Over the weekend, China publicly called for the International Monetary Fund (IMF) to dump the U.S. dollar as the currency of choice and create a new global currency detached from the fates of individual nations.
The latest blast from Beijing: a call by China’s top central banker to dump the U.S. dollar as the world’s most important currency. People’s Bank of China Governor Zhou Xiaochuan, in a paper released on the bank’s Web site on Mar. 23, called for a new “super-sovereign reserve currency” to replace the current reliance on the dollar. The goal, Zhou writes, is to “create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run.”
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By calling for a super-sovereign reserve currency, Zhou signals China’s dissatisfaction with the global economic pecking order. As well as demonstrating Beijing’s new more assertive role in the world economy, Zhou’s proposal to replace the dollar may also signal China’s intention to move more aggressively to diversify its foreign exchange holdings. Zhou’s paper contains a “hint of a threat that the U.S. should not take the dollar’s privileged status for granted,” Mark Williams, international economist at Capital Economics in London, wrote in a Mar. 24 report.
Obviously, U.S. policy makers wouldn’t be rushing to agree to such a proposal. During the President’s press conference yesterday evening, Mr. Obama stated:
The reason the dollar is strong right now is because investors consider the United States the strongest economy in the world with the most stable political system in the world,’ he said. ‘You don’t have to take my word for it, I think that there is a great deal of confidence that ultimately, although we are going through a rough patch, that prospects for the world economy are very very strong.’
Asked about suggestions by China and Russia that the world move toward a single global currency, Obama said, ‘I don’t believe that there’s a need for global currency.’
Situation finished, right? Nope…. Treasury Secretary Tim Geithner comments that contradict the message Obama is sending.
“I haven’t read the governor’s proposal. He’s a very thoughtful, very careful distinguished central banker. I generally find him sensible on every issue,” Geithner said, saying that however his interpretation of the proposal was to increase the use of International Monetary Fund’s special drawing rights — shares in the body held by its members — not creating a new currency in the literal sense.
“We’re actually quite open to that suggestion – you should see it as rather evolutionary rather building on the current architecture rather than moving us to global monetary union,” he said.
When pressed on the subject, Geithner backtracked:
Evidently sensing a gaffe, moderator Roger Altman told Geithner that it would be “useful” to return to the question, and asked if he foresaw a change in the dollar’s centrality.
“I do not,” Geithner said, adding several forceful promises, including, “We will do what’s necessary to say we’re sustaining confidence in our financial markets.”
Let’s tally this mistake up to poor wording on Geithner’s part. Fine. Look at the damage the assumed gaffe has caused – erasing almost 300 points from the DOW and the dollar losing 1.3% of it’s value compared to the Euro.
While these are short term losses, it just goes to show how the market reacts to a mixed message out of our government. Much as the Bush Administration needed to get the public message on the same track, the Obama Administration needs to do the same.
In the end, I don’t care what the message is… just get on the same page.
Related posts:
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- Uncertainty Creates Fear
- President Obama saying the Economic Crisis is “not as bad as we think” is like saying Ted Kaczynski (the Unibomer) only had poor social skills
- BBC: World wants Obama as president: poll. Me: STFU.
- Dollar Doom Once Again