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Replacement of the Dollar?

Posted by: Steve LeVine on March 25

China has created a stir with a call by its lead banker for the dollar to be replaced as an international currency. While the idea might appear outlandish, Treasury Secretary Timothy Geithner, Fed chief Ben Bernanke and President Barack Obama himself were all put on the spot yesterday to comment on it. “I don’t believe there’s a need for a new global currency,” Obama replied during his news conference. In congressional testimony, both Geithner and Bernanke also rejected the idea. And today, Geithner was forced to clarify a statement that traders perceived as hedging on the question.

In an interview today with Business Week, Nobel laureate Joseph Stiglitz explained why he has also advocated the replacement of the dollar, as expressed by Zhou Xiaochuan, governor of the People’s Bank of China.

Read the edited interview and let us know what you think of the idea:

Q – You are calling for a new global currency to replace the dollar. What is the crux of the idea?

A – The central idea is that the current system of depending on a single currency and the political and economic management of that currency is volatile. It’s inequitable because poor people are lending to the U.S. at low interest rates. In a global economy, you need a global reserve system, and that’s what we’ve proposed.

Q – Are you calling for outright replacement of the dollar, or complementing it with another reserve currency?

A – It’s a matter of moving to multiple currencies. Over time you would replace the dollar as a reserve currency. No one thinks it would happen overnight.

Q – Timothy Geithner, Ben Bernanke and President Obama himself yesterday all opposed the idea. Comment?

A – [Obama] has to say that. It doesn’t mean anything. If he were to say anything else, it would suggest he doesn’t have confidence in the dollar. It’s a little bit disappointing that he is not a little bit more open. He is worried as you might imagine that there is a bandwagon forming that there is something wrong with the dollar, with the balance sheet of the Fed. So they are putting on a brave face.

Q – You have been critical of the Geithner plan on toxic assets.

A – Very much so.

Q – Why?

A – The government is picking up the downside risk, and giving away the upside. There are incentives [for investors in the toxic assets] to delay resolving the mortgages. You don’t care about prices going down, because the government is picking up that risk, so you wait for the prices to go up. It’s totally distortive. It is designed to be a huge giveaway to the banks.

Q – You are also proposing replacing the G20 with a United Nations body. What’s this all about?

A – We are calling for a Global Economic Coordination Council. There is no rhyme or reason to the current system other than who President Bush invited to it. The new body would have more political legitimacy and a broader mandate. It could demand, for instance, that the World Bank and the IMF report to it and evaluate how they are performing.

Q – Why not fix the G20 rather than creating a new body? Is what you propose likely to happen?

A – Yes. [German Chancellor] Angela Merkel is strongly pushing the idea. People in the G20 are saying this is how we need to go.

Q – Do you feel vindicated regarding the alarms you raised in the 1990s over weaknesses in the global financial system and securitized mortgages [see here and here]?

A – Yeah. Yeah. I wish we had paid attention earlier so we didn’t have this mess. By and large most of what I said came true.

Q – One blog has dubbed you the “Chuckling Economist.” You do have humor. But I think they mean something else.

A – That’s funny. I’ll have to take a look at that.

Reader Comments

The Mad Hedge Fund Trader, San Francisco, CA

March 27, 2009 12:14 PM

Since we are smack dab in the middle of a six year trading range, I don’t really have a handle on what the buck is going to do short term. Could we see $1.20 or $1.00 for the greenback in an event driven overshoot short term? You betcha! But longer term, the trend is still down. Obama’s highly inflationary reflationary policies will eventually lead to an utter collapse in the dollar. If they are successful, the economy will recover, bringing Americans back to their old low saving, high consumption, high importing ways, adding fuel to the fire. Don’t bet against the 45 year trend. Expect to pay $2.00 for a Euro in the years ahead. Take that European vacation now!
www.madhedgefundtrader.com.

James Raider

March 27, 2009 01:45 PM

China is simply flexing its economic muscle before the G20 meeting.

http://pacificgatepost.blogspot.com/2009/03/chinas-weak-gambit-on-currency-shift.html

The U.S. Dollar is not about to be replaced, regardless what China's wishes might be.

Morrison Bonpasse

March 30, 2009 10:44 AM

The world should be grateful to China and Prof. Stiglitz's U.N. panel for leading the way to a Single Global
Currency, which will be managed by a Global Central Bank within a Global
Monetary Union. As China requests, this next global currency will not be the
responsibility of just one country. What is needed now is international recognition of those goals, and research and planning toward
them.
We are so conditioned to the fluctuations of the values of currencies, and the frequent need to assist currencies in trouble, that we fail to adequately recognize the contribution of such currency risks to the current global financial turmoil. We also fail to recognize how easy it will be to eliminate those problems. For every currency in the world today, we cannot predict a value for next year, next month, or even the next day or next hour. How can a stable
globalized financial system be built upon such instability and unpredictability?
The success of the euro shows that monetary union is the best way to ensure
monetary stability. It is now commonly recognized that Iceland, Hungary and
Poland and other European countries would have had far less of a currency problem this year if those countries have been part of the eurozone. The primary problem with the euro and currencies of other monetary unions is that they still must co-exist within the international multi-currency system itself where the value of those common currencies must still fluctuate in value against each other. If 16
countries can use the same currency, why not 192?
In addition to eliminating currency risk, the use of a Single Global Currency would eliminate the current foreign exchange trading expense of $400 billion annually, eliminate current account imbalances, eliminate the need for foreign exchange reserves (now totalling more than $3 trillion); and bring other benefits worth trillions.
The Single Global Currency Assn. (www.singleglobalcurrency.org) promotes the implementation of a Single Global Currency by 2024, the 80th anniversary of the 1944 conference. That’s only 15 years away. For perspective, consider that 15 years before the 2002 implementation of the euro in the pockets of Europeans, there was a Berlin Wall, a Soviet Union and a Yugoslavia.
The world is moving toward a Single Global Currency through the creation, expansion and merger of regional monetary unions. Another route is through international monetary conferences proposals and agreements, such as were seen at Bretton Woods. The challenge now is to reach that goal planfully, as soon as possible with as little cost and as few crises as
possible.
See the book, "The Single Global Currency - Common Cents for the World."
Morrison Bonpasse
President
Single Global Currency Assn.
Newcastle, Maine, United States

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