Zhou Xiaochuan of the People’s Bank of China recently proposed the creation of a new international reserve currency. Xiaochuan argues:
The desirable goal of reforming the international monetary system, therefore, is to create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run.
The bold letters were added by me. I find this statement profound. Zhou proposes a super-sovereign reserve currency managed by a global organization which could both create and control global liquidity. Zhou writes:
When a country’s currency is no longer used as the yardstick for global trade and as a benchmark for other currencies, the exchange rate policy of the country would be far more effective in adjusting economic imbalances. This will significantly reduce the risks of a future crisis and enhance crisis management capability.
My interpretation is that Zhou (China) supports a global institution to manage the “one world currency”, and that international trade would be conducted in this currency. Commodities like oil and gold would be priced in the world currency. At the same time, each individual nation (or zone, as in Europe) would keep and maintain there existing currency and manage fiscal and monetary policy within their borders in order to keep their currency’s relationship with the one world currency at an optimal ratio reflecting existing economic conditions in that country.
China is obviously concerned to find themselves the biggest holder of US Treasuries. China also holds the world’s biggest foreign exchange reserves. Watching the US Federal Reserve, the US banking system, and the near (actual?) fraudulent rating of sub-prime debt as “AAA” by the rating’s agencies Fitch, Moody’s, and S&P which is the root of the current crisis, who can blame China for trying to figure out a way to insure their US investments? As they watch Congress enact bailout packages for the ultra-rich who don’t need the bailouts, at the expense of the US middle-class tax-payers who DO need the bailouts, the Chinese must have lost all confidence in US policymakers’ ability to think logically and act in an economically prudent fashion.
The Chinese know the result of continued massive US deficit spending will be a devaluation of the huge pile of US Treasuries they sit atop. They would probably begin a massive move out of US dollar denominated assets now if they thought they could do so without harming themselves. So, what better way to do so than to create a global currency, establish equilibrium, and then move out of the US dollar in a controlled and more leisurely pace? With the US dollar being the world’s reserve currency, such a move is not currently possible as the spotlight is too bright. However, with a global currency and separate exchange rates in Euros, Yen, Renminbi, and yes, US dollars, to the world currency, the Chinese investment in US dollars would be better insulated. They could also buy oil and gold in the world currency, whereas now these two commodities are traded (pegged) to the US dollar.
Don’t expect the central bankers around the world to support such a world monetary authority in public. The timing is bad too – a world in financial crisis is probably not the time for such a fundamental change. Geithner and Bernanke have apparently flatly rejected the notion. Note that Geithner first appeared open to the idea, but when the US dollar weakened appreciably, he made a “clarification” of his position. Was such a slip intentional?
It should be noted that the Chinese proposals came after similar suggestions from Russia. French President Nicolas Sarkozy has repeatedly called for the US dollar to be demoted as the premier currency. Nobel Prize winner and World Bank chief Joseph Stiglitz has also called for a new global currency. Authorities in Brazil and India have made statements supporting a world currency. What chance does the US have as a debtor nation to keep the dollar the world’s reserve currency when all the members of the BRIC contingent argue otherwise?
Despite all the discussions on an international currency, note that Bernanke tells Ron Paul that the discussions are not taking place:
Bernanke lying to Ron Paul tells me that the world’s central bankers are moving toward a world currency. This might be the reason Congress, the Federal Reserve, and the Treasury appears to be doing everything possible to weaken the US currency. That is, it will be easier to take away American Sovereignty in a crisis situation. Like so many other instances in the US over the past decade or so, the scenario reminds me of Naomi Klein’s awesome book The Shock Doctrine. It may also be the explanation I have been searching for why US policymakers don’t make the obvious and logical strategic decision to adopt robust natural gas transportation policies. Such a policy would drastically reduce foreign oil imports, cure our huge trade deficit, and thus strengthen the US dollar. However, could it be that our policymakers don’t want to see the US dollar strengthen? Are US policymakers are working behind the scenes to enable the “new world order” that papa Bush spoke about so many years ago? One world, one currency is an obvious way to accelerate that goal.
I think it is happening but will obviously take a few years. The fact that Bernanke lied and said no discussions are taking place when anyone who can read the newspapers knows otherwise speaks volumes to me.
How does an American invest for such a future? Gold. Silver. Oil.
Disclosure: The author owns gold, silver, and oil related investments.