Asia Times: Beyond the dollar

[marmar]

Beyond the dollar
By Martin Hutchinson


People's Bank of China governor Zhou Xiaochuan said last week that the Special Drawing Rights (SDR) of the International Monetary Fund (IMF) should replace the dollar as the world's main currency. The political reasons for his proposal are clear, its merits rather less so. Could the world economy work better with a global central bank, whether in the form of the IMF or some other body, and with a global currency as its main reserve unit?

There is certainly a good argument for the world ditching the dollar. It's estimated that the US budget deficit for the current fiscal year that runs through September will be 12% of gross domestic product (GDP). Broad money supply, whether measured by M2 or the St Louis Fed's MZM, has risen at annual rate of 17% in the six months through March 16, before the start this week of the Fed's potentially hyper-inflationary purchase of US$300 billion of Treasury bonds over the next six months.

There is thus no reason to believe that the dollar represents a sound store of value, the principal function of a reserve currency. While liquidity in US dollar debt instruments is enormous and ever increasing as their supply skyrockets, there must be a danger of disruptions in the Treasury bond market similar to that caused by the "failed auction" last week in the UK gilts market, potentially causing price discontinuities and liquidity outages. In criticizing US economic management, therefore, Zhou is on solid ground, reflecting many of the criticisms this column has made of US monetary policy since 1995 and fiscal policy since 2002.

Other major world currencies don't look any more solid than the dollar. The pound is equally affected by the financial services disaster, and the UK has a budget deficit that is as large as the United States in terms of GDP, has been much worse managed over the last several years, and has an economy with very little raison d'etre outside the shrunken financial services sector. The yen has been strong recently, but that strength has caused a collapse in Japanese exports, down in February by almost half from the previous year. Domestically, the Japanese economy had been quite well run until September 2008, but Prime Minister Taro Aso represents a reversion to the worst tendencies of the 1990s, with four wasteful public spending "stimulus" plans announced, a budget deficit as large as that of the United States, and a government debt three times larger. .........(more)

The complete piece is at: http://www.atimes.com/atimes/Global_Economy/KD01Dj02.html

[screembloodymurder]

1. The Asian Times makes the WSJ look like a propaganda rag.

I believe.