Save Us from the Dollar!

People are starting to buzz about a global reserve currency. Will it solve the world's problems? What will its ultimate effects be?

About a month ago, Russia declared that the world should have a new super-national currency to replace the U.S. dollar as the primary currency reserve. Just this week, China called for something similar, while the UN just got on board today.

Whatever the explicit reasoning behind this, the implicit reasoning is clear: other countries are getting sick and tired of being whiplashed by the US economy. When times are good, and the dollar is strong, everybody else gets a free ride on the stable-currency express. The problem, of course, is that if the US economy tanks, it takes everyone else down with it. You know what they say when the US economy sneezes...

Assuming that we're talking about a real currency (rather than just something neutral that helps facilitate trade, something which things like gold already do), that means that it's going to come with a real organization involved in real monetary policy. This is quite a bit to take on, and it's effects need to be thought through.

Firstly, will a single currency, sitting in reserve in all of the government's stockpiles, stop other nations from hurting when the US goes into recession? The answer, of course, is no. This economic recession, for example, was made global primarily by foreign investors buying bad financial products (like CDO's, or mortgage backed securities). When they went bust, so did the investors, including a lot of foreign banks. The particular country in which the risky investables were produced isn't important.

The effects on foreign lands were further greatly exacerbated when Americans, laden with fear and debt, stopped their orgy of consumption. Lack of imports by America destroyed most of the rest of the developed world, whose economies were heavily based on exports (mostly to America). So goes the developed world, so goes the rest. Countries all across Africa, South America, and Southeast Asia tanked as demand fell through the floor.

If the American government had some of it's cash reserves in a mythical global reserve currency, then the American government would be less effected by this. Of course, the American government barely imports things, and in any case it pales by comparison to private sector, consumer demands. This basic idea is also true of other governments. In fact, the only real place where a non-sovereign global reserve would do anything is to curb the fact that governments lost money when the dollar dropped compared to their currency. Of course, no national currency is going to have complete stability compared to a global reserve currency, so this problem will always happen. The problem, of course, is that it opens this problem to burn governments when the world has problems. This means that a calamity in Africa, say, would drag down the world currency, when little, if anything, would have happened if the government were holding dollars (the US government generally being unfazed by problems across most of the world). As such, a global reserve would be introducing new liability for no real gain.

Finally, we have to ask ourselves who gains and who looses in this reserve currency idea? If the reserve exchange rate was set too high (say, above the dollar), then developed countries would be okay (after all, the pound sterling isn't destroying Britain's economy). Less developed countries, on the other hand, would have to sacrifice years of GDP for just a small amount of currency. This means that it becomes more difficult to trade for anything, which means that people can less afford food and medicine. As well, it makes it cheaper for foreigners of the developed world to buy stuff from less developed countries. While this would seem good on the outset, we have to remember that while demand is going up because their money is so worthless, the system that increases the demand makes the money more worthless. In the end, poor countries work more to get less. While I'm not saying that a global reserve currency is advocated for reasons of economic imperialism, it can't have escaped everybody's notice that they can buy things like oil, diamonds, and slave-labor produced items for even cheaper than before.

Of course, if they set it too low, then there is problems with rampant inflation. If Rwanda is able to exchange one of it's currency for 10 reserve notes, then the United States will be able to purchase hundreds of trillions of them. Needless to say, inflation hitting a less developed nation's reserve currency would be disastrous, especially given that their national currencies tend to already suffer from this problem.

In the end, a global reserve currency would send a shock through world markets if they didn't set the level exactly right and it would then only serve to weaken the stability of global trade by removing the backing of the strongest economy on the planet and letting it float with the vagaries and liabilities of all countries. The US would still be able to drag other countries down, just like now, while at the same time the strength of the US wouldn't be able to single-handedly save the day when things take a turn for the worse somewhere else on the globe.