U.S. leadership of the global financial system has been called into question by the global economic crisis. In the latest chapter of this ongoing story, China has proposed the creation of a new international reserve currency to replace the dollar. According to this report in The New York Times:
In another indication that China is growing increasingly concerned about holding huge dollar reserves, the head of its central bank has called for the eventual creation of a new international currency reserve to replace the dollar. In a paper released Monday, Zhou Xiaochuan, governor of the People’s Bank of China, said a new currency reserve system controlled by the International Monetary Fund could prove more stable and economically viable. A new system is necessary, he said, because the global economic crisis has revealed the “inherent vulnerabilities and systemic risks in the existing international monetary system.” While few analysts believe that the dollar will be replaced as the world’s dominant foreign exchange reserve anytime soon, the proposal suggests that China is preparing to assume a more influential role in the world. Russia recently made a similar proposal.
Though the Chinese statement notes that any eventual creation of a new reserve currency would take some time, and China will continue to buy U.S. Treasuries in the meantime, it’s clear that the long-term viability of the U.S. dollar as the cornerstone of the international financial system is now in doubt. Although I’m not an alarmist, our role as a steward of the international trading system has been so much a part of the U.S. role since WWII that I find it difficult to see this proposal as anything less than a watershed event in world affairs. True, nothing has happened yet, but the proposal has been made, China has framed the terms of the debate and the upcoming G20 meeting has now been turned into a referendum on U.S. economic leadership. A confidence vote on the U.S. dollar has been called and it will take some stunning diplomacy and quick success for the economic recovery program for Team Obama to turn this around.
