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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
This debate will no doubt will get a further stimulus from a special feature in
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
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
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
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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World - A World of Three Reserve Currencies -- Good or Bad? | Global Viewpoint