A new world currency draws nearer after Geithner's slip

By Ambrose Evans-Pritchard
The Telegraph, London
Wednesday, March 25, 2009

http://www.telegraph.co.uk/finance/economics/5051075/A-world-currency-mo...

US Treasury Secretary Tim Geithner confessed on Wednesday that he had not read the plans by China's central bank governor for a "super-sovereign reserve currency" run by the International Monetary Fund, but nevertheless let slip that Washington was "open" to the idea. Whoops.

This is how matters quickly escalate in geo-finance. China's suggestion – backed by Russia, Brazil, and India, and clearly aimed at breaking US dollar hegemony -- is making its way onto the agenda of the G20 Summit next week. 'Dollar-dammerung' no longer looks so far-fetched.

China's paper, by Governor Zhou Xiaochuan, is couched in understated language -- more a 'thought experiment' than a declaration of monetary war. His ideas could be mistaken for the musings of an academic theorist. Nobody should be fooled by decorum.

It comes days after premier Wen Jiabow demanded US action to safeguard the value of China's holdings of US bonds -- $740 billion of US Treasuries and a further $600 billion or so of other debt. "We have lent huge amounts of money to the US. Of course we are concerned about the safety of our assets," he said.

China's Communist Party seems to fear that the Federal Reserve is orchestrating a beggar-thy-neighbour devaluation -- and a disguised default on America's foreign debt -- by resorting to the nuclear option of printing money to buy US Treasury bonds.

China's proposal is to activate the IMF's power to issue Special Drawing Rights (SDRs). The IMF would be groomed as de facto central bank for the planet. The SDRs would gradually become an "accepted means of payment." Call it the "globo."

It would be an error dismiss this idea as a pipe dream. Cynics once ridiculed Maastricht plans to launch the euro. John Major famously said chatter about a European currency had "all the quaintness of a rain-dance and about the same potency". Yet once officialdom began assembling the machinery for monetary union, EMU acquired a life of its own.

The pitfalls of a world central bank are obvious. It is hard enough for the European Central Bank to run policy for 16 states in a region with a shared history, and shared EU institutions (Commission, Court of Justice, competition police, etc). The politics of global monetary management would be poisonous.

The heads of the Fed, the ECB, and the Bank of England, must all testify before parliaments and answer to democracy. There is no world parliament, no world government. Who would control a super-IMF?

In theory, this world reserve bank would be above politics. China's plan suggests a resource currency along the lines of the "Bancor" floated by Keynes at Bretton Woods. This was anchored on 30 commodities, giving it a broader base than the Gold Standard. Such a currency would prevent the "credit-based" debauchery of today's fiat system, says Mr Zhou.

True, but this would be jumping from frying pan to fire. If the world is running out of oil, metals, freshwater, and arable land -- as many believe -- then the price of commodities must rise over time. The "globo" would become a deflation machine, like the late 19th Century gold as it asphyxiated endebted US farmers.

The China-Russia plans may never come to much. As President Barack Obama put it, the US is going through a "rough patch" but still commands the world's biggest economy, under a stable democracy and the rule of law. He might have added that it will largely avoid the aging crisis already dulling Japan's dynamism, and soon to ensnare Germany, Italy, and above all China.

For all its bluster, Beijing must move with care. After years of export-driven mercantilism China is even more dependent on US markets than America is dependent on Chinese capital. The risks of currency and trade conflict are not symmetric. The hegemon must prevail.

But 10 years hence the picture may look different. If the G20 opens the door wide enough next week, a world currency may yet come into being.

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