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The New World Currency – Coming Soon!

Obama says no, but he might not be able to stop it…

This morning in the New York Times there was a two piece opinion section on the precarious position of the dollar… check them out here and here. They talk about how the dollar is the world’s reserve currency, which gives us all kinds of perks (like allowing us to maintain our crazy budget and trade deficits and such) and keeps our economy in a dominant world position.

A lot of people are worried that China would switch over their Renminbi (terrible name by the way), devalue the dollar, and get the rest of the world to cash out and buy Chinese. That means China goes from potential kinda already superpower to dominant superpower. While that’s certainly a possibility, I think it’s actually more likely that they’ll use their powerful position to build a new world financial order….

It sounds farfetched, but last year I was at a conference in Siena (I described it in this post) that brought together some heavy hitters from the hardcore right wing. It was hosted by Robert Mundell, Nobel Prize winner, co-inventor of supply side economics (gotta love the voodoo) and most importantly, “Father of the Euro”. It was pretty interesting – they sat around a table (in a castle btw) and talked about the causes of the global financial crisis (this was July, so the @#[email protected] hadn’t hit the fan quite yet). Mundell’s argument seemed to be that mortgages and oil and regulation aside, the real problem with the global financial system is currency speculation and the fact that we left the gold standard in the 70s. His prescription? A world currency.

And he has a plan.

After the Jump – The Plan

Just about everyone at the conference – about thirty people – economists, world finance ministers, and other very rich people – seemed mainly in agreement. World Currency here we come! It was odd, the question didn’t seem to be whether it should happen, but when it should happen, and how it should be done. And they’ve got some experience in this: when Mundell was helping to organize the European Union in the 90’s, he had this whole world currency thing in mind already. His logic was that no world superpower would willingly give up their currency position, especially not the US, so he was going to have to set up a global environment that balanced economic superpowers against each other so they would all agree to split the difference and join up. And presto! we get the Euro pitted against the Dollar in the West, and then the Yen in Japan can hold down the East, since China has been pegged to the dollar for years.

This puts China in a great negotiating position, because the Renminbi is the dollar’s greatest potential foe, and all the have to do is switch over their reserves, screw us, and take over the world economy. They don’t want to do it violently, cause our consumer culture fuels their industry, so they take the power out of our hands and put it into an international central bank.

And the craziest part of all is that they want to do this quickly – Mundell said that there would/should be a conference in 2010 in Shanghai that would get world leaders together to make this happen. They seemed very definite about this – it was sort of like the end of Wet Hot American Summer when everybody’s planning the ten year reunion (why don’t we say 9:30 and make it your beeswax to be here at 9:30!)

So then the financial crisis hits and I assume that world currency restructuring is no longer in the cards. But lo and behold, guess who’s starting to make some noise? China! Check it out: Wall Street Journal and The Gaurdian in March, and even last September in Reuters … They want it, and if they’re willing to push hard, who’s gonna stop em?

I’m actually still a little unclear on the economics of whether it’s a good idea or not (any comments on the subject would be very helpful) but I do know that getting rid of floating exchange rates could expose us to some serious instability. Plus, a world currency would require us to have an international central bank – sort of like the World Bank and the IMF combined and on major steroids. And who would run it? Cause it would be pretty damn powerful, and probably not democratically elected…

Wikipedia has a great analogy for the instability problem:

“Water carried in a biscuit baking pan will rapidly flow from high points to the lowest point, causing a sudden uncontrollable imbalance that forces the high points higher and the low point lower. The same quantity of water in cups on the biscuit pan will have no such inherent instability. Hegemonic currencies, free of regional limitations, flow rapidly away from high risk areas exacerbating their problems disproportionately to original causes. Such events are very damaging to the prosperity of the affected area. See for example the events leading up to, and subsequence consequences of, the Corralito in Argentina. For those with the power to do so, predicting, or even causing, such capital flights can lead to immensely profitable speculations; so profitable indeed that their likelihood of occurrence increases in proportion with the scale of the currency involved.”

Sounds a little scary if you ask me, and certainly gameable by all these guys who got us into the current mess.

Hopefully, the fight isn’t over already… because I think the general public (world general public I guess – strange concept) should have a say in it…

For now, here’s some more stuff on it:

Telegraph story about Geithner thinking it might be a good idea

Sorry Glen Beck – you should go ask your buddy John Rutledge at Fox News about this thing (he was at the Siena conference and could definitely be classified as part of the new world order, if there is one) instead of somehow conflating it with Obama and the mortgage bailouts…

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