The Financial Times pointed out that the governor of the People's Bank of China (PBoC), Zhou Xiaochuan, has released a missive on the PBoC website suggesting measures reminiscent of those proposed by the UN and Stiglitz. However, China getting in the action would be the game-changer as I've suggested many, many times before. I suggest that you read the PBoC missive in its entirety even if the translation is not the best. The juicy parts I will excerpt here. This is the intro:
The outbreak of the current crisis and its spillover in the world confronted us with the long existing but still unanswered question--i.e., what kind of international reserve currency do we need to secure global financial stability and facilitate world economic growth, which was one of the purposes for establishing the IMF? There were various institutional arrangements in an attempt to find a solution, including the Silver Standard, the Gold Standard, the Gold Exchange Standard and the Bretton Woods system. The above issue, however, as the ongoing financial crisis demonstrates, is far from being solved, and has become even more severe due to the inherent weaknesses of the current international monetary system.After alluding to how the US keeps abusing the privilege of issuing the world's standard reserve currency such as Bernanke's various money for nothing gambits, Zhou geets to discussing the benefits of a true supranational reserve currency:
Theoretically, an international reserve currency should first be anchored to a stable benchmark and issued according to a clear set of rules, therefore to ensure orderly supply; second, its supply should be flexible enough to allow timely adjustment according to the changing demand; third, such adjustments should be disconnected from economic conditions and sovereign interests of any single country. The acceptance of credit-based national currencies as major international reserve currencies, as is the case in the current system, is a rare special case in history. The crisis called again for creative reform of the existing international monetary system towards an international reserve currency with a stable value, rule-based issuance and manageable supply, so as to achieve the objective of safeguarding global economic and financial stability.
A super-sovereign reserve currency not only eliminates the inherent risks of credit-based sovereign currency, but also makes it possible to manage global liquidity. A super-sovereign reserve currency managed by a global institution could be used to both create and control the global liquidity. And when a country's currency is no longer used as the yardstick for global trade and as the benchmark for other currencies, the exchange rate policy of the country would be far more effective in adjusting economic imbalances. This will significantly reduce the risks of a future crisis and enhance crisis management capability.Like yours truly, the PBoC guv'nor realizes that there are tough obstacles to getting this done. That is, the United States will not let its (waning) hegemony slip without a fight by letting an alternative currency be established as a store of value in providing reserve liquidity as well as a medium of exchange in settling world trade. From the Chinese perspective, broadening its portfolio is certainly desirable:
The reestablishment of a new and widely accepted reserve currency with a stable valuation benchmark may take a long time. The creation of an international currency unit, based on the Keynesian proposal, is a bold initiative that requires extraordinary political vision and courage. In the short run, the international community, particularly the IMF, should at least recognize and face up to the risks resulting from the existing system, conduct regular monitoring and assessment and issue timely early warnings.Here are the steps Zhou envisions if the SDR is to become a real alternative reserve currency as opposed to its current status as little-held unit of account:
(1) Set up a settlement system between the SDR and other currencies. Therefore, the SDR, which is now only used between governments and international institutions, could become a widely accepted means of payment in international trade and financial transactions.These are fine words; I hope they translate into action. I just hope that China will be willing to side with LDCs when push comes to shove as the US inevitably objects to reform of the IMF in a way that diminishes its influence over the organization. Remember, it still holds a "veto" due to it having over 15% of SDR holdings that are equivalent to votes at the IMF where an 85% majority is required to push changes through. If China really wants an alternative reserve currency to become a reality, it certainly should be willing to play a larger role in international institutions. It should also be willing to put Uncle Sam on debt rehab despite its outstanding reputation as a debt pusher. I feel chuffed for now; we may finally be getting somewhere. And the UN is nowhere in sight for this proposed solution.
(2) Actively promote the use of the SDR in international trade, commodities pricing, investment and corporate book-keeping. This will help enhance the role of the SDR, and will effectively reduce the fluctuation of prices of assets denominated in national currencies and related risks.
(3) Create financial assets denominated in the SDR to increase its appeal. The introduction of SDR-denominated securities, which is being studied by the IMF, will be a good start.
(4) Further improve the valuation and allocation of the SDR. The basket of currencies forming the basis for SDR valuation should be expanded to include currencies of all major economies, and the GDP may also be included as a weight. The allocation of the SDR can be shifted from a purely calculation-based system to one backed by real assets, such as a reserve pool, to further boost market confidence in its value.
China getting fed up with dollar debasement--who'd have thought of it? Nobody likes being played for a fool. Heck, it only took five or so years and a major financial calamity for China to get the message.