End of the greenback as world reserve?
The US greenback has been the world’s currency for decades – 85% of international trade is done in $US. Would it matter if that changed? Could it change? And could it change overnight?
That’s the proposition being put by a columnist in the Daily Reckoning/Agora Financial stable of financial newsletter writers, Jim Rickards.
Mr Rickards maintains that, come 30 September, the International Monetary Fund’s special drawing rights (SDRs) will take over as the world’s reserve currency. At the moment, SDRs’ value is based on a basket of 4 currencies – the $US, euro, yen & pound. On 1 October, China’s renminbi will be added to the basket.
The IMF explains in its factsheet: “Only a few years after the creation of the SDR, the Bretton Woods fixed exchange rate system collapsed and the major currencies shifted to floating exchange rate regimes. Subsequently, the growth in international capital markets facilitated borrowing by creditworthy governments and many countries accumulated significant amounts of international reserves. These developments lessened the reliance on the SDR as a global reserve asset. However, more recently, the 2009 SDR allocations totalling SDR 182.6 billion played a critical role in providing liquidity to the global economic system and supplementing member countries’ official reserves amid the global financial crisis.”
The SDR isn’t a currency, but represents a claim on the currencies of IMF members. Mr Rickards argues that when the Chinese currency joins the other 4 in the SDR basket, the $US’s role as world reserve will end and, with that, many advantages the US has had over the last 5 or so decades will also fall away.
While you might respond that, if there’s to be a change, it needn’t occur overnight, once a trend starts it can be difficult to stop, and can readily speed up.
Americans have been able to use their exulted position to lord it over the rest of us. While Jim Rickards has been posting from a US perspective. Seen from a foreigner’s perspective, levelling of the playing field would remove many US advantages – far cheaper fuel is one, but the exchange rate makes all imports cheaper for American residents.
On the other side of the pendulum, New Zealand’s Reserve Bank has been trying to talk our exchange rate down, without success, so export returns have been reduced.
Arrival of the SDR as a more widely available super-currency (though you won’t see anyone with an SDR in their wallet – it’s an international trade measuring stick) would take away the greenback’s special status, allow the US to devalue – and allow it to repay trillions of dollars of debt at lower rates.
Much of the US economy has been able to ignore international events, but this change would remove many US business advantages. Mr Rickards sees mass forced business closures and a plummeting stock market as foreign investors pull out.
There might be no particular effect on New Zealand, but waves of repercussions around the world – and consequent repositioning – would impact our economy.
Attribution: Agora Financial, IMF