U.N. panel says world should ditch the dollar

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The fact that this news is coming out the very next day after the Treasury announced that it would start printing money by the trillions is not a coincidence.

(Reuters) - 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.

This news comes on the heels of a more concrete move by rival powers in Asia.

(Reuters) - China and other emerging nations back Russia's call for a discussion on how to replace the dollar as the world's primary reserve currency, a senior Russian government source said on Thursday. Russia has proposed the creation of a new reserve currency, to be issued by international financial institutions, among other measures in the text of its proposals to the April G20 summit published last Monday.

Calls for a rethink of the dollar's status as world's sole benchmark currency come amid concerns about its long-term value as the U.S. Federal Reserve moved to pump more than a trillion dollars of new cash into the ailing economy late Wednesday.

Russia met representatives of China, India and Brazil ahead of the G20 finance ministers meeting last week, as the big emerging powers seek to up their influence on decisionmaking globally. Their first ever joint communique did not mention a new currency but the source said the issue was discussed.

"They (China) did not formally put forward their position for the G20 summit but unofficially they had distributed their paper regarding the same ideas (the need for the new currency)," the source told Reuters, speaking on condition of anonymity.

The G20 summit in April is going to be very interesting.

In a related note, the Persian Gulf nations are moving towards having a common currency in 2010.

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Comments

the Hubris of America

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It ain't 1934 anymore. This is beyond bad news and maybe we need another post reminding people what happens if the United States is no longer a reserve currency.

Maybe I should let all of those referrer spammers through who are pushing "buy gold".

I thought the whole purpose of free trade

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WAS to bring down the United States and make the dollar no longer a reserve currency.
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Moral hazards would not exist in a system designed to eliminate fraud.

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Maximum jobs, not maximum profits.

Reserve Currency

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The replacement suggested by the U.N. as I understand it is
a global currency. (This is not practical in the short term.
Consider how long it took the E.U. to finally be able to issue the Euro.)

Why the Fed is monetizing treasuries

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There is simply not enough capital in the world to fund our deficit spending.

For that to really work

Now just to say a basket of currencies will be the "reserve currency" would be futile in the present form. You would be surrenduring the devil you know for a host of devils you don't know. The theory someone once put to me on this was that if one economy goes, there would be a buffer with the others. The problem with that is that buffer's stength is tied to who is in that basket, you don't want the "weakest link" in the chain to have the ability to take down the whole thing. You would have to impose a much more strickter currency band system than what was even in the old Bretton Woods agreement.

Instead what I've been reading is that they want something akin to another fiat monetary system.  They claim "hard" currency, but what, gold? You would need some sort of super fed with the ability to buy this gold.  Secondly, to create a global version of the euro, you would need to harmonize the economies of virtually every nation state.  The reason the US dollar works here in the states because our economies, for bettor or worse, are linked and in sync.  At this moment, the best you could do is regional currencies, like the Euro, or a North American Dollar or South American Peso.  A lot of this countries demanding this, like Russia, aren't doing it for the economic well being of the planet.  Moscow, for example, is still up to it's old Cold War nonsense, and its in their best interest to have a commodity based global currency; they produce things like gold, oil, etc.  The Chinese are just looking for another currency where they can a) serve as another tool for folks to buy their things, and b) another benchmark to devalue their currency and make themselves cheaper.  Right now the Chinese are losing work to Vietnam and others. 

Of course, the Chinese could be playing with fire.  If we truly went to a single planetary currency, then it would be easier to implement a global minimum wage.  If it costs say W$30/hr (pretend that dollar sign is the symbol for that new currency) in Germany and W$3/hr in China, you think that would last long in a global sync'd economy?  No way.  A global currency means a barrier-free trading system, like we have here between say California and Ohio, only this time it would mean China and the US.  You would have no choice because you would have a global federal reserve and treasury that has to make sure that the flow of capital is maintained.

Lastly

lets say we went to a basket. Ok, then you would have to pick currencies from a set criteria:

  1. Mature economies with fairly stable economies and governments (Japan, the US, Germany, etc)
  2. Commodity based economies with stable governments (Russia, Canada, South Africa, etc)
  3. That currencies included in the "basket" to move in a currency band, that is each can only get so strong relative to the others up to a certain point.  We had this system for decades.
  4. Eliminate or strictly regulate the trading of currencies, particularly those done over the counter.
  5. Insure that each new global currency unit can be exchanged with the basket.

The reason for 1) is because you want currencies where though the growth maybe slower than say China or India's, you are basically getting a known quantity that only shifts so much.  For all the doom and gloom I've been hearing about the US, it doesn't swing from year to year like mad when it comes to things like the rate of inflation or GDP growth, and only had recessions.  The reason for 2) is that currencies in commodity-based economies tend to act like a proxy for that commodity.  That future Global Treasury would have to stockpile things like gold and oil or what have you by God knows how much.  Why bother when you can buy the currency that acts like that.  You may have noticed that I included Russia but not Saudi Arabia, I'm not saying Russia is stable, but long-term compared to Saudi Arabia it is. 

James Galbraith apparently concurs...

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http://www.washingtonmonthly.com/features/2009/0903.galbraith.html#Byline