In another indication that China is growing increasingly concerned about holding huge dollar reserves, the head of its central bank has called for the eventual creation of a new international currency reserve to replace the dollar. Russia recently made a similar proposal.
Zhou Xiaochuan, governor of the People’s Bank of China, said a new currency reserve system controlled by the International Monetary Fund could prove more stable and economically viable. A new system is necessary, he said, because the global economic crisis has revealed the “inherent vulnerabilities and systemic risks in the existing international monetary system.”
China’s bold idea, released more than a week before world leaders are to meet in London for a global economic summit, also indicates that Beijing is worried that its huge dollar-denominated foreign reserves could lose significant value.
The New York Times
Tuesday, March 24, 2009
China calls for new international currency reserve to replace the dollar
Subscribe to:
Post Comments (Atom)
2 comments:
As a footnote: Should foreign nations extract themselves from the dollar, the likely impacts would be:
1) The dollar’s value will plunge as investors see the writing on the wall and jump ship.
2) US credit markets will collapse. As the dollar fall, a mass exodus from credit market will begin. Investors sitting on toxic securities will sell at firesale prices to escape the currency depreciation.
3) The fed’s balance sheet will explode beyond all reason. In response to the mass exodus from credit markets, the fed will buy trillions worth debt in a desperate attempt to hold interest rates down. Unfortunately, the more debt the fed buys, the more quickly the dollar will fall, and the more panicked the credit selloff will become.
4) US interest rates will soar, despite (or because of) the fed's efforts.
5) Countries around the world will be hurt badly by the dollar’s decline. These countries include:
A) Nations which are heavily dependent on US exports: Japan, Mexico, etc…
B) Nations with large dollar reserves: Japan, China, Gulf oil states, etc…
C) Nations which receive large amount of US foreign aid: Israel, Egypt, etc…
D) Nations which rely on remittances from citizens working in the US: Mexico, India, etc...
E) Nations which use dollars as their official currency: Liberia, Panama, etc…
F) Nations which have large amounts of dollars in circulation: Central and South America (especially Argentina), Eastern Europe, etc…
6) Some nations will see benefits from the dollar’s decline. These countries include:
A) Nations with large gold reserves: EU zone, Switzerland, etc…
B) Nations which owe dollar denominated debt will see that debt wiped out: Iceland, African nations, etc…
C) Nations who stable currencies: EU zone, Switzerland, China, etc…
7) World politics will be greatly altered. There will be considerable anger at the US from nations hurt by dollar’s fall. The US will lose influence to Asia (mainly China).
8) US retailers will get crushed. As the dollar falls, the cost of imports for retailers will increase, but the American consumer will be unable to afford to these higher prices. Competition between desperate retailers will force them the sell inventory at below cost, creating massive losses. Retailers most heavily dependent on imports (ie: Wal-Mart) will be the first to go under. Eventually as more and more retailers go bankrupt, the few survivors will be able to raise prices enough to cover costs, and the sector will stabilize at a fraction of its current size.
9) American lifestyles will change radically. The end of cheap oil, low interest rates, and deficit spending will mean a lower quality of life and higher taxes.
10) The price of gold and other precious metals will explode.
11) US will experience hyperinflation.
Amazingly, U.S. Treasury Secretary Timothy Geithner responded to this proposal by China: "As I understand his proposal, it's a proposal designed to increase the use of the IMF's special drawing rights. And we're actually quite open to that suggestion."
His less-than stabilizing statement caused the dollar to fall against major currencies, so Geithner then followed up with clarifying that the United States would do whatever it takes to make sure the dollar would remain the world's dominant reserve currency.
"I think the dollar remains the world's dominant reserve currency," Geithner said during a question-and-answer session at the Council on Foreign Relations. "I think that's likely to continue for a long period of time.”
Nouriel Roubini, the NYU economist who successfully predicted the current economic collapse, added, “[The replacement of the dollar] was a political call and in a nut shell - it ain’t going to happen any time soon.”
Post a Comment