The call earlier this week by the head of China’s central bank for a new world reserve currency to replace the dollar got a surprising second yesterday from U.S. treasury secretary Timothy Geithner, who told the Council on Foreign Relations that the administration is “quite open” to the idea. Shockingly, this did not go over well with those holding large dollar reserves.
Frank James, writing for the Chicago Tribune’s The Swamp blog, has the play-by-play.
Q Well, thank you. Wonder if you could comment on two related things. One, the Chinese government proposal about a global currency; and about the IMF regulations that were — the new IMF idea about, you know, very general agreements to borrow and having a faster ability to disburse to the (margin ?) markets…
SEC. GEITHNER: On the first question, I haven’t read the governor’s proposal. He’s a remarkably — a very thoughtful, very careful, distinguished central banker. Generally find him sensible on every issue. But as I understand his proposal, it’s a proposal designed to increase the use of the IMF’s special drawing rights. And we’re actually quite open to that suggestion. But you should think of it as rather evolutionary, building on the current architectures, than — rather than — rather than moving us to global monetary union.
Moderator Roger Altman, James reports, “immediately recognized that Geithner had slipped off the deck and was a man overboard, at least when it came to U.S. dollar policy. Altman tried to throw Geithner a lifeline.”
MR. ALTMAN: Let me just follow that up for one second. A number — I haven’t read the governor’s essay, either, but a slew of news reports interpreted his comments to suggest that the world needs a super reserve currency, and that the dollar, on some gradual basis, ought to be replaced in favor of that. And I wasn’t entirely clear what your response was.
SEC. GEITHNER: Well, as I said, I haven’t read his proposal, but I thought the initial reaction was sort of ahead of the details of the proposal I saw. The only thing concrete I saw was a reference to expanding the use of the SDR, but I look forward to reading his figures. As I said, I have tremendous respect for him. He’s a really thoughtful, pragmatic guy, and he has a great record of credibility in China as a whole, so anything he’s — he’s thinking about deserves some consideration.
It is very important just to underscore that the future evolution of the dollar’s role in the system depends really primarily on how effective we are in the United States in getting not just recovery back on track, our financial system repaired, but we get our fiscal position back to the point where people will judge it as sustainable over time.
After much back-and-forth, Geithner eventually allowed as to how “I think the dollar remains the world’s dominant reserve currency. I think that’s likely to continue for a long period of time.”
Here’s the video, which gives a sense of the short span of time between Geithner’s initial answer and his more nuanced version:
Ambrose Evans-Pritchard, writing for The Telegraph, reports that, “The dollar plunged instantly against the euro, yen, and sterling as the comments flashed across trading screens.”
David Bloom, currency chief at HSBC, said the apparent policy shift amounts to an earthquake in geo-finance. “The mere fact that the US Treasury Secretary is even entertaining thoughts that the dollar may cease being the anchor of the global monetary system has caused consternation,” he said.
Mr Geithner later qualified his remarks, insisting that the dollar would remain the “world’s dominant reserve currency … for a long period of time” but the seeds of doubt have been sown.
The markets appear baffled by the confused statements emanating from Washington. President Barack Obama told a new conference hours earlier that there was no threat to the reserve status of the dollar. “I don’t believe that there is a need for a global currency. 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.
Quite naturally, the folks at the WSJ editorial page are cutting Geithner little slack.
As if the dollar didn’t have enough problems, Timothy Geithner took China’s bait yesterday and said he was “quite open” to its suggestion this week to displace the greenback with an “international reserve currency.” The dollar promptly fell and stocks followed, before the Treasury Secretary re-emerged to say “the dollar remains the world’s dominant reserve currency. I think that’s likely to continue for a long time.”
Mr. Geithner is learning on the job, and yesterday’s lesson is that it isn’t smart to fool with currency markets when you are already tempting fate with a gigantic U.S. reflation.
Both reports point out the problems of a switch, much less effectively talking down the dollar without a plan in place. Telegraph:
Mr Bloom said that any switch towards use of SDRs has direct implications for the currency markets. At the moment, 65pc of the world’s $6.8 trillion stash of foreign reserves is held in dollars. But the dollar makes up just 42pc of the basket weighting of SDRs. So any SDR purchase under current rules must favour the euro, yen and sterling.
[W]ho would determine the “right price” of the SDR — the IMF? The multilateral institution’s economic prescriptions have sent numerous nations into tailspins, particularly in Asia. There’s nothing to say, too, that national monetary authorities wouldn’t cheat and adjust their domestic money supplies as they saw fit — or apply political pressure on the IMF to change the SDR’s currency weightings in their favor.
But the main problem with the SDR is that it can’t be used for anything in the real world. When the IMF allocates SDRs, recipient countries exchange them for local currencies at local central banks. That money is then used to buy real assets and facilitate trade. That exchange inflates the money supply of the domestic country that’s accepting the SDRs in exchange for local currency.
As one might expect, the blogosphere is abuzz over this. While much of the commentary is mere partisan sniping, some salient observations can be found.
RealClearPolitics’ Tom Bevan, noting conflicting statements from Obama, Geithner, and Austin Goolsbee, observes, “In some areas, a lack of message discipline among different players in the administration isn’t much of a problem. On an issue as vital as one involving the strength of the dollar in the middle of an economic meltdown, it’s a bit disconcerting – to put it charitably.”
CAP’s Matt Yglesias, meanwhile, argues that this is much ado over nothing.
[I]n a broad sense, the creation of the Euro, the integration of Russia into the global economic system, and the rising economic significance of China, India, and Brazil all argue toward the long-term adjustment of global economic institutions to a less dollar-centric dynamic. When these things were put into place, a large swathe of the world was Communist and not participating in its mechanisms, Europe was a land of many currencies, and the poor world was much poorer.
That’s of course right. Whether having the IMF manage a reserve currency or some other mechanism would be preferable in the long term over the current dollar-based system is a perfectly valid question. Indeed, in my original writeup on this, I viewed the premise quite favorably.
But here’s the thing: Neither Yglesias nor I are treasury secretary of the country managing the world’s foremost currency. Things perfectly fine for public intellectuals to bandy about often require subtlety and sidestepping by public officials. Diplomats must be diplomatic, presidents must be presidential, and treasury officials must be — well, okay, there’s not a word for it. I suspect, however, that “Geithneresque” will not be the choice if such a word is coined.