PBC's Proposal for International Monetary Reform

Governor Zhou Xiaochuan of the People’s Bank of China is proposing to reform the international monetary system through the creation of an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run.” He suggested that “special consideration should be given to giving the SDR a greater role. The SDR has the features and potential to act as a super-sovereign reserve currency.” The suggestion closely resembles my proposal for a “world currency unit (WCU)".

The WCU is just a standardized basket of market economy currencies that is weighted by GDP, but with the proviso that each of the constituent currency is indexed against the inflation of that economy. In a substantive sense, the WCU is an “index unit of account” that stands for a unit of real global purchasing power. Bonds denominated in the WCU would yield a real rate of return equal to the nominal rate.

Zhou proposed to expand the use of the SDR to cover international trade, commodities pricing, investment and corporate book-keeping international trade, commodities pricing, investment and corporate book-keeping. The WCU is exactly proposed for these purposes. As a unit of real purchasing power, it compels sovereign nations to repay in real terms what was owed in the first place. Inflating or depreciating away one’s debt becomes no longer feasible.

The WCU therefore promotes fiscal discipline. A currency that links with the WCU has the attractive benefit of very low inflation and thus is subject to very strict monetary discipline. To the extent that most currencies are depreciating in value on account of inflation, however, a country whose currency is tied to the WCU will suffer a loss of export competitiveness. For this reason I have proposed that countries that need some kind of peg tie their currencies to the WCU standard currency basket without indexing against inflation. Moreover, currencies that independently link with the standard currency basket will become linked together in a de facto currency area, even though they continue to have an independent existence.

Statistical evidence shows that higher real oil prices and commodity prices tend to follow dollar weakness. Quoting commodity prices in the WCU will promote stability in real commodity prices and should be helpful for global economic stability. Interested readers are invited to visit the WCU website for daily quotations of the WCU, examples of applications, as well as historical data.

Comments

[Steven Hansen:]

if a neutral currency is created, you still have to hedge big purchases or contracts where payout is long after signature. in fact, both parties may need to hedge. i see little advantage for international trade.

Mar 25 05:10 AM

[Lok Sang Ho:]

The key point is that countries that tie their currencies to the benchmark currency basket, with or without indexing against inflation, will be less influenced by exchange rate fluctuations caused by capital flow swings, which can be very damaging. I am not saying that all currencies can do this. Some currencies, particularly those from economies with greater financial market depth, should be allowed to float more freely, subject to monetary policy discretion. But other countries, those with shallower financial markets, can peg their currencies to the basket at levels that facilitate international trade.

Mar 25 09:28 AM

[Doc 224899:]

It is time for the US government to begin formulating a new foreign policy hinge to take the place of "dollar diplomacy", because "dollar diplomacy" will be even less effective when the dollar is no longer a global reserve currency.

If US currency will no longer be the global reserve currency, then the US government had better stop wasting time bickering about bonuses and micromanagement plans, and put on the big girl panties needed to address foreign policy.

It is unlikely that our dollar diplomacy foreign policy, based on attempts to bribe people who hate us into acting like they tolerate us, is going to carry us much farther, so it's time to look for a new approach. We should consider something other nations are likely to understand and react to in a predictable fashion, such as "We don't care what you believe or say. Do what we want or we'll bomb something you don't want to lose, and we'll use stealth technology so you can't pin it on us."

Too bad Hillary Clinton is our new Secretary of State. Just when the job became crucial we get a Secretary of State nobody else in the world trusts, whose credibility with foreign governments is limited, who alienates our own military with every breath she takes, who has inspired the majority of Americans to have an unshakable animosity for her, and who seems to have the troubling capacity to believe anything she finds it convenient to say.

China isn't talking about a "neutral" reserve currency. China is talking about a reserve currency that favors China, and that reduces the risk China incurs by holding US treasuries.

There were rumbles and murmers a month or two ago about a proposed Chinese+Russian currency at least partially backed by gold. We should direct our Federal Reserve to review its policies with respect to gold, to stop selling gold, and to buy more gold.

Mar 25 11:08 AM

[coreopsis:]

Out in the open at last --- hallelujah! We'll bomb them back into the Stone Ages! Thanks, 224899, for bringing the US Masterplan for Global Dominion (UMGD) into the public!


On Mar 25 11:08 AM User 224899 wrote:

> It is time for the US government to begin formulating a new foreign
> policy hinge to take the place of "dollar diplomacy", because "dollar
> diplomacy" will be even less effective when the dollar is no longer
> a global reserve currency.
>
> If US currency will no longer be the global reserve currency, then
> the US government had better stop wasting time bickering about bonuses
> and micromanagement plans, and put on the big girl panties needed
> to address foreign policy.
>
> It is unlikely that our dollar diplomacy foreign policy, based on
> attempts to bribe people who hate us into acting like they tolerate
> us, is going to carry us much farther, so it's time to look for a
> new approach. We should consider something other nations are likely
> to understand and react to in a predictable fashion, such as "We
> don't care what you believe or say. Do what we want or we'll bomb
> something you don't want to lose, and we'll use stealth technology
> so you can't pin it on us."
>
> Too bad Hillary Clinton is our new Secretary of State. Just when
> the job became crucial we get a Secretary of State nobody else in
> the world trusts, whose credibility with foreign governments is limited,
> who alienates our own military with every breath she takes, who has
> inspired the majority of Americans to have an unshakable animosity
> for her, and who seems to have the troubling capacity to believe
> anything she finds it convenient to say.
>
> China isn't talking about a "neutral" reserve currency. China is
> talking about a reserve currency that favors China, and that reduces
> the risk China incurs by holding US treasuries.
>
> There were rumbles and murmers a month or two ago about a proposed
> Chinese+Russian currency at least partially backed by gold. We should
> direct our Federal Reserve to review its policies with respect to
> gold, to stop selling gold, and to buy more gold.
>
>
>

Mar 25 12:01 PM

[ariosto:]

No fiat currency has ever survived the tides of history. Some
people in positions of power in our country, believe that currency
manipulation on a global scale, with America leading the pack,
will save the day and keep us in a preeminent position. Good luck!!!

Mar 25 04:54 PM