CHINA LOOKING FOR NEW "WORLD CURRENCY"

(don't confuse the U.S. dollar with "prestige" - prestige usually won't buy you much - but good currency will )

The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value"plus or minus one percent"in terms of gold and the ability of the IMF to bridge temporary imbalances of payments. In the face of increasing financial strain, the system collapsed in 1971, after the United States unilaterally terminated convertibility of the dollars to gold. This action caused considerable financial stress in the world economy and created the unique situation whereby the United States dollar became the "reserve currency" for the states which had signed the agreement.

The Conference has therefore agreed that broad international action is necessary to maintain an international monetary system which will promote foreign trade. The nations should consult and agree on international monetary changes which affect each other. They should outlaw practices which are agreed to be harmful to world prosperity, and they should assist each other to overcome short-term exchange difficulties.

UK Prime Minister Gordon Brown has urged world leaders at next week's G20 summit to "take action" to reform the global banking system.

The London summit must ensure "strong growth and recovery, and particularly jobs in the world economy", he said.

He added that there must be help for the poorest countries, saying that the global downturn had pushed 100 million people into poverty.

Mr Brown was in the US, as part of a three-continent tour ahead of the G20.

Following talks with UN secretary general Ban Ki-moon in New York, Mr Brown said that at the G20 summit in London "doing nothing is no longer an option".

........since OPEC already tags the priceof oil to THE VALUE OF GOLD EXPRESSED IN DOLLARS,......

The dollar as a reserve currency

Handle with care

Mar 26th 2009
From The Economist print edition


China suggests an end to the dollar era

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IN FUTURE, changes to the international financial system are likely to be shaped by Beijing as well as Washington. That is the message of an article by Zhou Xiaochuan, the governor of the People’s Bank of China. Mr Zhou calls for a radical reform of the international monetary system in which the dollar would be replaced as the main reserve currency by a global currency. It is a delicate issue, however. When Tim Geithner, America’s treasury secretary, discussed the proposal in New York on March 25th, his remarks sent the dollar tumbling before he made clear that, naturally, he thought the greenback should remain the dominant reserve currency.

Mr Zhou’s proposal is China’s way of making clear that it is worried that the Fed’s response to the crisis"printing loads of money"will hurt the dollar and hence the value of China’s huge foreign reserves, of which around two-thirds are in dollars.

He suggests that the international financial system, which is based on a single currency (he does not actually cite the dollar), has two main flaws. First, the reserve-currency status of the dollar helped to create global imbalances. Surplus countries have little choice but to place most of their spare funds in the reserve currency since it is used to settle trade and has the most liquid bond market. But this allowed America’s borrowing binge and housing bubble to persist for longer than it otherwise would have. Second, the country that issues the reserve currency faces a trade-off between domestic and international stability. Massive money-printing by the Fed to support the economy makes sense from a national perspective, but it may harm the dollar’s value.

Mr Zhou suggests that the dollar’s reserve status should be transferred to the SDR (Special Drawing Rights), a synthetic currency created by the IMF, whose value is determined as a weighted average of the dollar, euro, yen and pound. The SDR was created in 1969, during the Bretton Woods fixed exchange-rate system, because of concerns that there was insufficient liquidity to support global economic activity. It was originally intended as a reserve currency, but is now mainly used in the accounts for the IMF’s transactions with member countries. SDRs are allocated to IMF members on the basis of their contribution to the fund.

Mr Zhou’s plan could win support from other emerging economies with large reserves. However, it is unlikely to get off the ground in the near future. It would take years for the SDR to be widely accepted as a means of exchange and a store of value. The total amount of SDRs outstanding is equivalent to only $32 billion, or less than 2% of China’s foreign-exchange reserves, compared with $11 trillion of American Treasury bonds.

There are also big political hurdles. America would resist, because losing its reserve-currency status would raise the cost of financing its budget and current-account deficits. Even Beijing might want to rethink the idea. Mr Zhou praised John Maynard Keynes’s proposal in the 1940s for an international currency, the “Bancor”, based on commodities. But as Mark Williams of Capital Economics says, central to Keynes’s idea was that a tax be imposed on countries running large current-account surpluses, to encourage them to boost domestic demand.





Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved.

Massive money-printing by the Fed to support the economy makes sense from a national perspective, but it may harm the dollar’s value.

from high seas quote of dr. mundell

Quote:

Massive money-printing by the Fed to support the economy makes sense from a national perspective, but it may harm the dollar’s value.

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