practices so it buys more goods from US and the rest of the world.
The US has so long had to worry about the effect of it’s legitimate domestic policies on the rest of the world that it often was constrained in the effort to do what is right for the US citizen. I for one am tired of spending so much on our military which frankly half probably goes to ensure the oil shipping lanes are not closed, for the benefit of the entire world, while we get a black eye and are charged with manipulating everything to our sole benefit.
That attitude is such a political knee jerk by too many people. You know the types, the ones who said we invaded Iraq for their oil. Don’t tell anyone, but Exxon has contracted with me to hide all that oil in a hole in my backyard.
So I would welcome an overarching world wide currency with a currency exchange to include all country currencies trading in a real free market where no country is advantaged. Somehow I do not think that is what Russia nor China have in mind even though Mr. Zhou, governor of the People’s Bank of China, said the goal of reforming the international monetary system was to “create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run.” A logical and high minded goal. Call me an optimistic skeptic.
March 26th, 2009 at 3:16 am
Chief…The main and real problem here is that America is the prime consumer and debtor of the world. Her fiscal debt policies and Keynesian and Monetarist economics reflects this in all her “deficits and consumerism are good” policies. Unfortunately, the rest of the world follows other economics - with China, Russia, The Middle East, India etc following the economic tenets of “savings is the reward of productivity”.
Europe, too, is having her struggles with the US govt, the Czech prime minister saying today that the American style bailouts are “the way to hell”. This is worrying and also illustrates the clash of economic policies and styles between the EU and the US.
Yesterday, Obama and his economic team “dismissed” the fact that other countries - major countries - were calling for a new reserve system. I admit I was amazed at this - as if Obama and his economic team were the only ones controlling the dollar. The truth is that if Obama and his team do not satisfy Russia, China, The Middle East, India etc - who have all said they are not against a new world currency system(some are demanding it), then what can Pres. Obama do if China starts to slowly sell off and diversify out of her huge dollar reserves and Treasuries?
Absolutely nothing is the answer to that.
I’ld love to be a fly on the wall at the G20 meeting this April !!
March 26th, 2009 at 12:52 pm
I’ve been nervous about the Federal Reserve since reading “Secrets of the Temple” 20-years ago.
The U. S. manipulated its currency to benefit others for six decades. I agree with Chief - it is time for enlightened self-interest. Subsidizing lifestyles elsewhere should end and quickly.
Let them carp and complain, and it will take time to recover the GREEN BACKS strength but it can happen and as an American I think it should and soom.
March 27th, 2009 at 4:29 am
The situation is as bad if not worse in UK. Sir Fred Goodwin, ex-CEO of RBS who received millions in his executive payoff, has just had his mansion in London completely trashed and ransacked by bankster-haters. I’ve also read that the national private credit debt in UK is now - per capita - the highest in the world. It also appears that there will almost certainly be a run on pound sterling within six months.
Also rumoured is that UK Prime Minister Gordon Brown is going to visit Japan soon to rally support for his marvelous economic plan to save the world. However, others who are quite close to the PM have also suggested that he is really going to Japan to learn the ancient ritual of sepuki. In considering what his past and current policies have already achieved for the UK, it is heart-warming indeed to see that he will be making such a complete job of it at long last.
March 29th, 2009 at 1:25 am
China is simply flexing its economic muscle before the G20 meeting.
http://pacificgatepost.blogspot.com/2009/03/chinas-weak-gambit-on-currency-shift.html
The U.S. Dollar is not about to be replaced, regardless what China’s wishes might be.
March 29th, 2009 at 11:36 am
It’s not just China who wants this. The likes of India, The Middle East and Russia have all said that they are not currently averse to a new world currency. Europe is none to happy with the dollar situation either. The new world currency will probably take shape using the SDR’s from the IMF so that no one world currency will dominate.
And it is well known that other regional reserve currencies will be springing up too. Currently, as I’ve said in some of my articles, China is already initiating trials to use her Yuan as the Asian regional reserve currency(with 8 other Asian countries), six Middle Eastern States - including Saudi Arabia - will be using the new gold-backed Khaleeji currency by 2010 and Russia has made it know that she will be using her rouble as a local regional currency(Russia has been trading oil and gas for years in anything but the dollar).
In light of these facts, it seems pretty clear where this is all going. With the US currently and blatantly now “inflating away” her dollar debt, I’m not surprised that China, The Middle East and India are all worried about their savings surplus in dollars and US Treasuries disappearing in a puff of inflated smoke. Perhaps all that can really be said here is that China et al will continue buying US Treasuries as long as it makes economic sense to do so.
June 12th, 2009 at 4:26 pm
The idea of an actual world currency that is used everywhere, and not just a “reserve currency,” makes sense. Right now, like the English language, the USD is so widespread that it could become the internationally used currency. But of course countries like Russia don’t want that. It’ll be interesting to see what happens in the next couple of years, especially if some of the weaker countries are calling for the USD to be made international…
Here’s an interesting article on the subject:
http://www.mindreign.com/en/mindshare/Economic-Conditions/A-Call-for-A-New-World-Currency/sl4358145bp283cpp5pn1.html
June 16th, 2009 at 7:25 pm
I’m thinking if Russia returns the $913 Billion plus interest in welfare aid the tax payers of the US have provided since the mid 90’s I’d care more what a country that often can’t feed itself has to say. This one industry third world nation has been on the dole for too long and has plenty of gold reserves to pay back what it got. Russia is nothing more that welfare cheat that won the oil and gas lottery and now thinks it deserves respect.