There are $6.5 trilion in currency reserves all over the world and most of them are in dollars. That is putting all your eggs in one basket. Given the global gloom and its origins, the world, especially China and Russia is looking for a new world order – a new currency. And they think America is the main reason behind the mess the world is in.
Euro was tipped to be the new world currency but it has its own problems. Adding to the existing Euro’s problems is the statement by Russian president Dmitry Medvedev :
“The dollar system or the system based on the dollar and euro have shown that they are flawed," (Business Week)
That’s not an insinuation anymore. That is a direct remark on the existing global currency – the dollar and a damper for the probable new global currency of euro.
China has 70% of its $2 trillion forex reserves in dollar. Most of India’s $260 billion forex reserves are in dollars. There are renewed discussions in the Indian camp about re-thinking the forex portfolio.
China has been pretty vehement in its talk about the global currency. Looks like France and Brazil have joined the party along with Russia. When Russia and China support the same cause then we know we have a serious issue at hand. They wanted to discuss this issue at the G8 summit.
Only problem is, the world has a bigger fish to fry (shouldn’t it be freeze?) at G8. Global warming and not global currency is a more burning and pertinent problem to discuss at G8. And I agree.
Though everyone is talking about a new currency, no one has clear idea of what the global currency would.
I am sure of one currency that would not be a global currency. That is the Zimbabwean dollar. Everything else is on the table – excluding the dollar of course.
What’s wrong with the dollar anyway?
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For decades there has been a groundswell of opinion developing in support of a single global currency. With a single global currency, prices worldwide would be denominated in the same unit and could be easily compared. This integration would lead to reinforcing the hegemonic control of a small number of global banking and financial institutions over the process of money creation. This, in turn, would overshadow the functions of national central banks, encroach on the sovereignty of the Nation State and eventually lead to a new phase of the global debt crisis.
Other side of the fact is that a global currency based on the existing IMF’s Special Drawing Rights (SDRs) arrangement, would not fundamentally change the global monetary order.
Indian economy is recovering faster than expected and is consistently getting broader based. According to World Bank’s South Asia Economic Update, India’s economy will grow at 8-9 per cent over the next two years. Inflation, rising interest rates, small appreciation in the rupee and continued low growth in high-income countries, however, could weigh on the recovery. Risks to outlook come from volatility in capital inflows, staggering global recovery and inflation shocks. Staggered recovery in high-income developed nations might also adversely affect trade prospects and hit remittance inflows; however, growth prospects continue to be optimistic.
Indian economy have raised the issue of greater internationalization of the Indian rupee and India needs to proactively take steps to increase the role of the domestic currency in the region. Internationalization of rupee would also require India to make the rupee fully convertible.
Talking about foreign reserves I think India’s foreign reserves increased because of IT boom.
True we should come up with some standard currency. Dollar is not every thing there is much beyond it !
Nice article Sriram :)
@Sriram, what I dont understand is, why do we need Dollar as the pivotal currency and why cant we come up with some kind of standards (and not currency) against which every currency will be measured, traded and exchanged.
Now, let me tell you that I have zilch of knowledge in this field, but it is apparent that we need to move out of this dollar domination and move to new standard based system !!
Gold used to be the global currency in the 70’s. As it was too heavy to transfer and transact the world decided to go with dollar – which was a powerful nation at that time. And, it still is.
Only change now is the rise of China, Russia and EU which are challenging both the US and dollar dominance.
Though we kind of agree that an alternate currency is needed, no body really knows what would that be. With the new currency comes new responsibility and I don’t see any country or a consortium which is ready to take the mantle. Hence the dollar might prevail.
But as @Abhilash pointed out does the US and dollar deserve to be the global currency is the question. If we say no, what should the new currency be?
A common Asian currency is also mooted. With the rise of Asia may be that’s a remote possibility.
As long as US government was on strong Dollar policy it made sense to consider to have Dollar as reserve currency. But now that the Fed is flooding the market and debasing the currency like there is no tomorrow it no longer makes sense to hold Dollar.
Since, Dollar is the reserve currency, US is the only country in the world that can get something for nothing. All it has to do is print more and buy anything (oil, gold, commodities). The only reason other countries were willing to accept Dollar was because US was willing to limit the supply. Now that it is no longer true, the nations with large USD (mostly south east asia, India comparatively has less) cannot help but feel betrayed.
Instead of “what’s wrong with the dollar?” the question really should have been “why should one country have the privilege of having reserve currency status?”
China has recently announced that it will settle its trade with Hong Kong in Yuan instead of USD. I expect if the Dollar debasement continues other countries in South East Asia will adopt a similar agreement with China. China has also announced bilateral agreement with an African country (I forget the name) to settle the trade in local currency instead of USD.
Though, to some extent the problem also lies with China’s monetary policy, had they let RNB float they would not have amassed such large amount of USD in first place. But now that they have they want to make sure that USD will buy the commodities they desperately need to fund their growth.
the problem with dollar is that its being printed like no business by the US treasury. But to replace it will take decades if not years. The only two countries who are cribbing about the domination of the dollar are China (which already thinks that it can rival the US both economically and militarily) and Russia (which still lives in the cold war mentality). The other usual suspects are countries like Venezuela etc who have an axe to grind with US.
All these talks are simply hogwash. They are akin to the bark of the dogs when an elephant walks. Truth is, there is no equivalent to the dollar either in the short or medium term.
Philip, There is no currency equivalent to Dollar right now, that is fact. However, in my view, it gives undue advantage to U.S. They can literally manipulate everything based on dollar.
Yes, there are more important issues, but this stands at top as well.
I agree that there might not be an equivalent to the dollar. But it is just not China and Russia. The talk is gaining traction as Brazil and France have also joined.
India is also thinking about hoarding other currencies instead of dollars. Countries can continue to have this debate and still reduce their dollar reserves. What would happen then?
over a period of time, the dollar will not only lose value and reputation in the market but also get replaced as the default currency. no doubt about that. but that will take time. a long long time.
Countries will slowly try to get rid of the dollar, but there has to be someone to buy it. If everyone wants to dump, they themselves will suffer. China has over the past few months/years tried to buy commodities using the dollar but even that has reached an end cos they have had enough of the commodities.
Now what, is the question. If the US recovers from this recession well, then probably the demise of dollar will be prolonged much more.
Having a global currency is inevitable. Some point of time, mentality of human civilization will grow beyond national (if not, planetary) boundaries. What’s more interesting is, will the currency need to be real? I think soft-currency shall serve way better than paper bills. It’s just the mentality of people of feeling assured by physical storage of wealth that’ll be the prime barrier to this concept.