Susan Strange, the godmother of international political economy, wrote a book that is suddenly very relevant to thinking about today's international monetary system. In Sterling and British Policy, Strange talked about different types of international currency. Top currencies, for example, are forms of international money where the economic incentive to hold them is pretty overwhelming. Negotiated currencies, on the other hand, are forms of international money where there the economic incentive is more muted, but political imperatives lead to an agreement on a particular form of currency as the reserve to hold.
Why am I bringing this up? Remember, like 48 hours ago, when I said that this news item warranted watching?
Well, this Financial Times story by Jamil Anderlini drops the other shoe:
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”.
Analysts said the proposal was an indication of Beijing’s fears that actions being taken to save the domestic US economy would have a negative impact on China.
“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....
China has little choice but to hold the bulk of its $2,000bn of foreign exchange reserves in US dollars, and this is unlikely to change in the near future.
Here's a link to the actual paper, which is not long.
That last paragraph is important -- what China is proposing is not going to happen anytime soon. Indeed, looking at the actual proposal, I'm not convinced that Beijing's idea is even doable (a show of hands -- who's comfortable with the IMF as the world's central bank? Anyone?).
With China and Russia both proposing some sort of change in the international monetary system, we're about to some veeery interesting economic negotiations. There are other important players -- the EU, UK, Japan, Brazil, the Gulf economies, etc. And their incentives to switch away from the dollar are more cross-cutting. For example, while the EU would probably love to switch to a system that keeps the euro from appreciating too much, I suspect they will be loathe to reallocate the IMF voting quotas that China would demand in any switch to a new system. Both Japan and the Gulf economies have security considerations that make them less eager to change.
If this does happen, however, the United States will suffer a serious loss of standing and, oh yes, a much harder budget constraint. And whatever happens, it would be difficult to call the dollar a top currency anymore. I think we have clearly crossed some threshhold where the dollar is now a negotiated currency -- and some of the negotiating partners are pretty hostile to U.S. hegemony.
Developing....
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