A new super currency?

Monday, 6th April 2009 09:57 - by Didedo

There were interesting developments prior to last week’s G20 meeting. A growing number of countries have begun to question whether the United States Dollar should be the global reserve currency. This follows the Federal Reserve Bank’s decision to commence ‘quantitative easing’, which has caused concern to Central Banks around the globe who perhaps see the trillions they have invested in dollars in effect devalued, and who question the current ‘condition’ of the dollar. China planned to raise the issue of a new reserve currency at the G20 and this is supported by Russia and a number of other countries. Whether this will subsequently be dealt with separately from the G20 remains to be seen, however, it does raise an issue which I have been pondering (and have posted on the lse Chat section) which is whether the current monetary system suits today’s electronic age. Until I took up my recent forays into the stock market I had not really appreciated the importance of the dollar and the vast sums purchased by Central Banks. I understood that commodities were expressed in dollars, e.g. gold, but had not realised the impact of buying into such a commodity if, say, Sterling is your base currency. Put simply, exchange rate conversions and fluctuations have to be taken into account as well as the trend of Gold itself. The European Economic Community (EEC) tried to smooth exchange rate variances between its Member nations with the introduction of the Euro and a number of Middle Eastern ‘Gulf’ Countries have been trying, for some time, to develop a new currency union based on similar lines to the Euro. In fact, the deadline has just been extended as the Gulf Co-operation Council does not believe it will be possible to introduce it by the planned 2010 launch date. Consensus is always difficult and practicalities protract talks, so global consensus on a global currency may be tricky indeed. Some say that the ‘Gold Standard’ should be resurrected but is there enough Gold, I wonder? Would it be perceived as a backward step? Certainly, the price of Gold would rocket and some states are already beginning to buy up Gold. I hate to say this, as some of my cyber chums (for whom I have the utmost respect) are ‘Goldies’, but I am not sure how it would work in the long-term, although I can see a bubble forming with Gold if the current milieu continues. Russia is one of the exponents of an International Monetary Fund (IMF) ‘Global currency’ or a ‘Global accounting unit’. The use of the term ‘accounting unit’ is a rather radical idea and one, I believe, more suited to today’s electronic age. I suppose it doesn’t really matter what it is called, but it is more a question of whether such a move could ever be implemented. I can see the benefit as it could be argued, and forgive me as I am no Economist and more than happy for someone to put me straight, that when a crisis like today occurs, with only a few currencies to run to, countries may believe they are putting trillions at risk. Do they perceive they are too closely linked or tied to a particular economy? Please don’t think I am being deliberately provocative or endeavouring to undermine the current reserve currencies. I merely ask the question ‘Is there a better way?’