The Possibility of a Global Currency

Robert Hsu, March 30, 2009

As I have discussed recently, one of the loudest voices expressing concern about a potential coming debasing of the U.S. dollar is China. China is largest creditor to the U.S., and it is worried that it will be paid back in a cheap and devalued currency. I think this is a reasonable concern, considering that China increased its Treasury holdings by 46% last year, and it currently holds about $740 billion of the securities.

So in response to its concerns about its exposure to U.S. dollar-denominated financial assets, China's central bank governor Zhou Xiaochuan last week proposed a creation of a new currency to replace the U.S. dollar as the world's main reserve currency. In an essay released in Beijing, Zhou proposed expanding the role of "Special Drawing Rights," a synthetic currency issued and used by the International Monetary Authority that is backed by a basket of major currencies.

Zhou said the new currency would let governments manage their economies more efficiently because its value would not be influenced by the needs of any one nation to regulate its own finance and trade. He also said that it would create and control global liquidity.

The idea of a global currency has come and gone in recent years in tandem with global economic woes. I am not surprised that a global currency has been proposed again. But I think that a global currency actually happening is unlikely any time soon.

That's because the U.S. dollar is a popular currency in the world, and it would be unwise to rid of it right now. In addition, America has a unique economic and military superpower status, and the U.S. would be unwilling to compromise this in order to create a global reserve currency.

Although this is unlikely to materialize, I think it is important to note the solutions that countries are proposing to help save the global economy. China offering a global currency is another example of the country being proactive in the solutions to fix the global economy. I like that China is stepping up and being vocal about the possibilities to help the global financial crisis. Join China Strategy today!

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