End of dollar hegemony?

The Telegraph reports that the US is open to giving support to Chinese proposals for a new World currency not under the control of a single sovereign nation. They have more here, too.

Yesterday Zhou Xiaochuan of the Chinese Central bank published proposals for an new international reserve currency, that is able to remain stable over the long run (maintain value). This comes hot on the heels of similar proposals for “paper gold” from the Russians.

Recently the US Federal Reserve began undertaking Quantitive Easing, which involves increasing the supply of existing money and using that new money to purchase assets, typically US Treasuries. The Chinese hold significant amounts of US Bonds ($740bn of US Treasuries and a further $600bn or so of other debt, according to the second Telegraph report) as part of their foreign reserves, and have been diversifying into other assets in recent months as concerns began to grow over American ability to repay.

According to the Telegraph the dollar traded sharply lower against the Euro on the news that Tim Geithner, the US Treasury Secretary, stated that the USA were willing to countence such moves. Respected investors such as Jim Rogers, Marc Faber and Peter Schiff have been predicting a serious dollar decline for some time.

The White House swiftly backed away from this position, but the seeds of doubt have been sown.

Update: The Moscow Times have the detail on the Russian proposal.
Russian news spin, states China backs Russian call.
IMF open to chinese proposals.
Dollar’s days maybe numbered – Moneyweek
Dollar crisis in the making- Asia Times
UN Panel – Ditch the dollarFrom the Telegraph article

The dollar plunged instantly against the euro, yen, and sterling as the comments flashed across trading screens. David Bloom, currency chief at HSBC, said the apparent policy shift amounts to an earthquake in geo-finance.
“The mere fact that the US Treasury Secretary is even entertaining thoughts that the dollar may cease being the anchor of the global monetary system has caused consternation,” he said.

Mr Geithner later qualified his remarks, insisting that the dollar would remain the “world’s dominant reserve currency … for a long period of time” but the seeds of doubt have been sown.

The markets appear baffled by the confused statements emanating from Washington. President Barack Obama told a new conference hours earlier that there was no threat to the reserve status of the dollar. “I don’t believe that there is a need for a global currency. The reason the dollar is strong right now is because investors consider the United States the strongest economy in the world with the most stable political system in the world,” he said.

  • IRIA

    We’re talking reserve currency, not a one-world currency, like many(most?) right-wing nutjobs in the US are saying.

  • Mack

    IRIA –

    That’s my reading of it. I imagine we’re talking a reserve currency that can’t be debased in the way the Federal Reserve may be debasing the dollar at the moment.

  • Paddy Wan Kenobi

    So southerners won’t just stop at Newry now?

  • Greenflag

    There’s nothing new here apart from the Chinese ‘opening ‘ up and saying publicly what other countries particularly the ‘dollar ‘ rich OPEC cartel and others have been saying for a long time .

    The ‘dollar’ is of course the world’s reserve currency of last resort . Governments and businessmen around the world know that in the final analysis ‘sovereign ‘ governments can spend their way out of recession/depression by simply printing the dosh. In a non globalised world economy there could even be local benefits for a particular country to ‘print ‘ As we have seen from the Mugabe ‘experience ‘ in Zimbabwe and the short lived Weimar inflation which wiped out the German middle class in the 1920’s and gave Hitler his edge this is a policy with both foreseeable and unforeseeable political and social implications . In todays world while the USA and the UK have the power to ‘print’ their way out of recession the fact is that the Chinese and others hold a trillion dollars of USA Government Treasury Bills. For the USA to ‘devalue’ these holdings by printing billions would be seen as ‘stealing ‘ by many of those countries who ‘prop’ up the US debt .

    Back at the time of the second Arab Israeli war mid 1970’s and the then oil crisis Richard Nixon ‘agreed’ to defend Saudi Arabia and other oil rich countries in the region if those countries agreed to the ‘dollar’ as being the currency in which to denominate and sell oil -thus tying the US dollar to oil . Back then it may have made sense as the world’s oil supplies were mainly in the hands of the Seven Sisters (anglo american and french corporations ) but in today’s world the oil supply is predominantly in the control of countries and their sovereign wealth funds which are NOT controlled by powers necessarily well disposed to the USA /UK . e.g Venezulea , Russia , Iran , etc etc .

    SO we will see a gradual retreat of the dollar from it’s role as ‘oil ‘ currency . It may still be the world reserve currency for most purposes but it can only hold that role if it’s government ‘behaves ‘ reaponsibly .

    The Chinese are just getting their spake in ahead of the G-20 meeting .

  • Oilifear

    If faith is lost in the Dollar the alternative right now it the Euro. A shift to the Euro would be a seismic body blow to the US. Faced with the possibility of that, cutting their losses and backing a “no-one wins” (and hence no-one loses) solution would be the smartest move for the US.

  • Cahal

    Nice post Mack. More of the same please.

    On topic, a lot of people would like to see the dollar collapse for all the wrong reasons.

