Will 2008 Wall Street meltdown kill the dollar standard?
Published:Friday | May 6, 2011 | 12:00 AM
Wilberne Persaud, Columnist
In the 1960s, Charles de Gaulle's finance minister, Valéry Giscard d'Estaing, spoke of the fact that the US dollar had become the world's currency as providing the United States with an "exorbitant privilege".
The French President had made this a central issue for France at that time. Yet, despite numerous press conferences and critical statements explaining this asymmetric financial system, the dollar continued as the world's preferred unit of exchange.
The dollar features in 85 per cent of all foreign-exchange transactions worldwide. Oil is priced in dollars and the world's major commodity exchanges are priced in dollars.
Dollar holdings constitute in excess of 60 per cent of central banks' reserves and perhaps half of the stock of global debt securities.
About three-quarter of all US$100 bills circulate outside continental United States. These facts attest to the dominance of the dollar in international commerce - including illicit activities. Valéry Giscard d'Estaing was correct in his reference to the dollar standard as providing an "exorbitant privilege" to the US.
There are some simple reasons for this. Whereas the US Bureau of Engraving and Printing spends but a few cents to produce each US$100 bill, foreigners must give up US$100 worth of real resources - actual goods and services - to hold one.
Additionally, foreign firms, banks and, of course, central banks hold not only currency but also bonds of the US Treasury - central banks hold about US$5 trillion of such bonds. China now counts billions of dollar-denominated financial instruments among its reserves.
Come the upheaval, the once-in-a-century or 'Black Swan event' - Wall Street meltdown of September 2008 following the Lehman Brothers collapse - and a hurried bailout of AIG, Citi and other household names of big finance cauterises the bleeding.
Nevertheless, markets, or rather the people who operate in markets, continue to exhibit symptoms of the jitters. They worry about a US Congress in an election year dithering around problems of rising debt.
The Tea Party and diverse right-wing fringe elements can be as worrisome as the so-called spendthrift democrats, particularly as there is no IMF to intervene with a standby arrangement. So people begin hedging their bets, moving to gold, shifting investments to countries whose fortunes they expect will rise as that of the US declines.
Do we have here validation of the view some hold that the US is on a path of inexorable decline? China, according to the IMF, shall surpass the US as the world's largest economy not at 2050, or there about as previously predicted. The magic date is closer - 2016.
What is the meaning of this? Should America be worried? Should we? Yes, America should worry but not in the way the jingoistic group has begun to, and surely shall continue, touting the US as benign whereas China is likely to be a malignant power; that the US should be wary and prepare militarily.
Surely, this is hogwash. The real issue is for the US to foster policies that give a shot in the arm to its legendary innovative capacity.
With respect specifically to the dollar, it is entirely against China's interest to wish for, or do anything to precipitate fallout in dollar value. They stand to lose the most of any one country.
The Chinese have never been known for stupidity.
Second and perhaps more importantly, it is entirely possible that we are embarking on a multipolar financial architecture, if not by design then certainly by practice, that shall become reality as international monetary arrangements catch up.
There is no reason that the euro, the Chinese renminbi, as well as the dollar could not share the task of providing global liquidity centred on emerging trading and investment blocs of the global economy.
It is important to remember the currency of the dominant economy does not confer power; rather, the relationship goes the other way.
Economic power and global reach render the dominant economy's currency supreme. So as the British lion lost its capacity to roar, sterling lost its grip to the dollar. Keynes tried to avoid this with his plan for a world currency. He failed.
There shall be no world currency in the near future, and the dollar standard shall not disappear.
It's just that there are likely to be others sharing the stage. To what degree, we do not know and cannot say.