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Saturday October 3, 2009

A new dey coming?

A QUESTIONS OF BUSINESS by P.GUNASEGARAM


If a world currency is not forthcoming, Asia should push ahead with its own.

ONE of US President Barack Obama’s few unconvincing arguments is one he made in March this year when he rejected China’s call for a new global currency saying that the US dollar was stable and strong enough to be the world’s reserve currency.

While the People’s Bank of China Governor Zhou Xiaochuan had called for a replacement of the dollar with a different standard run by the International Monetary Fund, Russia had called for a new world currency altogether.

Obama’s arguments are rather insubstantial and are likely based on a defence of US interests because the US dollar is the de facto world currency already.

If it surrenders this to some other instrument, then it effectively surrenders its ability to dictate monetary policy – the use of interest rates and money supply to influence the economy.

For instance, if say the dey (for dollar, euro and yen – offered by world currency proposers as a possible name for a new world currency) was already in existence, could the US have injected trillions of US dollars to save its banks, businesses and economy?

Perhaps not. It can effectively print US dollars but it can’t print the dey for instance which will presumably – if it ever came into being that is – be controlled by a world central bank with participation by all major world economic powers and other developing countries.

The US is not going to give up a cake that it has and can eat too. So the bad news for the rest of the world is that there is not likely to be a world currency any time soon, even though it has great attractions.

Imagine not having to worry any more about your exchange rate – the billions and billions of dollars or dey which will be saved by not having to hedge, trade, exchange or arbitrage. Imagine how much easier it will be for planning.

Imagine all the predatory hedge funds preying on foreign exchange markets, moving them, driving them down, forcing nations into bankruptcy etc will no longer have a reason for existence.

And imagine the amount the banks will save and the enormous amount of brain power that will be released to the world for engaging in more productive activities when banks close their foreign exchange departments for good.

It will be a more certain world for sure but we are sure it won’t happen quickly. The latest crisis, now abating, would have provided the push for it and it did with Russia and China wanting an alternative system. But without US support, it was bound to fail.

The next best thing is for Asian countries to heed the call by the Asian Development Bank early this week to set up their own currency. That is a far more workable proposition if key Asian countries can see beyond their own noses.

If China, India, Japan, South Korea, Taiwan and South East Asia can agree on a system it will considerably help and promote intra-regional trade, stabilise currencies, cut speculation, help keep money within the region and the new currency will eventually likely be bigger than any other.

After all, Asia has the largest reserves in the world so it is most natural that it should have the largest amount of currency – eventually. The euro has already overtaken the US dollar as the currency with the largest amount of value in circulation.

If Asia plays its cards right, the renyenpee (you go figure that out for yourself, I am not saying what it is) may overtake the euro as the largest currency in circulation in the world.

Heck, the renyenpee could be the world currency!

>Managing editor P. Gunasegaram says multiple currencies facilitate multiple sins.

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