Is the supranational currency proposed by Russian President Medvedev for real? At the G8 meeting in L’Aquila, Italy (July 8-10, 2009), Medvedev is reported to have brought a sample of a new “united future world currency” coin minted in Belgium and bearing the words “unity in diversity.”
According to Bloomberg, Medvedev said “the question of a supranational currency “concerns everyone now, even the mints.” The test coin “means they’re getting ready. I think it’s a good sign that we understand how interdependent we are.”
I have to admit, the speed at which Russia, India and France have joined China in its concern for the stability of their foreign reserves (most of which are held in U.S. Treasuries) and in pushing for a new world reserve currency is a bit surprising.
Arguments for a Supracurrency: Why the US Dollar Should Not Also Be The World Reserve Currency
One important point to note, for those new to these developments, is that neither China nor any other country is suggesting that its own currency become the replacement to the U.S. dollar. China is NOT suggesting the renminbi replace the dollar. What they are suggesting is that there be a new currency created in order to take on the role of a truly inter-national world reserve currency that gives no advantage to one country over another. On this view, it is a detrimental conflict of interest when the world’s largest national economy’s currency is also used as the world reserve currency. It encourages a greater purchasing of US dollars than would otherwise be the case, thus creating an artificially inflated level of demand for dollars (countries need dollars, for one, in order to purchase oil – and the world economy is heavily dependent on oil).
The secondary problem with using the US dollar as world reserve currency is that its value becomes an issue of economic and geopolitical security when all other countries must hold it in their foreign reserves. Since the Fed has been busy increasing the US money supply at an unprecedented rate recently, the value of the US dollar is also under question. And China holds more US Treasuries than any other country. Naturally, it is concerned about the value of its “investment.”
If you haven’t been paying attention to these developments, they started (most immediately) back in March 2009 when Zhou Xiaochuan first proposed replacing the world reserve currency with some more equitable currency, even if a new one must be introduced:
Zhou Xiaochuan’s Proposal For World Reserve Currency is Accepted by UN (March 29, 2009)
Although both Obama, Geithner as well as PM Harper and other world officials have reiterated that no one will be touching the status of the world reserve currency anytime soon, the fact that it has come under fire so quickly sheds light on what is bound to be a growing international concern. I’ll continue to write about it, as I find it a fascinating topic with enormous economic implications.
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It is hard to believe that we are so close to a world currency. I need time to digest the idea, but off the cuff it seems like it would offer stability in commerce which is good for business and economic growth. Might level the playing field a little bit.
Damn new world currency, Damn the new world order, damn socialism, damn all those who support it.
What I do not understand is why countries hold, if not exclusively, then predominantly USD. Could they simply not just hold a diversified basket of currencies reflecting what they BUY from their trading partners, since presumably that is the point of holding foreign currency reserves—to buy something in other countries.
As I see it, other countries are pissed that their central banks have been soaking up USD to increase US buying power in their countries and they do not want to pay the price in terms of local manufacturing/export pain of reversing this [stupid] policy.
Also, where does it say that oil has to be sold in exchange for dollars? Is that international law or something? I know this is a point of content with some saying that one of the reasons for the Iraq invasion was that Saddam wanted to start selling oil denominated in Euro.
@TAM – well remember, that we already have a world reserve currency. The idea of a world reserve currency in itself is not anything new. It’s the U.S. dollar, so right now the U.S. dollar is effectively acting as the “supracurrency” – which may be why Americans don’t notice this effect.
@ERE – good point, I am not sure why oil has to be traded in dollars except for the tautological reason that the U.S. dollar is the world reserve currency. Yes, there was speculation that officials were concerned about proposals to trade oil in something other than the dollar – Google “Iranian oil bourse” for example – as I understand it, oil is one of the main uses of having a world reserve currency. So no matter what “currency” is used, it’s mostly going towards buying/selling/hedging oil. If anyone knows more/better, please do correct me.
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