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Wednesday April 1, 2009

Another meeting just to keep what is undone not done

MIDWEEK WITH BUNN NAGARA


THE G20 Summit in London tomorrow is set to avoid examining alternatives to the US dollar as the standard global currency. But ignoring the problem will not help to solve it.

The roots of the current crisis reach back to at least December 2007 in the US economic heartland itself. That a swift and adequate solution will come from the same place is not at all assured.

A sleazy combination of banking regulatory systems, conspicuous greed, high-end corruption and extravagant spending in reckless wars first turned a Clinton-era budget surplus of US$127bil (RM463bil) into a staggering US$455bil (RM1.7tril) deficit, then a string of corporate scandals, a housing loans meltdown, and now a crisis of global proportions.

US managers failed to exercise due prudence, and the central role of the dollar as international medium of exchange sprang the global contagion. The East Asian financial crisis a decade ago began in Asia and was largely contained within the region, but not this time.

The current crisis is different in origin, reach and prospective scale. The dollar as both global reserve currency and native currency of the ailing world’s largest economy only highlights the precarious predicament.

China, as the largest repository of the dollar outside the United States, has lately become nervous about the continued value of its holdings. It had overtaken Japan as both the largest prop for US debt as well as the United States’ largest trading partner.

On March 13, Prime Minister Wen Jiabao urged the United States “to maintain its good credit, to honour its promises and to guarantee the safety of China’s assets.” The fear was that if unchecked, the slide in the US economy could lead to inflation and a massive loss in value of Chinese holdings.

For many observers, this was a first from a Chinese or any other foreign leader. The surprise came not so much from what Wen had said as from his saying it at all, since his comment came as the dollar was rising.

However, holding nearly a trillion dollars in US Treasury bills as just half a nation’s foreign exchange reserves can change things. Besides, many of China’s vital trading partners in the developing world today have become disproportionately burdened by the plunge in US economic fortunes.

As it soon turned out, this was just the beginning for China. Wen’s remark was followed by commentary by Chinese analysts and the governor of China’s central bank about the need to rethink world finances, including a new global currency to replace the dollar handled by the International Monetary Fund (IMF).

The governor of the People’s Bank of China Zhou Xiaochuan did not mention the dollar specifically, but his published tract appeared unusually in both Chinese and English. He was obviously reaching for an international audience with his message.

Zhou said an international reserve currency should be based on the shares in the IMF held by its 185 member countries. He argued that the current crisis exposed “the inherent vulnerabilities and systemic risks in the existing international monetary system.”

Chinese anxieties have also been fuelled by US President Barack Obama’s economic stimulus packages, which can produce immense deficits that might force the dollar down further. The real surprise may be that China is more concerned about US economic welfare than US leaders themselves.

Obama said a new global reserve currency was unnecessary, since investors still find the United States has “the strongest economy in the world with the most stable political system in the world.”

What Obama did not say is at least as crucial: that the United States may no longer have the most stable economy in the world with the strongest political system in the world.

Emerging economies Brazil, India, South Africa and South Korea have backed China’s proposal that had originated a week before in Moscow, but US and EU officials dismissed it out of hand. While Washington insists on keeping the dollar the prime currency of world trade, Brussels is mainly concerned with practicalities.

Tomorrow’s summit is set to go no further than platitudes against protectionism and how emerging economies deserve an expanded role. But the problem of the dollar’s hulking, sulking dominance in world economies remains inaccessible by everyone except US managers responsible for much of the problem in the first place.

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