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The beginnings of a multi-currency monetary system for the world

Zhang Monan

One of my favorite columnists for China Daily is Zhang Monan. She has a crisp picture of our world’s financial system. Her recent Op-Ed, “Rebalancing global economy,” lays out for us the benefits enjoyed by the U.S. for having the USD dominating the international monetary system. Precisely because the U.S. is diluting the value of the USD at the rest of the world’s expense, China, Russia, Europe, and generally rest of the world are now pushing for a multi-currency based system through G20.

Of course, in bilateral trade, various countries are already finding ways to bypass the USD. For example, Russia and China announced agreement in late 2010 to quit the dollar in their trade with each other. While Zhang points to the fact that the U.S. wiped away $3.58 trillion in debt owed to foreigners from 2002 to 2006 simply via printing, one should remember American citizens holdings are proportionately diluted too. I guess the point is still that Americans are stake-holders in U.S. national debt and diluting their assets is somewhat “just.” However, nullifying money owed to foreigners via such a scheme doesn’t sound so “right.”

Some of you might recall the sovereign ratings firm, Dagong, still having rated US with a “AA-” rating. Zhang, herself, have also argued recently that the USD is still a relatively good currency to invest in. This is absolutely not about the USD being devalued to a point of junk status. The U.S. is still the world’s largest economy by far. The U.S. is still the most stable government. She also has the strongest military to back her up.

The point here is that the U.S. wields so much financial power by virtue of her currency being the default for world trade. When she needs to dilute’s it’s value quite significantly to suit her economic interests, there is really no recourse for everybody else. This is the situation for which the world would like to change.

Below is the full text of Zhang’s Op-Ed:

“Rebalancing global economy”
Updated: 2011-02-24 07:38
By Zhang Monan (China Daily)

Continuous dilution of US dollar debts calls for replacing its dominance with multi-currency monetary order

The US-led Western countries’ advocacy of revising the way that current accounts are measured fully exposes their attempts to shift the responsibilities for the global economic imbalances to countries with a trade surplus.

Global economic imbalances are in essence a result of the imbalances in global comparative labor advantages among different countries. There are two major labor divisions in the current global economy, namely in trade and finance.

The first category is mainly represented by Germany, Japan and China, all big commodity exporters that hold a huge current account surplus, and the second is represented by the US and some European countries that enjoy huge financial advantages in exporting capital and various kinds of financial products and services that contributed to their huge current account deficits.

While the global manufacturing sector has shifted from developed countries to emerging markets, developed economies still firmly retain their status as the world financial centers. Developing countries, due to their less-developed financial markets and vulnerable financial systems, have to employ established reserve currencies for their overseas trade pricing, settlements, lending and investments. As a result, emerging economies have to sustain bigger exchange rate and assets risks.

The huge current account deficit of the US is a reflection of the current skewed international monetary order. As of Jan 31, 2011, the total US public debt was $14.13 trillion, 96.4 percent of the country’s 2010 GDP of $14.7 trillion. By taking advantage of its long-established monetary dominance, the US has a long history of credit abuse and its trade and fiscal deficits have increased far faster than production. The volume of US national debts held by foreign countries and regions has kept rising over the past decade and it has issued 32 percent of the world’s total bonds.

However, Washington has skillfully utilized the dollar as the world’s leading reserve currency for overseas financing of its national debts and promoted their international circulation to the US’ advantage.

The dollar standard system has not only helped the US realize international circulation of its enormous national debts, it has also helped the world’s largest economy to increase its national wealth through monetization or devaluation of the dollar. The dollar’s status as the world’s leading currency has also increased the US’ capability to pay off or dilute its foreign debts through oversupplying and over-issuing the dollar.

From 2002 to 2006 alone, the US diluted an accumulated $3.58 trillion of its national debts under such a monetary strategy. With the evaporation of a large volume of US national debts, the wealth of other countries, especially those holding US national debts, has seriously dwindled over the past years.

In 2009, the value of global foreign reserves was about 13 percent of the world’s whole GDP. Of this, more than 60 percent was dollar-denominated assets. In the same year, the gross volume of US assets held by foreign countries, not including financial derivatives, was 1.25 times its nominal GDP. However, dollar depreciation has accelerated the transfer of this large amount of wealth, a process in which the US has proven to be the largest beneficiary.

The current dollar-led international monetary order already fails to reflect the latest developments in the global economic structure. In the absence of a corresponding monetary system, the world economy is encountering a series of challenges and dilemmas induced by conflicting policies among different countries on economic growth, inflation, employment and interest rates. In a sense the latest global financial crisis is an unavoidable adjustment of disparities in the distribution of global interests and a rectification of some other unreasonable problems in the process of globalization.

Because the imbalanced global monetary structure has directly resulted in imbalances in the global current account, there have been strong calls in the international community for reform of the world’s monetary system since the onset of the global financial crisis. Following China’s proposal of setting up a super-sovereign international reserve currency, European countries, which are facing the possibility of a widespread sovereign debt crisis, have also called for the establishment of a global reserve currency through reforms of the global monetary system under the G20 consultation mechanism.

Considering the widespread international criticism of the current dollar-led global monetary system, a diversified global reserve currency system remains a good option for promoting a balanced and healthy development of the global economy.

The end of the dollar’s decades-long hegemony and the formation of a multi-currency monetary system, which also involves the euro, the Japanese yen and the Chinese renminbi, would help the global economy develop in a more balanced direction.

The author is an economics researcher with the State Information Center.

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