What China’s Push for An Alternative World Reserve Currency Means

Washington’s Blog
Sunday, June 28, 2009

Yesterday, after China called for a super-sovereign currency, the dollar slid as investors started seeing the writing on the wall. Specifically, the People’s Bank of China said the International Monetary Fund should manage part of members’ foreign-exchange reserves. See this.

“To prevent the deficiencies in the main reserve currency, there’s a need to create a new currency that’s delinked from the economies of the issuers,” the People’s Bank of China (PBOC) said in a review of the economy in 2008 released today. In March, the PBOC had urged the IMF to expand operations of its Special Drawing Rights currency (SDRs) and move toward a “super-sovereign reserve currency.”

The PBOC argues that the frequency and intensity of financial crises following the collapse of the Bretton Woods system suggests costs of the dollar-based system may have exceeded its benefits and that that the SDR could take on a key global role.

The PBOC statement comes a day after a top Communist Party research chief said that China should buy gold and U.S. real estate rather than Treasurys.

American officials and talking heads have attempted to downplay the irreversible trend of the dollar fading as the world’s reserve currency. They have argued that China is in a dollar trap. With trillions in dollars, they argue, China cannot let the dollar tank.

But as Marc Faber has pointed out, 2 trillion dollars in reserves isn’t really that much for a country with as many people as China has. And China long ago signaled that it was gradually moving out of dollars. The signals came in the form of (1) China moving out of long treasuries and into treasuries with a duration of 3 years or less, and (2) China using its reserves to buy commodities, instead of more dollars.

Nouriel Roubini argues:

The process that will lead – in the medium-long term – to a challenge of the US dollar as the major global reserve currency has started. The US creditors – the BRICs, the Gulf states and others – are becoming increasingly alarmed that the US will deal with its unsustainable fiscal path via inflation and debasement of the value of the dollar via depreciation. So they will not sit idly waiting for this to happen: they are already diversifying into gold, into resources (as China purchases mines and energy, mineral and commodity resources all over the world).

And the senior economist at the Federal Reserve Bank of Cleveland argued last month:

While SDRs may be declared an official international reserve asset today, they are not likely to become the world’s key international currency anytime soon.

In other words, as explained by Nouriel Roubini, the Fed economist he believes that the SDR may be declared the world reserve currency, but the current usefulness of the dollar as a highly liquid, international medium of exchange means that it won’t be replaced in the near future as the key unit of international trade.

Would the SDR be a Better Reserve Currency than the Dollar?

Given the IMF’s history of imposing draconian, destructive and anti-democratic measures on third world countries, I’m not sure that appointing the IMF as the issuer of the world reserve currency is a great idea.

But to understand the big picture on SDRs, dollars and other potential reserve currencies and mediums of exchange, we have to take a step back and look at what money really is.

It should be remembered that money does not itself have to be a valuable commodity. Obviously, gold is a valuable commodity and can serve as money. And, in many ways, having a gold-backed currency is better than having a fiat currency.

But in its most essential form, currency is solely a way to keep track of the exchange of goods and services. In other words, money is simply a way of keeping tally, a scoreboard, a record keeping system.

As such, money could be pegged to just about anything objective, such as the consumer price index (as long as it included food and energy) or – as China has proposed – a basket of 30 or so commodities.

In fact, there is no need for the U.S. or any other country to cede its sovereignty to a group of international bankers. On the other hand, there is no need for the rest of the world to be beholden to the dictatorial one-sidedness inherent in using the dollar as the world’s reserve currency.

Instead, money can be returned to its most minimalist function of being a neutral yardstick to measure goods and services exchanged. In other words, instead of being an instrument of financial warfare and oppression, money can return to its function simply as an objective tally of who owes who what for the good and services they have provided.

As Ellen Brown explains in her book Web of Debt (as summarized by Stephen Lendman):

A global currency is another proposal – one that creates more problems than it solves. The world “is not one nation or one region,” and who’s to be boss and in charge. Further, if all governments issued the same currency, “the global money supply (would be) vulnerable to irresponsible governments (issuing) too much.” Strong ones would end up dominating the weak, and national sovereignty would be weakened, perhaps ended. A “fully dollarized” world is a prescription for trouble enough to make scarcity “the order of the day.”

