OPINION> Commentary
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OPINION> Commentary
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Dollar living on borrowed time in this defining hour
By Ding Yifan (China Daily)
Updated: 2009-04-01 07:55 The high hopes people worldwide have pinned on the G20 London summit have continuously fallen as the all-important meeting approaches. It was widely expected that concrete actions by heads of the world's 20 largest economies, which produce 90 percent of the world's output, 80 percent of its trade value and two-thirds of its population, would help pull the global economy out of recession as soon as possible. However, widening rifts and discord on some major issues between the US and the EU, have dampened its prospects, European countries, believing they have taken adequate financial stimulation measures, want top priority placed on tightening loose international monitoring of cross-border investment by financial bodies. Meanwhile, the US believes more stimulus packages are needed. Washington is encouraging other countries to continue to expand spending, as it intends to. Given that its own financial corporations are mostly transnational, the US thus appears averse to a so-called cross-border financial oversight mechanism. In particular, it remains opposed to the EU taking part in monitoring US financial bodies.
Washington fears that a delayed government intervention will contribute to the outbreak of a crisis matching that of the 1930s. However, what European countries are most concerned about is malign inflation. The British government has recently shifted its stance from sympathizing with US policy to supporting a strengthened transnational financial institution strongly advocated by the EU. Amid fierce US-EU brawls, People's Bank of China head Zhou Xiaochuan caused a major international stir last week. In three signed articles, the central bank chief claimed the use of the International Monetary Fund's (IMF) Special Drawing Rights (SDR) should be expanded with the aim of setting up a super-sovereign reserve currency to replace the US dollar. The proposal has not only been echoed by some emerging economies, such as Russia and Brazil, but received positive responses from the UN and the IMF. According to Financial Times reports, a UN advisory commission recommended the UN General Assembly reach a consensus as soon as possible on the creation of a new reserve currency to offset the risks brought by drastic devaluations of some key reserve currencies. Joseph Stiglitz, a Nobel-prize winning American economist, who chairs the UN advisory body, has called for urgent reform of the global reserve currency system. In addition to the UN, the IMF and some world members have also extended support to Zhou's idea for a super-sovereign reserve currency. IMF chief Dominique Strauss-Kahn said last week he believes it reasonable to discuss the establishment of an international currency to replace the dollar as the new global reserve currency. As early as the Bretton Woods conference prior to the end of World War II, John Maynard Keynes, head of the British delegation, raised the idea of a world currency. However, the US, by taking advantage of its possession of more than half of the world's gold reserves and one-third of its trade volume, forced other participants into concessions. A dollar-led international monetary system was then set up and the fixed dollar to gold exchange rate finally established. However, the establishment of the Dollar Standard System, in which the dollar was pegged to gold, was soon exposed as defective. The outbreak of the dollar crisis in 1971 finally prompted then-US president Richard Nixon to stop pegging the dollar to gold, which quickly resulted in the dollar's devaluation. The subsequent collapse of the Bretton Woods system brought the international monetary system into a period of fluctuation. However, given its unchanged status as the settlement currency in the world's oil market, the dollar still remains the major pricing currency of the futures markets of other major commodities. Imbalanced international payment in the United States usually leads to an unstable dollar exchange rate, which has imparted financial instability to other countries. It is known that the outbreak of international financial crises since the 1980s have been closely related to a fluctuating dollar. In particular, the latest subprime mortgage-sparked US financial crisis quickly spread to other countries, plunging the world economy into recession. Enormous rescue packages taken by the US administration will possibly cause a more drastic fluctuation of the dollar, which will dramatically impact countries holding dollar-denominated reserves. In this milieu, it is understandable that the proposal by the governor of China's central bank has won support from the overwhelming majority of developing countries within the G20. Recent remarks made by a few US financial heavyweights, including its Federal Reserve chairman, indicated that the world's largest economy will not give up its dollar's dominant status. But a declining US economy and the country's decreasing clout means the dollar's hegemonic position is difficult to sustain. The author is a researcher with the Development and Research Center under the State Council. (China Daily 04/01/2009 page8) |
