Since the 2008-2009 global banking collapse — which drew the vast majority of the world economy into a lingering recession alongside the United States — many in the international community have sought an escape from the American dollar as the primary global reserve currency. Fears of continuing fiscal instability, a desire to make global finances more “democratic” and simple fatigue over the U.S.’s domination of the global markets have drawn many countries to consider alternatives to the greenback.
An example is Argentina. Since the 1999-2002 Argentine economic crisis, in which Argentina defaulted on its foreign debt and the value of the peso bottomed out, public confidence in the peso has hit an all-time low. To stimulate use of and investment in the peso, President Cristina Fernández de Kirchner sought to limit the number of dollars in active circulation in the nation. To do so, Kirchner introduced a currency control measure known as “dollar clamp,” in which the government would bar private purchases of the American dollar with Argentine pesos.
In response, those who had dollars due to transactions with foreigners started to hoard them instead of selling them to the government for pesos. The false scarcity actually increased the value of the dollar in Argentina, making it even more valuable against the struggling peso. Worse still, Argentina’s international reserves — which are used to support liabilities on local banks and to trade with other nations — have fallen 19 percent since the introduction of the control regime in 2011. The reserve lost $2.84 billion in the first quarter of 2013.
More damningly, the “clamp” has created a situation in which Argentines are spending more money outside of Argentina than foreigners are spending in the nation. The country’s first-quarter 2013 trade surplus is $688 million less than the first-quarter 2012 surplus.
Uneasiness in considering the dollar
While most of Argentina’s problems derive from the nation’s 2001 default on $100 billion in foreign debt — the largest in history — and the mandated debt restructuring, some of the blame can be directed to the inflexibility the dollar offers as a global currency. Despite the traditional stability of U.S. Treasury bonds, many in the international community bemoan recent moves by the Federal Reserve to artificially stimulate the American economy — most recently with its ongoing buyback of Treasury bonds, which is thought by some to be a ploy to devalue the dollar and control exchange rates — and the politicization of the nation’s debt management policy, which was the leading consideration in the downgrade of the nation’s credit rating.
In addition, the United States’ massive amount of international debt — which, as of December 31, 2012, was $15.9 trillion — has given pause to many of America’s debt-holders and raised concern about the nation’s ability and willingness to repay.
“The monetary policy of the United States has a major impact on global liquidity and capital flows and therefore, the liquidity of the U.S. dollar should be kept at a reasonable and stable level,” said former Chinese President Hu Jintao in 2011. Hu has indicated that the dollar’s domination of the international currency system is a “product of the past” and that China is interested in replacing the dollar with the yuan. This cannot be easily done, as the yuan’s price is not set by the market, but by internal capital controls.
Brendan Kelly, an analyst with Pacific Forum CSIS, feels that the removal of China’s capital controls would conflict with the ruling philosophy of the nation’s Communist Party.
“Investors would also likely require significant reforms in the rule of law, raising the question of whether an authoritarian government could ever gain the trust required to be a reserve nation,” he wrote in a study. “Significant further development of China’s bond markets over the upcoming decades will be required to support a role for the yuan as a reserve currency.”
It may be that the dollar is inevitably the medium of international commerce, as the system works currently.
“There is no currency that could replace the dollar,” said David Breuhan, vice president and portfolio manager of Gregory J. Schwartz & Co., Inc., to Mint Press News. “China still pegs to the dollar. The Swiss Franc had been the most stable currency for years. In 2011, when the euro crisis hit, many Europeans bought Swiss francs, causing inflation in Switzerland. For the first time in decades, the Swiss central bank had to increase the money supply by double digits and devalue the franc.”
“Other potential replacements for the dollar include the Canadian and Australian dollar,” Breuhan continued. “These nations’ fiscal management is good, relative to other countries. They have natural resources and international respect. However, their currency float is not large enough to handle the pressures of global markets. Everything in the world is commoditized in dollars. Oil, sugar, wheat, corn, gold, etc. It would be virtually impossible to replace it. So, the world is stuck with the dollar. That being said, foreigners will demand more dollars for the same thing, as our dollar buys less for them, once converted. This causes prices to rise.”
