Monday, June 11, 2018

See? US Frowns On Alternative Reserve Currency

In recent days, we have gone on a mini-binge of reserve alternative stories [1, 2, 3]. Bang on schedule, the United States is pooh-poohing the notion that an alternative reserve currency and medium of exchange for world trade is needed. Debase the dollar? Not me, says the US. First up, let's see what Obama has to say:

There is no need for a global currency to replace the dollar as suggested by Chinese leaders, President Barack Obama said Tuesday. "The dollar is extraordinarily strong right now," he said, because the American economy and political system are stronger than many others.
Yes, whatever. These guys are starting to sound exactly like Bush and Paulson with the tragicomic "strong dollar" theme that any reasonably informed commentator would see through. Speaking of whom, US Treasury Secretary Tim Geithner and Fed Chairman Ben Bernanke also chimed in with the same message. From MarketWatch:

Federal Reserve Board Chairman Ben Bernanke and Treasury Secretary Timothy Geithner flatly rejected on Tuesday a call from a senior Chinese official to drop the dollar as the world's key reserve currency. Zhou Xiaochuan, head of the People's Bank of China, proposed the creation a new international reserve currency in an essay published on the central bank's Web site on Monday.

The proposal is the latest sign of tension between China and the U.S. over important global economic matters. Zhou is expected to attend the Group of 20 meeting in London on April 2 where reform of the global financial system is on the table...
The MarketWatch article also contains currency watchers' opinions of what is going on. Both commentators seem to be suggesting China is just firing a warning shot across the bow, not taking aim at the mast:

Axel Merk, president and chief investment officer at Merk Investments, said that Zhou's views "reflect China's frustration in relying on the U.S. dollar as the world's reserve currency, when U.S. policy makers conduct monetary policy based on domestic considerations." "That's a friendly way of expressing that the U.S. may be trying to debase the dollar, raising concern in China about the value of its massive U.S. dollar denominated reserves," Merk said in a research note. Central banks around the world won't be willing to yield power to a new world monetary authority, specifically the IMF, Merk said. "We believe China may realize sooner rather than later that building a diversified basket of reserves followed by a free floating exchange rate, will provide China with the advantages China's central bank governor is seeking," he said.

Marc Chandler, currency strategist at Brown Brothers Harriman, said that China has not sought to undermine the U.S. dollar. "Just as important is what China is not saying," Chandler said. "It is not saying it will dump dollars. It is not saying it will buy more euros." The support for a new international reserve asset seems to be an attempt to get around the contradictory pressures on a national currency that is also a reserve asset, he said. "The dollar's role seems as secure as ever," Chandler said. "There is no clear national alternative and a new international asset cannot simply be foisted on countries. The dollar remains numeraire, imperfections and all."
It is no surprise to me that the United states is keen to scuttle the Chinese proposal. After all, who would remain as keen to fund America's enormous deficits if its currency were no longer the world's main reserve currency and medium of exchange in international trade? Once more, I am surprised how uninformed commentary on this proposal has been in much of the blogosphere. For instance, there has not been much discussion of the evolution of the international monetary system in the postwar period--something Zhou goes into at some length. To be honest, your average Amerocentric blogger wouldn't know the difference between an SDR and a DDR3.

To get things done, China will need the assent of many other countries also concerned about ongoing dollar debasement. Think of other Asian exporters and Middle East oil exporters who too have played a significant role in funding US deficits in recent years. As the commentator Chandler said, China needs to put its money where its mouth is at by moving away from dollar purchases if it is to be taken seriously. With PRC exports to the US shrinking anyway, this should be happening in fairly short order if China is really serious about it.

Can the IMF be the place where moving away from the dollar to an upgraded SDR? Again, effective American "veto power" in having a 15% share of SDRs or voting rights will likely block any such initiative from being started without significant LDC cooperation. So far, it is notable that China has resisted calls to participate more in the IMF. Whether it is wary of US influence or wants more changes like upgrading SDRs we cannot really tell from the outside looking in. Ultimately, though, the ball is in China's court. How it accumulates or diversifies away from dollars will be key in determining whether this latest tantrum is just more bluster or something more significant.

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