Thursday, March 26, 2009

New Global Currency Proposal: Good Diplomatic Theater but Bad Policy

From the Heritage:

Recently, both China and Russia have called for the replacement of the dollar as the international reserve currency of choice, suggesting use of IMF Special Drawing Rights (SDRs) instead. Don't rush to sell your greenbacks, however: The proposal has far more to do with the theater of international diplomacy than the workings of the world economy.

Even as he made the proposal, Chinese central banker Zhou Xiaochun acknowledged that it would require "extraordinary political vision and courage." That is diplomatic speak for "We know this is impossible." The fact that Zhou and his Russian counterpart in proposing the idea, Finance Minister Alexei Kudrin, placed the timeline for the change far in the future--30 years in the case of Kudrin--offers an additional strong clue that the proposal is politically motivated rather than intended to address a real and pressing economic problem.

For both Zhou and Kudrin, an attack on the dollar just before the G-20 economic summit is a great theatrical device with which to express displeasure at U.S. dominance of the international financial system. It is also a marker of their unhappiness with the ineffective U.S. approach to restoring world growth and protecting international trade and financial flows, sending a clear signal that they have no intention of rubber-stamping U.S. proposals at the summit. (more)

No comments: