Heads Up on the Dollar Today: The World's Reserve Currency Is Changing

The U.N. Commission of Experts on International Financial Reform, a specialist advisory committee that includes representatives from the U.S. government, will advise today that the world should begin to move away from the U.S. dollar as the world's sole reserve currency. They will suggest either an international currency unit based on several countries' currencies, including the dollar (their preferred alternative), or a currency based on the Special Drawing Rights issued by the International Monetary Fund.

Their stated reason will be that having the dollar as THE reserve currency unfairly burdens American policymakers at a time they are trying to deal with huge financial problems. Unfortunately, both Fed Chairman Bernanke and Treasury Secretary Geithner have made comments from time to time that gives the U.N. Commission cover for this position. Both Bernanke and Geithner have pointed out that if every other country is going to save in dollars, the U.S. has to run a deficit in dollars.

Avinash Persaud is a currency specialist and a member of the panel of experts. He is a former currency chief at JPMorgan. Here's a video of him at the Reuters 2009 Funds Summit in Luxembourg last week.

Their actual reason for doing this is distrust and anger at the financial mess the U.S. has foisted on the rest of the world, plus a deep fear in China, Japan, the Middle East and Russia that we will simply inflate away the value of the huge amount of Treasury debt they hold. I think that is Bernanke's unspoken plan, so they are right to worry about it.

To the extent the UN Commission has any special knowledge of the situation, it also may be true that things are much worse than the U.S. government is letting on. John Mauldin recently said the government's attitude towards the voters can be summed up by Jack Nicholson's line in A Few Good Men: “You can't handle the truth!” I disagree; I don't believe the government has any special knowledge at all. I think they are so out of touch that they really have little understanding about what is going on. But that's a discussion for another day.

The UN Commission seems to think this is the moment that the world can orchestrate a managed, relatively pain-free withdrawal of the dollar as the world's reserve currency. They see the alternative as a free-for-all withdrawal from U.S. assets as our major creditors dump both dollars and Treasuries. That could cause a severe run on the dollar and lead to even worse economic conditions for Americans, probably causing hyperinflation and global destabilization.

The presentation of their report today may give the dollar quite a hit yet be very good for stocks. I know this is counter-intuitive, but inflation is good for asset values and bad for debt values, so while some foreigners may sell all U.S. assets, most will just sell Treasuries and buy stocks. More details should come out at the G20 Summit in London in April.

Changing the reserve status of the dollar would have widespread effects on:

The Dollar – The value of the dollar will slide, perhaps by 20% against other currencies and 40% or more against gold and other commodities. That's good for U.S. exports, but bad for Main Street America. Any slip-up and hyperinflation becomes a real possibility.

At the same time, regional currencies similar to the euro will spring up that are exchangeable into the world currency, but give the regions some autonomy – under the “benign” guidance of the most powerful country. The Middle East and China have indicated they are ready to introduce regional currencies based on the khaleeji and yuan respectively, and Russia would be eager to use the rouble as a regional reserve asset that would give them more control over the former USSR countries.

Any currency like the Swiss franc or pound sterling that is not part of a regional currency will be left out and suffer.

The dollar may have a future in a North American or even North and South American regional reserve asset.

Fiscal and Monetary Policy – The U.S. government will have less economic leeway to deal with the current financial mess, because excess Federal debt creation will lead immediately to a lower dollar and higher imported inflation.

Longer term, the government will have to find another way to pay its debts than just selling Treasuries to the Fed. Most likely, they will have no choice but to tax U.S. citizens and businesses more heavily.

The Bond Market – Treasury bond yields will start rising immediately, as the Bernanke Fed becomes the only buyer. If the dollar really does lose its reserve currency status, Bernanke's plan to print whatever money it takes will be thwarted.

The Stock Market – In spite of weak demand for physical goods, the obvious inflationary implications of losing the dollar's reserve status would spark a major asset allocation shift from bonds to stocks and other assets.

Commodities – The price of gold and silver will go up as they are used more as a currency asset, competitive with the world and regional currencies. The price of oil and all other internationally traded commodities will go up in most currencies, and go up a lot in US dollars.

Society – American lifestyles and financial habits will be forced to change radically in a world where we have to pay as we go. Longer term, economic power and wealth will shift from the West to the East and, to a lesser extent, the Middle East.

Comments

[bluesmoke:]

Good assessment. Thanks.

Mar 25 09:37 AM

[Schneidehouse:]

It isn't going to happen. You can't force a "World Reserve Currency", it happens on its own. They can talk all they want, but there won't be ANY change any time soon.

Mar 25 09:39 AM

[kelm:]

I think this is an excellent article and the authors analysis of the impacts on the US markets and people are spot-on. Frankly, if we were not the major (though we are not THE only reserve currency) the US would have been forced by the markets to run a much tighter fiscal sip in the past decades than we have run. many will look at this proposal as a means for countries who are ideologically or economically in opposition to us to gain greater influence in the world. It is true they will but it is also true that they are to a large degree at our economic and financial mercy now. Countries who maintain a currency with reserve status have a responsibility to maintain a strong and stable currency and an economy backing it up. We have been somewhat lacking of late on the fiscal discipline side. So frankly, I can;t fault them for saying "something needs to change".

Generating an international standard currency that would be used by governments, institutions, business, and commodities is not far fetched. The old ECU was such a construct. You couldn't go to a bank and withdraw ECUs but if you were an international business you could perform transactions in it. It is also not far fetched to think that commodities may become part of that basket potentially leading to an upward re-valuation of gold.

Here is the paper from the Chinese gentleman that is being quoted - a well written read.

www.pbc.gov.cn/english...

Again, good article.

Mar 25 09:53 AM

[Morrison Bo...:]

The world should be grateful to China and to the U.N. Commission on Finance Reform for leading the way to a Single Global Currency, which necessariy will be managed by a Global Central Bank within a Global Monetary Union. This next global currency will not be the responsibility of just one country. What is needed now is international recognition of those goals, and research and planning to achieve them.
The success of the euro shows that monetary union is the best way to ensure monetary stability. The primary problem with the euro and currencies of other monetary unions is that they still must co-exist within the international multi-currency system itself where the value of those common currencies must still fluctuate in value against each other.
If 16 countries can use the same currency, why not 192?
In addition to eliminating currency risk, the use of a Single Global
Currency would eliminate the current foreign exchange trading expense of $400 billion annually, eliminate current account imbalances, eliminate the need for foreign exchange reserves (now totalling more than $3 trillion); and bring other benefits worth trillions.
The Single Global Currency Assn. (singleglobalcurrency.org) promotes the implementation of a Single Global Currency by 2024, the 80th anniversary of the 1944 conference. That’s only 16 years away.
The world is moving toward a Single Global Currency through the
expansion of monetary unions in the Caribbean, Europe and West Africa, and the creation of monetary unions in Africa, Asia, the Middle East, and North and South America. Another route is through international monetary conferences proposals and agreements, such as were seen at Bretton Woods.
The challenge now is to reach that goal planfully, as soon as possible with as little cost and as few crises as possible.
See the book, "The Single Global Currency - Common Cents for the World."
Morrison Bonpasse
Single Global Currency Assn.
Newcastle, Maine, United States

Mar 25 10:34 AM

[DiggerUK:]

I feel the Chinese are saying that the world is losing confidence in the stability of USD as number one reserve currency.

It was under the umbrella of the IMF at Bretton Woods following WW2 that the USD was established as main world reserve currency.

The Chinese are talking about the IMF developing "Bretton Woods 2" in my opinion.

Would love to know what Hilary Clinton chatted about over her fortune cookies when she visited the Chinese recently !

Mar 25 11:32 AM

[Michael Murphy:]

Thanks for your comments.
Schneidehouse - there's no "force" to it. This is a heavyweight committee with U.S. participation. The Chairman of the Commission of Experts is an American, Dr. Joseph Stiglitz, a professor at Columbia and the 2001 winner of the Nobel Prize in Economics. He was formerly the Senior Vice President and Chief Economist of the World Bank.

Other Americans on the Committee:
Robert Johnson, Former Chief Economist of the US Senate Banking Committee and former Senior Economist of the U.S. Senate Budget Committee. Former managing director at Soros Fund Management. Member of the Board of Directors of the Economic Policy Institute and the Institute for America's Future.

Jan Kregel - Former UNDESA senior staff member, now Senior Scholar, Levy Economics Institute of Bard College and Distinguished Research Professor, University of Missouri, Kansas City.

Other key members:
Andrei Bougrov (Russia) Managing Director and member of the Board of Directors of the Interros Company. Former Principal Resident Representative of Russia, Executive Director and member of the Board of Directors of the International Bank for Reconstruction and Development.

Charles A. E. Goodhart (UK) Norman Sosnow Professor of Banking and Finance Emeritus, London School of Economics. Former Chief Advisor to the Bank of England and member of its Monetary Policy Committee.

Eisuke Sakakibara (Japan) Former Vice Minister of Finance for International Affairs. Currently Professor at Waseda University, Tokyo.

Yu Yongding (China) Director, Institute of World Economics and Politics, Chinese Academy of Social Sciences. Former Member of Monetary Policy Committee, People’s Bank of China.

I think Bernanke, Geithner and Obama signed off on the Committee's conclusions in advance of today's release. I'll have more on this on my website, NewWorldInvestor.com.

Mar 25 12:24 PM

[manya05:]

I do not see it happening that way. If the UN, a UN committee, the IMF, or any other international body comes out and says the dollar is no longer the reserve currency, use something else instead (a basket, or whatever), it will be the automatic kiss of death for whatever new currency they are trying to introduce. The dollar will stop being a reserve currency when, and only when, producers around the world start asking to be paid in currencies other than the dollar. I think it would make a lot of sense for countries to look at where do they import from, and request that their exports be paid in a basket that resembles their import universe. Of course you cannot get a perfect match, but governments can institute rules to try to force as close of a match as possible.

Mar 25 01:48 PM

[capt Brian:]

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Mar 25 09:19 PM

[capt Brian:]

I have never read so much before. The more I read the less I know. Geezo, Biology and math was much simpler than trying to boil down all the rhetoric coming from every [talking head] that has access to words.

What I cannot figure out is why no one seems to understand some simple solutions to all these global problems. For one thing, I have been taught, and have taught mine to save for a rainy day. Now, our government seems to be teaching us to spend, and our troubles will be over. Now really, does that make sense.

So, what do we really do. Hunker down. Admit our mistakes, whether they were criminal or oversights. I don't care if the liberal bosse who forced cheap mortgages down the throats of banks and allowed people to buy things that they could not afford.

Anyone would buy something they have always wanted if given it for free, and pay for it if you can.

I'm sorry. The only real answer is to let the bad stuff rot on the vine. Let the people who took on the debt either foreigners or domistics eat their broth they made in their cauldron.

If an ice cream store cannot control its expenses and spends more than it should, welcome to business in Pokeepsie... or [wherever]

If I can't make my car payment, the bank or lender comes and gets it with those odd folks with the nose rings, bouncer, and tow truck and film crew so we can watch it on TV...

If I can't produce cars and make a profit, then the workers should go look for another kind of work, the stockholders who took the risk and did not sell when they had a chance. Well very sorry, but go eat cake.

I bought some stocks and lost my A$$ and I didn't get a form from my broker spelling out now the other tax payers who did not lose money nor invest in a bad company or got out when the getting was good, would send me a check to bail me out. Somehow that never happened. BUT I guess many people who could not make payments for any reason found a way to get someone to pay them and feel sorry for them.

I have paid off my real estate, saved enough for retirement, and I am supposed to feel bad for those guys putting bolts in bumpers making $78 bucks an hour, with medical etc. and many other bennies that lil business owners don't have unless they pay for them themselves. Where is the savings those union people made while times were good? They didn't save for a rainy day. I DID!

I am tired of paying for people who lost money in stocks, no one paid me for nuttin' I didn't earn. I think it is time to say Americans, "HOLD THE PRESSES!"

There is a better way.... I already told you how in an earlier post and said no one would listen, and they haven't.

We are gonna be in deep doo doo if this continues,,, better do something correct and real soon to. If I were a thinking American, I would see the handwriting on the wall. Our enemies are finding a way to put us down,and we better move correctly. They cannot beat us militarily for now, but they sure can economically if we allow this poppy cock approach to getting things going again..

BEWARE AMERICA.. our enemies are rubbing their hands at our foolishness.... B E W A R E. Keep the dollar strong, save money, and if you think I am foolish, then buy yourself some real money... 'Cause if you don't do force us back to what America was made for, then you will be needing gold and silver to trade with
REAL SOON this is a good heads up to what may come if we don't grab victory from the jaws of defeat.

Mar 25 09:35 PM

[Bobby Rifle:]

Brian, autoworkers don't make $78/hour. That was fiction written by Corker, Shelby, etc. in their attempt to destroy the US auto industry for the benefit of the foreign automakers in the South.

Mar 25 11:41 PM

[munny:]

Bobby, the $78 per hour sounds high and probably is, but it it an amalgam of compensation which includes all employment costs, may include allocating vacation and time off pay over actual hours worked, employer FICA, health and disability insurance, retirement accrfuals for pension and healthcare. It adds up pretty fast.

Mar 26 02:44 AM