Free Markets, Free People


Crisis For The Dollar? Is This The Calm Before The Storm?

A week or so ago, I mentioned the fact that Russia was lobbying for a new international currency to replace the dollar and opined that it most likely wouldn’t have any legs.  By itself, Russia just didn’t have enough clout to bring about such a change.   But apparently Russia was only the beginning.  Later that same week, the UN came out in favor of a new currency option:

A U.N. panel will next week recommend that the world ditch the dollar as its reserve currency in favor of a shared basket of currencies, a member of the panel said on Wednesday, adding to pressure on the dollar.

Currency specialist Avinash Persaud, a member of the panel of experts, told a Reuters Funds Summit in Luxembourg that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket.

Persaud, chairman of consultants Intelligence Capital and a former currency chief at JPMorgan, said the recommendation would be one of a number delivered to the United Nations on March 25 by the U.N. Commission of Experts on International Financial Reform.

“It is a good moment to move to a shared reserve currency,” he said.

But does the UN have enough leverage to push something like this through? Probably not without some fairly powerful backers of the idea.  And speaking strictly of the UN, any such proposal would have to pass through the Security Council, and it’s unlikely the US would sanction such a change.

Today, though, China came out in favor of doing exactly what Russia and the UN recommend:

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”.

As was noted last week, China has some concerns about the US economy:

“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.

And that’s a valid concern. With the Fed pumping out trillions of freshly printed dollars, inflation is almost assured.

In case you haven’t noticed, Russia and China are two of the four countries known as BRIC (Brazil, Russia, India, China). These emerging economies feel they deserve more clout than they now enjoy. And they’re meeting in advance of the upcoming G20 meeting in April of this year:

Finance ministers and central bankers from Brazil, Russia, India and China will convene ahead of the Group of 20 finance chiefs’ meeting in London on Friday, a Russian delegation source told Reuters on Thursday.

The source said the four will discuss the reform of international financial organizations such as the International Monetary Fund and the Financial Stability Forum, anti-crisis policies and preparations for the G20 summit in April.

Take a look again at China’s proposal for basing the international reserve currency in the IMF and the topic of their upcoming meeting in advance of the G20. Suddenly Russia’s proposal has some legs.

What clout does BRIC bring to the proposal? Well they are the holders of vast portions of the currency reserves around the world:

China runs the world’s biggest reserves, Russia comes 3rd, India 4th and Brazil 7th, as of last autumn.

Keep an eye out for Brazil and India weighing in on this. Should they come out in favor of such a change, as has China, it could portend some fireworks at the G20.

In the meantime, read this by Mikkel Fishman. It will explain some of the deeper and less evident problems we face.  Then take a moment to look around and reflect.  In my estimation, this truly is the calm before the storm.

~McQ

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12 Responses to Crisis For The Dollar? Is This The Calm Before The Storm?

  • Buyer’s remorse?

    This is just the sort of solution one would expect to be proposed by nations that do not appreciate the importance of free markets. “It’s painful, we need a large supranational organization to make the pain go away. And to serve our own purposes.”

    Like Dorothy, these nations have it within their power to effect “hope and change”. Sell your dollars and buy Euros.

    Maybe the dollar’s position as the default  world reserve currency is an historical artifact. But to paraphrase a former cabinet secretary, you go to the market with the reserve currency you’ve got.

    Actions speak louder than words. 

  • WHy should there be fireworks?  All they have to do is tell Obama that they will like him and he will be heads over heels for the idea.

    problem solved.

  • I dunno. I just don’t understand this. I was told that when The Clown™ came into office, with a wave of his hand and a mighty “Hi ho, Silver!” that the world would bow before the United States, and every single country that ever disagreed with us would merely agree to everything we wanted. Iran would give up nuclear weapons; North Korea would agree to become a democracy; Venezuela would cheer in the streets to photographs of The Messiah; Cuba would instantly move to name a new President who would quickly end communism on that island; and al-Qa’ida would simply go out of business because, after all, the United States elected a black man, and something had to be said for that.

    Hell, it appears that I was wrong, or that someone told me something that turned out not to be true. Even Britain hates us now. And all because of The Clown™.

    • Overheard at the Oval Office…

      “Currency problem!????  See if they’ll book us on Letterman, Cowell is busy”.

  • A new currency based on what, exactly? We already have quite a variety of currencies backed by the ‘Full Faith And Credit’ (more or less) of their respective governments. We really do not need another fiat currency.

  • It’s a good threat, though I imagine the cure would be worse.

    Still, an important reminder to Obama and Congress not to run wild with debt. I hope they get the message.

  • About now there should be a lotta remorse on Capitol Hill about spending trillion upon trillions, but they are unrepentant.  Who in their “right mind” goes on a untargeted spending spree when they are bankrupt ?

    Frankly, I don’t think a President McCain would be doing a hell of a lot better at this point in time, but out President Obama seems to be going out of this way to make us a “3rd World” country.  Today is bad, but tomorrow looks dismal.

    Biggest lesson .. we need better statesmen and few politicians

  • They can threaten this. But if they did it, their currency would either rise (as ours dumped) or they would have to have capital controls and all manner of internal distortions.

    Because if the US dollar does lose its position as reserve currency, it would fall even faster.

    Personally, I doubt that governments will create a reserve currency – instead it will slowly come from the bottom up, as more people quote prices in RMB or the Euro (my company already quotes Euros for all European customers..)

    One sure sign would be the open availability of foreign currency accounts at your local banks. Can you open a Euro account at your local branch?

     China is an export oriented economy, and until that changes, they will constantly whinge about their currency being too strong, ala Japan, etc.

  • As Harun says, they are already free to choose any currency they want as their reserve currency, and given that we are probably in for a bit of inflation in the coming months, they might just do it.

  • And here come the first rain bands of Hurricane Inflation…

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