End of Dollar as Reserve Currency?

We may be witnessing the beginning of the end of U.S. economic dominance, and addressing how we got here will be the subject of many long articles and several books. For now, let’s just call it a travesty, an absolute head-shaking, goddamned shame that should see people rioting in the streets but instead finds them slack-jawed as ever in front of the boob tube or a game console.

From the China Daily, which you should get used to reading instead of the The New York Times evidently, comes this glimpse of the future, with emphasis added by me:

China’s central bank chief on Monday proposed a sweeping overhaul of the global monetary system, outlining how the dollar could eventually be replaced as the world’s main reserve currency by the Special Drawing Right (SDR).

The SDR is an international reserve asset created by the International Monetary Fund in 1969 that has the potential to act as a super-sovereign reserve currency, Zhou Xiaochuan, governor of the People’s Bank of China, said in remarks published on Monday on the bank’s website, www.pbc.gov.cn.

“The role of the SDR has not been put into full play due to limitations on its allocation and the scope of its uses. However, it serves as the light in the tunnel for the reform of the international monetary system,” Zhou said.

Zhou did not refer directly to the dollar.

But his speech, issued in English as well as Chinese, spells out in detail China’s dissatisfaction with the primacy of the US currency, which Zhou says has led to increasingly frequent international financial crises since the collapse of the Bretton Woods system of fixed but adjustable exchange rates in 1971.

“The price is becoming increasingly high, not only for the users, but also for the issuers of the reserve currencies. Although crisis may not necessarily be an intended result of the issuing authorities, it is an inevitable outcome of the institutional flaws,” Zhou said.

“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, thus removing the inherent deficiencies caused by using credit-based national currencies,” he added.

A super-sovereign reserve currency not only eliminates the risks inherent in a credit-based currency such as the dollar — in contrast to one backed by gold — but also makes it possible to manage global liquidity, Zhou argued.

“And when a country’s currency is no longer used as the yardstick for global trade and as the 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.” he said.

…the issue is a pressing one for China, whose top officials regularly bemoan the volatility of the dollar and what they see as mismanagement of the world’s leading economy.

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