The French president Charles De Gaulle once called the reserve currency status of the U.S. dollar an "extraordinary privilege". Part of the privilege is that the U.S. can borrow in its own currency and later pay back the debt in its own currency even when the dollar by then decreased in value.
China and others are now pressing to end that U.S. privilege.
In 1965 De Gaulle threatened to take the Franc back from a dollar reserve covered currency to a gold reserve status. At that time the U.S. had a persistent trade deficit, small in today's terms, and De Gaulle feared the U.S. would devalue the then gold backed dollar. That indeed happened and when in 1971 Nixon unilaterally stopped the direct convertibility of the U.S. dollar to gold.
The same fear De Gaulle had is again increasing around the world and a new attempt is now made to relieve the dollar of its privileged role. But this time the attackers on the dollar's reserve status are much more powerful than in 1965 when only France and Spain were the troublemakers.
The U.N. Commission of Experts on International Financial Reform will soon recommend a new reserve standard:
Persaud said the panel had been looking at using something like an expanded Special Drawing Right, originally created by the International Monetary Fund in 1969 but now used mainly as an accounting unit within similar organizations.
The SDR and the old Ecu are essentially combinations of currencies, weighted to a constituent's economic clout, which can be valued against other currencies and indeed against those inside the basket.
A new reserve currency was also discussed at a recent meeting of the BRIC countries, Brazil, Russia, India and China:
The Russian source said Moscow was aware that the emergence of the new global currency would not happen overnight and said its goal was to initiate a discussion about it at the G20 summit in London on April 2.
The source said that India did not object to the discussion but was not prepared to take the lead. The source said South Korea and South Africa backed the idea, while developed nations were not "allergic" to it.
Today the Vice Governor of the People's Bank of China was send out to assure the world that China would, for now, continue to buy treasuries. But that was likely only to cover for a quite revolutionary speech his boss Zhou Xiaochuan gave today. China Daily reports:
China's central bank chief on Monday proposed a sweeping overhaul of the global monetary system, outlining how the dollar could eventually be replaced as the world's main reserve currency by the Special Drawing Right (SDR).
From the speech:
While benefiting from a widely accepted reserve currency, the globalization also suffers from the flaws of such a system. The frequency and increasing intensity of financial crises following the collapse of the Bretton Woods system suggests the costs of such a system to the world may have exceeded its benefits. The price is becoming increasingly higher, not only for the users, but also for the issuers of the reserve currencies. Although crisis may not necessarily be an intended result of the issuing authorities, it is an inevitable outcome of the institutional flaws.
The desirable goal of reforming the international monetary system, therefore, is to create an international 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.
This HUGE! China will propose the new world 'currency' with reserve status, in fact a basket of major currencies as defined by the IMF Special Drawing Rights, at the G20 meeting on April 2.
It will take a few years until a full fledged SDR based system will become functional. The U.S. and the UK will likely fight against this. The Euro based countries will mostly be indifferent. For China this is now a major official policy goal. With BRIC pressing for a new reserve system and support from others medium weight countries like South Korea and South Africa the new initiative has a lot of momentum.
So far the U.S. could borrow cheaply and pay back less in real value than the original loan. That privilege is now going away. The trillions the U.S. currently needs to borrow from abroad will have to be payed back in full. That is a major change in its global power status and will seriously decrease its influence in international policy questions.