“As English is the language of aviation, the dollar is the currency of commerce,” he said.
A supranational currency
This, however, does not diminish the international displeasure at the use of the dollar as the world’s currency. Former World Bank President Robert Zoellick infamously made a call to return to the gold standard — the principle that all currency is pegged to the value of gold. In an op-ed piece, Zoellick suggested that the dollar, the British pound, the euro, the Japanese yen and the Chinese renminbi, or yuan, be included in a “plan to build a co-operative monetary system that reflects emerging economic conditions.” This system’s monetary worth would be pegged to the trading value of gold.
“This package approach to economic co-operation reaches beyond the recent G20 dialogue, but the ideas are practical and feasible, not radical,” Zoellick wrote. “And it has clear advantages. It supplies a growth and monetary agenda that parallels the G20 financial sector reforms. It could be built upon prompt incremental actions, combined with credible steps to be pursued over time, allowing for political dialogue at home. And it could help rebuild public and market confidence, which will remain under stress in 2011.”
In 2009, former Russian President Dmitry Medvedev called on the establishment of a supranational currency that would replace the dollar in international trade. The philosophy behind the international currency would be a mixing of regional reserve currencies. To physically represent the call for a single, independent world currency, Medvedev had a prototypical coin pressed, which bears the words “unity in diversity.” Medvedev stated that the question of a supranational currency “concerns everyone now, even the mints.” The prototype “means they’re getting ready. I think it’s a good sign that we understand how interdependent we are.”
A system built around the dollar
It may be this interdependence that is at the heart of the dissatisfaction with the dollar. Prior to 1944, the pound sterling was the global reserve currency. After World War II, it was agreed that the international financial system should be based on an agreement that came to be known as the Bretton Woods system. The International Monetary Fund was established and the world’s economies were tied to the dollar, which — in return — was pegged to the price of gold.
At the end of the Second World War, the United States controlled more than half of the world’s gold supply, and with massive American investment globally through the Marshall Plan, this proposition seemed assured. But as Germany and Japan recovered, and as France, England and Italy rebuilt their infrastructures, the United States found its share of the world’s economic output falling. By 1969, the U.S. share of world economic output was only 27 percent.
With the arrival of the Vietnam War, the U.S. formed a trade deficit and a deficit in balance-of-payments. There were more dollars in circulation than gold to back them. To resolve this potential economic collapse, President Richard Nixon de-pegged the dollar from the price of gold and instead pegged it to “faith in the American government.” This made the dollar “fiat” or free-floating, which in turn made the world’s other currencies free-floating. As many of the modern currency markets were designed around the dollar, the interconnectivity remained. For the typical nation-to-nation transaction — say, Mexico to Iceland — Mexican pesos must be converted to American dollars, which are converted to Icelandic króna, with American banks receiving transaction fees for each conversion.
Recent talks between Australia, New Zealand and China were aimed at allowing direct conversion of the Australian and New Zealand dollars to the Chinese yuan. This arrangement would exclude the United States from trade between the Oceanic nations and China — reducing trading costs and opening investment opportunities. This trend toward dollarless international trade exposes the United States to the possibility that it may have increased competition in selling its bonds and the possibility that private investment and trade to the United States will shrink.
But this may be a distant fear.
“If there is talk then there is viability,” John Curran, vice president of USForex, the American arm of one of the world’s largest foreign exchange companies, told Mint Press News in regard to the possibility that the dollar will be replaced as the world’s primary reserve currency. “The reality is at this stage it is nothing more than banter. There would need to be some sort of commitment by a larger number of G-20 countries to, at least, table discussions on the viability of replacing the U.S. dollar as the major reserve currency before it would get some legs. In reality, individual countries or groups of countries formed into coalitions like China, Australia and Argentina, along with their central banks, would end up adjusting their reserves according to their own timetable and preferences; so if it were to happen, it would be a slow moving unilateral move by those entities.”
“The U.S. dollar would obviously decline in value if it were to be reduced as a reserve currency,” Curran continued. “The reality is the markets are not expecting anything like this to occur any time soon.”
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