STAFF NEWS & ANALYSIS
Ditching the Dollar at G20 Summit?
By Staff News & Analysis - September 26, 2009

The embattled US dollar is expected to come under scrutiny at a summit of developing and industrialized nations following China-led calls to review its role as a reserve currency. The dollar issue is bound to surface at the two-day meeting in Pittsburgh as US President Barack Obama and other leaders of the Group of 20 economies debate a new framework for tackling the so called global "economic imbalances" blamed for fuelling the latest financial crisis. "Though not clear how the plan would be enforced, it would involve measures such as the US cutting its deficits and saving more, China reducing its reliance on exports and Europe making structural changes to boost business investment," analysts at French bank Societe Generale said in a report. – AFP

Dominant Social Theme: The Chinese hope for common sense.

Free-Market Analysis: There are plenty of calls to get rid of the dollar as the world's reserve currency, and China has been leading the way because the Chinese hold so much American paper. Japan is another country that holds a good deal of American debt, and between them these two countries may hold close to US$1.5 trillion. These two countries along with much of the rest of the world are said to have come to the conclusion that the US dollar is being mishandled in the US, and that a new reserve currency must be created.

The new currency being contemplated is one that would be managed by the International Monetary Fund and would be based on a basket of currencies including the pound, yen and euro along with the dollar. While the IMF currency doesn't seem as if it would circulate on the street, it could be used by nations that needed to make large payments to each other that used to be denominated in dollars. Here's some more from the article:

What is baffling analysts is that a key UN agency — the United Nations Conference on Trade and Development, or UNCTAD — has joined the chorus of calls for a new reserve currency. An UNCTAD report this month endorsed a proposal that IMF-issued SDRs "could be used to settle international payments."

Until the current global economic crisis, SDRs issued by the IMF have been used by IMF member nation states "primarily as a reserve account to support international trade transactions, not as an alternative international currency available to settle international debt transactions in danger of default," said political scientist Jerome Corsi in "Red Alert," a global financial newsletter.

China, meanwhile, continues to flex its muscle. It has proposed that the G20 economies consider setting up an international wealth fund that would invest a portion of its members' current-account surpluses in developing economies.

"These comments reinforce their desire to diversify out of dollars and to encourage other nations to do so as well," said Kathy Lien, chief strategist for Global Forex Trading.

A few Chinese deals were recently seen accepting payment in the currency of the buyer rather than in dollars, especially with Brazil, which the Asian giant is wooing as a future oil supplier.

It is not baffling to us that the UN would propose SDR paper. The UN is a creature manufactured initially in the United States (a wealthy US family donated the land), and the IMF is controlled out of the US as well. While the dollar is world's reserve currency currently, if the dollar is swapped out for SDRs, even if only in certain situations, then the IMF would gain enormous clout worldwide. If one accepts that the Anglo-American axis is indeed intent on the creation of a more world-spanning governmental union, then it makes sense that certain international agencies gain additional credibility through the legitimization of alternative currencies.

What IS odd about the SDR proposal is that it carefully avoids backing SDRs by anything but other currencies. No basket of commodities, and certainly no gold or silver. We have pointed out that were countries really intent on creating an alternative currency all they would probably have to do is offer a currency backed by gold or silver or both. China's unhappiness with US profligacy will look far more serious were her leaders ever to announce that they were contemplating such a move.

Until China and other countries begin to seriously examine gold and silver-backed currency options (for monetary purposes, not just for diversification), we will continue to believe that the IMF option is mainly a political gambit. IMF money, were it ever recognized, provides that institution with enormous credibility. It further removes money from the hands of any specific group of citizens and puts it under the control of international agencies. It continues the process of severing the linkages between transactional money that was once dug out of the ground, and money that seems to have no relationship to its historical creation.

After Thoughts

The US dollar is the reserve currency because countries usually need it – per treaty – to buy oil. The US dollar is backed by the eroding industrial might of America, but also by America's enormous military strength. Neither of these two facts "on the ground" is going to change any time soon. Thus, if countries migrate toward an IMF dollar, it will be with the implicit cooperation of the US and its allies. The obvious solution to the crisis is a gold and silver backed dollar, but it does not seem to be part of the dialogue. For this reason among others we think the indignation over the dollar's erosion is in some sense of a political gambit aimed at accomplishing other goals.

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