Listen to this article
Athenian owls, Roman denarii, British sovereigns, US dollars. There have been many pseudo reserve currencies down the ages. Now the governor of the People’s Bank of China has called for a new global currency “disconnected from individual nations”. Russia, too, wants to move away from a world dominated by the dollar. Kazakh president Nursultan Nazarbayev suggests such a currency could be called the acmetal – an amalgam of “acme” and “capital”.
But is there a case for one? In theory, yes. (Although no one was banging the table for change when emerging growth rates were still being powered by deliberately undervalued domestic currencies.) The reserve currency status of the dollar helped to create nasty global imbalances – one of the main culprits of the current downturn. As China, for example, recycled export earnings back into dollar-denominated assets, the US could happily run profligate trade deficits with impunity. That helped push up the price of US assets, particularly house prices.
Now surplus countries are stuck. They cannot diversify fast enough and a rapid sell down of US assets would destroy their portfolios. Not only that, global central banks holding about two thirds of their reserves in dollars are hostage to the Obama administration. Unsurprisingly, huge budget deficits and the Federal Reserve’s leap into quantitative easing have foreigners fretting over the longer term health of the dollar.
Theory is one thing, however. In reality, currencies live and breathe more than just short-term economic air. The two other life forces for a reserve currency are sovereign credibility and power. China, Russia and India simply do not have long enough economic track records to justify backing a reserve currency. Find a single investor in this crisis that has panicked out of dollars into roubles. Of course, if China one day emerges as the dominant economic and military power, the status quo will change. Until then, investors cannot be rushed.
The Lex column is now on Twitter. To receive our daily line-up and links to Lex notes via Twitter, click here
Lex is the FT’s agenda-setting column, giving an authoritative view on corporate and financial matters. It is also one of the few parts of FT.com available only to Premium subscribers. This article is provided for free as an example. A Premium subscription gives you unlimited access to all FT content, including all Lex articles and the FT mobile Newsreader.
If you have questions or comments, please e-mail firstname.lastname@example.org or call:
US and Canada: +1 800 628 8088
Asia: +852 2905 5555
UK, Europe and rest of the world: +44 (0)20 7775 6248