By Associate Editor David Stevenson Mar 27,
2009
If you've been on holiday abroad recently, you'll be all too
aware how expensive everything has become if you're paying in
pounds.
Sadly for travellers, and also for importers, our national
economic woes mean there's little sign of sterling recovering much
in the near future. But the pound's not the only currency with
problems.
With various parts of the eurozone near-bankrupt, the euro is
under pressure, while Japan's recession means the yen doesn't look
too hot either. And the Swiss franc – a traditional safe haven –
has been deliberately crushed by the Swiss central bank, keen to
prevent deflation.
Still, there's always the dollar. It might be massively
indebted, but America is still the place where everyone runs to put
their money when things start looking shaky. The dollar is still
the world's reserve currency.
But perhaps not for much longer...
Unless you have a secret stash of dollars or euros you can press
into service when the need arises, travelling outside the UK these
days has become awfully pricey. The currency swap shops will give
you less than $1.40 per £1, while you're lucky if you can beat 1:1
on euros.
While exchange rates may improve again one day, you only have to
scan the horrendous headlines about our economy to realise this
isn't likely to be any time soon.
But sterling's main saving grace is that the world is in a mess
too, particularly the US. Right now, the dollar is the
world's "reserve currency", which means that many other countries
hold large amounts of dollars in their foreign exchange reserves –
65% of the total, at the last count. That means the Americans are
in pole position to set the global economic agenda – effectively
they run the racetrack.
But the trouble is, as we discuss in MoneyWeek magazine this
week (Can America's latest rescue package really
work?, if you're not already a subscriber, get your first three issues free here), the US has
gone on a spending spree like no other in history. That means
they're running up debt like no tomorrow - $11 trillion and
counting, if you include social security obligations. In fact, if
you want to see something really scary, check out the US National
Debt Clock and keep hitting the 'refresh' button. The numbers
just ratchet up while you watch in horror.
This means humungous levels of US borrowing, and probably lots
more new money being minted, for years to come. That poses some big
question marks about the greenback's long-term future.
So anyone who
holds US dollars could be forgiven for getting a bit twitchy about
the value of their holdings. And the Chinese have
started the ball rolling. Central bank governor Zhou Xiaochuan has called for
a "super-sovereign reserve currency" that would be run by the
International Monetary Fund (IMF). Russia, Brazil and India have
backed the idea as well.
Now people have been predicting the end of the dollar's status
as reserve currency for years. But it's easier said than done.
Having the global
reserve currency is the main reason that America has been able to
rack up the debts it has. Losing that position might be healthier
for the global economy in the long run, but it wouldn't be a very
comfortable adjustment for the US.
And then there's the status issue. If you no longer control the
world's main "go-to" currency, it rather suggests you've
lost your position as the world's most important country. Hence the
long tradition of Presidents and Treasury Secretaries pretending
that the US has a "strong dollar" policy, regardless of what's
actually happening on the ground.
So it's no wonder that markets were
shocked when on Wednesday, US Treasury Secretary
Tim Geithner said that America is "quite open" to the Chinese
proposals, sending the dollar plunging. "This apparent policy shift
amounts to an earthquake in geo-finance", says
David Bloom at HSBC, according to The Telegraph.
Dramatic
stuff. It didn't take very long for Mr Geithner to
"clarify" what he meant, i.e. that there was no policy change and
that "the dollar would remain the world's dominant currency" –
though that's not quite the same thing – but by then the cat was
out of the bag. "If there's a lesson from today", says Chris Turner
at ING Capital Markets, "it's that the dollar's on thin ice and any
loose talk will be quickly punished."
So how would a global super-currency work? At the moment the IMF
runs on Special Drawing Rights, which are a basket of the world's
major currencies. "The IMF would be groomed as the planet's central
bank", says The Telegraph's Ambrose Evans-Pritchard, "and
the SDRs would gradually become an accepted means of payment - call
it the 'globo'."
This could have some benefits. It would mean a new monetary
start for a world racked by deflation, and maybe inflation again
soon. The managers – the IMF - would be independent of national
governments. That means countries wouldn't be able to 'inflate'
their way out of debt by de-basing their currencies.
But as the problems of the eurozone show, monetary union is
easier said than done. Trying to set pan-eurozone interest rates is
hard enough. Doing it on a global basis would be nigh-on
impossible.
And more to the point, any basket of currencies used to back the
'globo' would include a far smaller number of dollars than central
banks currently hold in their reserves. That would mean a big
plunge for the dollar and serious upheaval for the global financial
system.
So you won't be able to swap your pounds for globos any time
soon. "This is obviously not something that's going to happen for
quite a long time", says Morris Goldstein at the Peterson
Institute. But Geithner's 'slip' means the door has been opened to
a future without the dollar. As Goldstein puts it, "the crisis does
raise a lot of fundamental issues, and the reserve currency is one
of them".
China holds almost 30% of the world's entire dollar reserves,
says Mr Bloom, so "what they say matters". If the dollar starts
dropping in earnest, and the Chinese really get fed up with losing
so much money, don't bet on some form of the world super-currency
not happening.
And in the meantime, we've said it before, but we'll say it
again – gold looks like the only currency worth having.
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