Main Article:

Do we need a new global currency?

  1. 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
  2. Actually the
    more relevant concept is the more comprehensive ‘current account balance’,
    which adds investment income flows, remittances, and aid.
  3. 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
  4. “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)
  5. Warren Coats,
    “The D E Fs of the Financial Markets Crisis” CATO Institute, 26
    September, 2008.
  6. “The Big
    Bailout–What Next?”, CATO Institute, 3 October, 2008
  7. Currently,
    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.
  8.  Zhou
    Xiaochuan, “Reform the International Monetary System”, Website of the
    Peoples Bank of China, March 23, 2009.
  9.  Dimitry A.
    Medvedev, “Building Russian–US Bonds” The Washington Post, March 31,
    2009, Page A17.
  10.  The complex issues surrounding a so called ‘substitution account’ focus on the
    possibility of substituting SDRs for dollars in existing reserve holdings.
  11.  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.
  12.  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.
  13.  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.
  14.  Coats, 1990.
  15.  14
    Coats, Gons, Leddy, and van den Boogaerde, 1987.