China suggests switch from dollar
China's central bank has called for a new global reserve currency run by the International Monetary Fund to replace the US dollar.
Central bank governor Zhou Xiaochuan did not explicitly mention the dollar, but said the crisis showed the dangers of relying on one currency.
With the world's largest currency reserves of $2tn, China is the biggest holder of dollar assets.
Its leaders have often complained about the dollar's volatility.
China has long been uneasy about relying on the dollar for trade and to store its reserves and recently expressed concerns that Washington's efforts to rescue the US economy could erode the value of the currency.
His speech was, unusually, published in both Chinese and English, signalling it was intended for an international audience.
"The outbreak of the crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system," said Mr Zhou in an essay on the People's Bank of China website.
Mr Zhou said the primacy of the US currency in the financial system had led to increasingly frequent crises since the collapse in the early 1970s of the system of fixed exchange rates.
On Tuesday, the dollar weakened against most major currencies following the announcement of a US plan to buy up toxic debt.
'Light in tunnel'
Mr Zhou said the dollar could eventually be replaced as the world's main reserve currency by the Special Drawing Right (SDR), which was created as a unit of account by the IMF in 1969.
"The role of the SDR has not been put into full play, due to limitations on its allocation and the scope of its uses," he said.
"However, it serves as the light in the tunnel for the reform of the international monetary system."
The essay comes before the G20 summit in London on 2 April, at which reform of the international financial system is top of the agenda.
"This confirms that China intends to play fully its role of global economic and political power at the next G20 summit," said Sebastien Barbe, an analyst at French financial service firm Calyon in Hong Kong.
(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
Get article background
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.