Do we need a new global currency?
- The net inflow
or outflow of currency also reflects income from foreign investments and gifts
(remittances and aid) to or from abroad and is referred to as the current
account balance (deficit or surplus) of the country with the rest of the world
- Actually the
more relevant concept is the more comprehensive ‘current account balance’,
which adds investment income flows, remittances, and aid.
- The US enjoys
the seigneurage (profit) from producing the world’s reserve currency, but
carries the risks if it does not fulfill its responsibility to manage the
dollar’s external value. Because of this loss of domestic control over monetary
policy, the Bundesbank strongly discouraged external use of its revered
- “The US net
international investment position at year end 2008 was -$3,469.2 billion….” US
entities owned assets abroad valued at $19,888.2 billion and foreigners owned
assets in the US valued at $23,357.4 billion. The US current account deficit
peaked at $804 billion in 2006 dropping back somewhat to $706 billion in 2008.
(US Bureau of Economic Analysis)
- Warren Coats,
“The D E Fs of the Financial Markets Crisis” CATO Institute, 26
- “The Big
Bailout–What Next?”, CATO Institute, 3 October, 2008
many speculators borrow dollars at extremely low interest rates in the US and
convert them into foreign currency investments with higher interest rates. The
return on their investment is even higher than the interest rate differential
if the dollar is expected to depreciate over the life of the investment. This
outflow depreciates the dollar, but the Fed is reluctant to raise interest
rates to reduce this activity and defend the dollar, because it would undercut
its domestic policy of encouraging aggregate demand.
Xiaochuan, “Reform the International Monetary System”, Website of the
Peoples Bank of China, March 23, 2009.
- Dimitry A.
Medvedev, “Building Russian–US Bonds” The Washington Post, March 31,
2009, Page A17.
- The complex issues surrounding a so called ‘substitution account’ focus on the
possibility of substituting SDRs for dollars in existing reserve holdings.
- This describes
a relative imbalance rather than a global shortage of reserves. If as now the
world were in recession or suffering a global shortage of reserves (which would
otherwise require a global deflation to overcome) the IMF’s members could
authorise a further allocation of SDRs as the G20 recommended earlier in 2009.
- A relatively
simple change in the rules of the gold standard might have saved it. Its
essential feature of market regulation of the money supply depends on the fixed
exchange rate with the value of a given quantity of gold, not actually
exchanging it for gold itself. See Warren Coats “In Search of a Monetary
Anchor: Commodity Standards Reexamined” in Frameworks for monetary stability:
policy issues and country experiences, Edited by Tomás J.T. Baliño, Carlo
Cottarelli, International Monetary Fund, 1994. http://tinyurl.com/monetary-
- The SDR’s
value could also be fixed to gold, as it was initially, or to baskets of
commodities, or goods and services. See Coats, 1994.
- Coats, 1990.
Coats, Gons, Leddy, and van den Boogaerde, 1987.