By Paul Kennedy

Those who snoop around the op-eds and letters pages and finance/currency sections of our more thoughtful news outlets (e.g., the Wall Street Journal, the Financial Times, The Economist) will, in recent weeks, have detected an interesting debate emerging: namely, a debate among bankers and economists regarding how our world will look should the U.S. dollar lose its peculiar status as the world's only reserve currency and become, instead, merely one of three such currencies, along with the euro and the renminbi. The debate was stirred again by a "thought piece" from The World Bank, released on May 17, about major shifts in the global economic balances, as a half-dozen developing countries (Brazil, Indonesia, South Korea, India, etc.) become the major "drivers" of global economic growth, and as financial exchanges between those countries lose a dependency on the U.S. dollar as the currency of last resort and move towards at least a tri-reserve-currency regime. As the Financial Times suggested on that same day, the age of dollar primacy is coming to an end.

This debate will no doubt will get a further stimulus from a special feature in The Wall Street Journal of June 2 (10 articles, no less!) on the rise of China's financial muscle, suggesting that, with the steady appreciation of the value of the yuan (renminbi) and China's enormous capital surpluses, it may attain a reserve-currency status sooner rather than later. It will certainly get more attention after the Moody's ratings agency cautioned on June 2 that it may soon downgrade the United States government's credit rating if it does not get its colossal deficits in better order. This led, predictably but sadly, to the Republicans' knee-jerk attack upon the Obama administration for failing to cut federal spending, and Democrats' charges that most of the deficit had been caused by the faulty tax-and-spend policies of Republican governments.

The whole debate is sophomoric, and misses the larger points: The United States' credit has come into question, a lowered rating would mean higher interest rates (a horrible time for that), and America may be losing its exceptionalism and may be increasingly subject to the harsh credit tests under which all other nations and currencies labor. It is not a pretty picture.

Let us, for the moment, have a willing suspension of disbelief about whether this circa-2025 world of three equally powerful reserve currencies will actually materialize. One can easily get a headache at reading too many pieces by shrill pundits who "prove" that the greenback will maintain an impregnable position, because of America's special hard-power position in the world, because of the role of the dollar as a safe haven in global storms, because of the unique prestige of the Fed, and all such accompanying arguments; and because -- a very hard nut to digest -- the present deficits will steadily, even smoothly, disappear.

Let us also suspend judgment upon the truly awful and stupid situation that the European Union has got itself into because of its incoherent policies concerning the amazing fiscal deficiencies of some of its more feckless member states. Perhaps it will, as the World Bank thinks, emerge stronger in the future because of its sheer heft in the global trading and manufacturing system. And perhaps we can forget all the problems (many of them being ably handled by Beijing) that face the renminbi's chances of being a fully tradable global reserve currency. Let's just assume, for sake of the argument, that by 2025, governments, national banks, private banks, currency traders, multinational corporations, oil companies and private individuals inhabit a world of more than one reserve currency in which to place one's own cash reserves.

What then? What follows has to be tentative and theoretical, but it has the legitimate purpose of asking readers to imagine what a tri-reserve-currency world would look like. The transition would surely not be without fiscal turbulences, for there is no case in recorded history where the international system moves from one structure to another in a smooth passing-the-baton way, and without winners and losers. Even the assumed winners -- the euro and the renminbi, with their newly enhanced status -- may be losers in some ways, as they grapple with certain international responsibilities shouldered by the Bank of England for a century and by the U.S. Treasury and Federal Reserve for close to 70 years.

The big winners here would be the traders, those nifty and hard-hearted operators in today's borderless world who have no national loyalties but who spend every second of the day looking for marginal advantage. They have all but destroyed any rationality to the commodities markets (you don't actually buy copper futures because you produce copper wire; you buy it to sell the next day at a 15 percent profit), they can trade against a national currency to a deleterious extent, and they can send global shipping prices up and down to an alarming degree. What a field day they will have when there are three global reserve currencies to play with.

Moreover, wouldn't sensible managers of the Dubai sovereign wealth fund want to be less dependent on a single currency? Wouldn't the Norwegian state employees' pension fund? Wouldn't another Russian billionaire? Why not spread your bets and distribute your eggs into more than one basket? After all, by far the world's three largest economies by 2025 will be the United States, the EU and China -- almost equal, by various estimates -- so why should one of them shoulder the burden of having the only reserve currency? Already, only about 61 percent of foreign reserves are denominated in dollars, and it drops each year. The writing is on the wall, as these pundits of the future are saying.

If all this happens by 2025, or happens 10 years later, the consequences for the United States are colossal. Perhaps it will be a relief not to carry the reserve-currency burden, staggering like some weary Titan. But the transition will come at a cost. Gone will be the days when America could simply find its way out of colossal debts by printing even more dollars, as no other country could. The rest of the world would by then have other options, and Moody's and its sister credit-rating agencies could keep downgrading America, turning it into a normal country that might -- horrors -- have to adopt the same good-housekeeping rules regarding taxes, spending and deficits as Germany or Switzerland. We might also expect much more volatile changes in the value of the dollar internationally, as the British experienced since the 1950s, with great uncertainty for American export industries. (Indeed, American multinational companies may be among the quickest to go to a tri-reserve-currency system, for how otherwise could they survive?)

This will not be an easy ride, and the blatant inability of American politicians to think strategically may well hasten this new, unstable and perhaps unfriendly world order.

In sum, these rather obscure and technical articles in the financial press may carry a lot more significance for the future of our planet than all the hype about the latest iPod. For the latter is simply an enabling tool. But currencies are what make the world go around.


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