The dollar is still the dominant reserve currency, but for how long? The IMF has recently forecast that China’s economy will overtake that of the U.S. in 2016. How will this effect the global monetary system?
Parag Khanna: Welcome to the Global Roundtable. This series focuses on the future of economic competition. I’m Parang Khanna, joined by a very distinguished panel including: Dambisa Moyo, Daniel Altman and Anand Giridharadas. Today we are talking about the end of the dollar, but is it? The dollar is still obviously the dominant reserve currency, but it does face competition. Clearly we see that the Yen, the Euro, the Renminbi and others are getting ever more play in global currency exchanges. So what is the future of the global monetary system going to look like?
Dambisa Moyo: Some people would argue, it might not be a relevant point. But I think if you look at what’s going on right now, particularly with the Chinese renminbi, fascinating. They are lending to organizations like the IMF and other economies in their currency, they are doing swap agreements, trade agreements based on the Renminbi. I think longer term the concern is about whether there is actually financial infrastructure developed enough in China to sustain a role as a global reserve currency. But the fact of the matter is that they are the big lender around the world, not just to the west, across Africa, Latin America, Europe and Australia. So the fact of the matter is that they will be playing a bigger role and with greater demand.
Daniel Altman: Look, with reserves, you can have as many currencies in the basket as you want. People thought the Euro was going to be the great alternative to the dollar, now there are a lot of questions about the Euro. If you look at the Euro countries long-term potential to grow and their risks, they could be heading in four different directions. But you do need one currency for things like trading oil. That’s where the IMF, the International Monetary Fund, wants to step in and offer their own currency, which is a mix of other currencies, but who decides what the mix is? Maybe it’s just the IMF trying to reassert its relevance.
Parag Khanna: But even with oil and other commodities actually you are seeing bilateral agreements that actually are denominated in non-U.S. dollars. So even that’s happening.
Daniel Altman: Well, you can have computers that are fast enough to make all the transitions, but the fact is that people have to be able to think, well how much is this in Dinar, how much is this in Rupee, how much is it in Dollar. And computer may do it, but it’s harder for us.
Dambisa Moyo: Well I think how relevant, going back to this idea of the new silk road. If China and Saudi Arabia are doing much more trade then let’s say Saudi Arabia and Middle Eastern countries are doing with the United States and Europe for example, then how much sense might there be for the U.S. Dollar to be in the long-term the reserve currency? I think the jury’s out. We know that in the middle of the last century, the British Sterling was the main currency, but obviously their inability to remain competitive globally as the lead economy is essentially manifested and reflected in the demise of the Sterling as the reserve currency.
Anand Giridharadas: I think it is… to build on that, I think it’s part of this larger question of I think nobody denies that the west is going to lose a certain amount of power, relative power. I think the big question that remains is that even as it loses that power, can it at least maintain a certain kind of mediating roles, like being the **** currency of the world being the military that goes into kind of police situations and even those things are now starting to fall away.
Parag Khanna: **** just because there should be a standard global currency it doesn’t even have to be one of the existing ones, what about the idea of the IMF special **** SDR’s.
Daniel Altman: Well, as I said before, I think that that’s a problematic idea because the SDR’s are really built as combinations of other currencies. There has to be an exchange rate between the SDR’s and other currencies. So you have to know how much they’re worth in Dollars, Euros, etc. But who decides how much of a Dollar, how much of a Euro, etc. It goes into that basket that forms the SDR. That’s an extremely powerful decision to be able to make. And I think the IMFA wants to be able to make it because they are feeling a little bit irrelevant these days. And B, it’s a decision where the IMF board is going to have a lot of say. And countries like China and Korea and growing economies are having more and more of a say on that board.
Parag Khanna: Well, what about the fact that now only can you transition away towards a basket of some kind, but countries have the right to define the basket as they so choose of differing compositions, for example, you’re counting out Europe, but there’s still many countries buying the Euro. And in fact, the Euro’s own likely to spend despite everything that’s happened because some of the smaller countries, whether it’s Iceland or over in Eastern Europe, the Balkan countries, they actually still want to join the Euro Zone. So we’re going to have a multi polar, multi currency world whether we like it or not and it’s not necessarily going to be harmonized, standardized or led by the IMF or anyone else. So is there a way out of that sort of chaos, currency chaos?
Daniel Altman: I would say that we don’t need a way out as long as our computers can keep all the numbers straight. But it does make it a little more difficult for us as consumers and investors to see what we’re getting at any one time. It means that not only are we going to internationalize our portfolios, we’re going to have to think a lot more about currency risk when we plan for the future.
Dambisa Moyo: And I would just add to that by saying countries are already voting with their feet. I mean, the Chinese government as an example, has a portfolio and it’s deciding right now whether it wants to put it in Euros, whether it wants to hold it in Dollars and we know what the impacts on the markets of those type of decision are. So I think you will very much see that sort of nation… nation determination, which is about currency baskets which is just done at a national level.
Parag Khanna: So the Dollar is down, but it’s not out because really to replace it, you would have to build and substitute from the bottom up through these individual national baskets the way China is doing, but that story as it evolves is going to have a major impact, of course, on global economic competition. Thanks very much for your insights. More on that and many other relevant topics at BigThink.com.