    As Obama says, the US remains the strongest economy in the world. People there simply work harder, smarter and longer than most lazy Europeans. (ducks for cover).

  • I recall an interesting contribution to the debate on the travails of the dollar, all the way back in June 2001. It doesn’t predict this, but it does point to the tensions built into the “reserve currency of last resort” line.

  • Greenflag

    ciaran ,

    From your link – LOL

    ‘However, nobody can buy equity in U.S. households’

    That was then . Part of the problem facing the world now is that ‘everybody’ across the world ‘invested’ in such dubious equity of the sub prime variety by means of the sophisticated financial instruments engineered and cast upon the investment world by the masters of financial legerdemain 🙁

    Cahal

    ‘As Obama says, the US remains the strongest economy in the world.’

    He got that right ,

    ‘ People there simply work harder, smarter and longer than most lazy Europeans.(ducks for cover )

    Longer most certainly -harder well perhaps – smarter ? I’d say the jury is out on that one .

    Never mistake ‘activity ‘ for results . You can run around the rugby /business field for twice as long as your opponents but if you can’t get the ball across the try line -what’s the point ?

    Shorter life expectancy – a health care system that is sucking away almost 20% of GDP plus 45 million without health insurance seems a poor reward for all that hard work .

    Nobody wants to see the dollar collapse or devalue by say 25% or so but it may yet be necessary for the USA to dig it’s way out of it’s largely self built financial meltdown . Obama is boxing clever on this one and his cautious non condemnatory reply to the Chinese indicates one of two things .

    a) He’s learning on the job – and the USA is so lucky to have somebody who seems prepared to ‘learn ‘ in this new economic and political environment or

    b) The Chinese have the USA by the short and curlies on this one .

    Mack ,

    I agree with Cahal -nice post 😉

  • Earnan

    Obama is tripling the deficit.

    For the first time ever last week the FED printed out money solely to buy some of it’s own bonds.

    This has to be curtailed.

    I’m glad I put 15K in Gold in 04. Wish I had more to put in

  • Driftwood

    Gold seems to be the universal choice of real currency. Everything else is just bits of paper.
    Wonder how much my George Best fiver will be worth in 10 years?

  • Paul

    Maybe that little bit of the benighted 6 with the gold mine will finaly be worth fighting over

  • Greenflag

    Paul ,

    ‘Maybe that little bit of the benighted 6 with the gold mine will finally be worth fighting over ‘

    FFs 🙁 . Now everybody will know exactly why GF favours ‘repartition’ . That ‘little bit’ is in predominantly ‘nationalist ‘ terrain .

  • Mick Fealty

    Here’s a related piece from Global Dashboard yesterday: http://www.globaldashboard.org/2009/03/25/china-bancor-reserve-currency/

    “If, on the other hand, the world moved over to a multilateral reserve currency – based, perhaps, around a reformed version of Special Drawing Rights (as Zhou suggests) – then the US would forfeit this privilege. So if Bretton Woods 1 was in some ways a negotiation on the transfer of power from UK to US, then an end to the dollar’s status as global reserve currency would certainly represent a transfer of power away from the US and towards the multilateral level. (Time magazine’s Justin Fox argues that this ending the current set-up would be in the US’s long term interests anyway: as he observes, “running big deficits and spending more than you earn aren’t really great long-term economic strategies”.)

    “In practice, as Zhou recognises, this is a very long term agenda – certainly much further off than the London Summit. Nonetheless, it does mark a significant evolution in the debate. Until now, China has been notably reluctant to talk turkey about what it really wants from multilateralism, preferring instead to stick to the comfortable but largely content-free language of its a ‘peaceful rise’. Zhou’s essay, on the other hand, moves a significant step closer to talking turkey on new rules for the global economy.”

  • Greenflag

    driftwood ,

    ‘Wonder how much my George Best fiver will be worth in 10 years? ‘

    Don’t expect to retire on it 😉 Not as much as the genuine article the lad himself was worth back in his heyday 😉

    Only ever saw him play once at Dalymount and he was past his best but even then there were sharp flashes of the younger George somehow appearing behind three defenders with the ball with the opposition visibly looking mystified as to how did that happen . A one off was GB.

  • NCM

    I think beer should be the world’s currency. That was a serious comment.

  • veritas

    wheres O`Connell when he`s needed. The end is nigh..

  • Mack

    Cahal, Greenflag –

    Go raibh maith agat.

  • Wilde Rover

    Yes, Peter Schiff and the Austrian School have been calling this meltdown for quite some time and yet there are still people out there that believe “magic mathematics” will solve the problem created by “magic mathematics.”

    Mack,

    “I imagine we’re talking a reserve currency that can’t be debased in the way the Federal Reserve may be debasing the dollar at the moment.”

    The reason why any such currency would not stay as merely a reserve currency is contained in the above sentence. The existing fiat currencies will continue their journey to their actual value: zero.

    It would seem that the people of the world will be presented with a fait accompli.