Rather than one currency, “a single global yardstick” is needed “against which governments can value their currencies – some independent measure (by) which merchants can negotiate their contracts and be sure of getting what they bargained for”…

National currencies “would become what (they) should have been all along – (contracts) or promise(s) to return value in goods and services of a certain worth, as measured against a universally recognized yardstick for determining value.”

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11 Responses to “What China’s Push for An Alternative World Reserve Currency Means”

AntiLieGuy Says:
June 28th, 2009 at 8:03 am
On 10-10-09 the us/israel are going to do another false flag with the nuke they stole in ‘07. On this same day, Russia, China and the SCO are going to completely destroy America. Russia has threatened to nuke us over Iran for 2 years now and they have put the hardware in place to do it.

This is the war of Armageddon and you can know that it is now because of all the chemtrails sprayed every day to hide the dign in the heavens, our 10th planet. This is also the reason the govt is now classifying all asteroid events secret.

News and sources here:
http://www.docstoc.com/docs/6519605/WarNews

pitofdoom Reply:
June 28th, 2009 at 9:38 am
At best Magog, then the Tribulation.

Brandon Reply:
June 28th, 2009 at 10:13 pm
Come on dude really? You need to stop being so paranoid. The world isn’t going to end, no one is getting nuked. And russia does not have the hardware to nuke the US anymore. Didn’t you know we can shoot down ballistic missiles?

Artyom Reply:
June 29th, 2009 at 6:49 am
Your reply is funny, but Russia only has a desire to protect itself so there won’t be a nuclear war anyway. No hardware! HAHAHAHAH!!!! XD so funny… ))))))))
TE Says:
June 28th, 2009 at 8:27 am
The Chinese dollar bashing and world currency proposals are just a smoke screen for a stealth devaluation by China against non-dollar pegged countries. The Chinese are willing to take a hit in the short run on the value of their dollar fixed income assets in order to spur exports and create jobs. Nothing concentrates the mind of party members like millions of angry unemployed people roaming the streets and countryside. They know in the long run that the dollar will bounce back.

I believe that this plot was hatched in conjunction with the US Chamber of Commerce when they flew to China after Obama was elected to convince the Chinese not to devalue the RMB against the dollar. It appears that a consensus was made for China to bash the dollar which would give them an indirect devaluation against non-dollar pegged countries AND give the US a stealth devaluation AND make the Obama administration look BAD for having a collapsing currency and runaway gasoline prices (when the dollar goes down, oil goes up in the US, Obama’s popularity goes down). Sort of a win, win, win for the china, chamber of commerce/multinational, Republican Party Junto.

The commodity exporting countries are going along with this because a weak dollar pushes up commodity prices. The Japanese know what is going on and have tried to talk the dollar up. The Europeans are oblivious to what is happening, perhaps blinded by glee with the US bashing. This whole thing is one slick trick.

pitofdoom Reply:
June 28th, 2009 at 9:37 am
Dollar will bounce back based on what?

Oblivion Reply:
June 28th, 2009 at 12:17 pm
“Dollar will bounce back based on what?”

It won’t. America’s troubles have barely begun.
they're here Says:
June 28th, 2009 at 8:34 am
Check out page 4 on the USPS web site. The world currency is already here:

http://74.125.47.132/search?q=.....=firefox-a

Madman Reply:
June 28th, 2009 at 2:36 pm
US dollar is .6259 of a SDR.
Interesting, so an SDR is worth 1.6 something another of the US dollar… ?
Funny that we’d see this reflected in our shipping rates first… to get us used to the idea of an SDR.
The dollar won’t last too much longer, if a company like UPS is accepting SDR’s, it’s only a matter of time, before the whole world abandons the dollar, or worse, prices reflect the SDR in walmart. Think of this, the dollar store would now be the SDR store, and that dollar item, now cost 1.63 cents, a 63 % increase. How’s that for hyper inflation?

Artyom Reply:
June 29th, 2009 at 6:53 am
I think US will take a huge hit this August/September when the quarterly reports are released. All those WEEEEE consumers are happy and spending crap that gave artificial rises in the market will be blown apart once the reports come out. Add any new taxation to the mix and we can watch a new decline.
Do Logic Says:
June 29th, 2009 at 8:59 am
It means that China wants it’s currency to stay week relative to the dollar. It means that the last thing China wants is for Chinese citizens to have purchasing power. It means that the Chinese government is scared to death the rest of the world will stop buying poison toys and medicines from Chinese manufactures because it will cost less for Western companies to manufacture the poison toys and medicines.