Wednesday, January 12, 2011

Can a Universal Global Currency Prevent a Global Currency War?

As the leading network news providers talk of the looming global currency war, will the implementation of a universal global currency prevent such inevitability?

By: Ringo Bones

As the world’s leading and emerging economies scramble to position themselves to gain an advantageous foothold in the global export market, many resort to the under-handed and somewhat illegal means of currency manipulation in order to make their export goods become competitively priced. Leading economists then started to ponder whether such moves will inevitably result in a global currency war that can certainly make us – the globalized capitalist consumers – the unfortunate casualty. But does a purpose-built universal global currency provide the best solution to prevent such a global currency war from ever happening that could certainly devastate the world’s already heavily globalized economy?

Back in 2009, the 1999 Nobel Economics prize Laureate and euro “inventor” Robert Mundell proposed a universal global currency that is a Special Drawing Rights-based currency immune from fluctuations unlike the speculator-plagued US dollar. This proposed universal global currency would be administered by a “global bank” modelled after the European Central Bank. Though Mundell’s proposal back in 2009 was aimed at preventing the global credit crunch from ever happening again, will such a universal global currency also work in preventing a global currency war?

Since the Bretton Woods Agreement, the US dollar was often perceived as a universal global currency based on gold, but ever since US President Richard M. Nixon took the US dollar off the Gold Standard back in August 15, 1971, many other countries followed suit. Despite being taken off the Gold Standard, the US dollar was still being perceived by almost everyone in the whole world as the world’s most dominant currency since the end of World War II. Unfortunately, the events of September 15, 2008 that led to the collapse of the Lehman Brothers that also almost brought our global economy to the brink had more-or-less tarnished the global perception of the US dollar as the world’s most dominant currency.

Despite of this, the US dollar and the euro are still widely accepted as the world’s two leading currencies based on their use by the world’s various central banks as a reserve currency to prevent external shocks against their own currencies. Believe it or not, exchange rate volatility was the main cause of the Asian Banking Crisis of 1997 primarily due to the lack of a global reserve – i.e. a universal reserve currency.

Many countries around the world still peg their various currencies with the US dollar. Unfortunately, geopolitical reality has woefully failed to keep up with global economic reality. The massive property booms and the cheap loans being offered by various banks like they are going out of fashion since 1998 was the primary instigator of the questionable economic risk taking that led up to the US economic meltdown of September 15, 2008.

From the economist’s perspective, the US dollar is merely seen as something that has filled a vacuum as the world’s de facto global reserve currency in the absence of a purpose-built, true-blue universal global currency. Many economists cite this as the reason for the encouragement of risky economic behaviour in the US that led up to the Lehman Brothers’ collapse of September 15, 2008. Worse still, an overwhelming majority of Americans hasn’t saved enough money in their own banks.

Despite of such an apparently dismal economic position of the US dollar, the People’s Republic of China still holds 2 Trillion US dollars in reserve. If and when the US dollar devalues even further, this would result in a bank run that would ruin the Mainland Chinese economy for a very long period of time. And despite of the world’s somewhat “shaky” confidence of the US dollar, America’s relatively stable government and a relatively resilient economy is all the world needs to pledge their economic allegiance to the US dollar. But will a purpose-built universal global currency be a better choice?

Believe it or not, the Beijing government is in favour of a Special Drawing Rights-based universal currency whose value is based on a basket of currencies instead of just the US dollar and the euro – at least back in 2009 before Beijing’s and every central bank governor around the world started waging currency wars in order to make their export products globally competitive. At present, Special Drawing Rights only involves the world’s top 4 currencies – i.e. the US dollar, the euro, the UK pound and the Japanese yen.

At present, the Mainland Chinese RMB or the yuan is not included in the Special Drawing Rights or SDR even though Mainland China is already the second largest economy in the world. But the number one challenge facing the implementation of a purpose-built universal global currency is the inevitable “global scale” of the monetary policy involved which inevitably results in a global-scale red tape. And despite of the difficulty of implementation, it is probably the best alternative yet devised in halting a global currency war.


VaneSSa said...

Ever since President Nixon too the US dollar off the Gold Standard back in 1971, it's value rose and fell like an extreme fairground roller coaster ever since. From the Plaza Accord / Plaza Agreement of 1985 to quell a super-strong US dollar to the first Gulf War to the 9/11 attacks - the value of the US dollar seems to have always been at the mercy of geopolitical events. I think for Universal Global Currency to work, a new Bretton Woods like agreement would have to be worked out by the established and emerging global economic powers.

Ringo said...

I do agree Vanessa that the value of the US dollar is far from stable ever since President Nixon removed it from the Gold Standard back in 1971. But making the US dollar a floating currency does have advantages - it makes it more liquid than a currency still adhering to the Gold Standard. And since the advent of globalization, a very liquid currency has since become the be-all-end-all of global economic competitiveness.

VaneSSa said...

Speaking of the need of a universal global reserve currency, 2001 Nobel Economics Laureate Joseph Stiglitz spoke in his April 11, 2011 interview on the urgent need of a new global reserve currency free from the inherent risks that plague the US dollar in order to stem global trade imbalances.