OP-ED: The rumours of the dollar's death are much exaggerated, By Martin Wolf, Financial Times, October 13 2009
From my favorite analyst of globalization:
It is the season of dollar panic. These panic-mongers are varied: gold bugs, fiscal hawks and many others agree that the dollar, the dominant currency since the first world war, is on its death bed. Hyperinflationary collapse is in store. Does this make sense? No. All the same, the dollar-based global monetary system is defective. It would be good to start building alternative arrangements.
Couldn't have said it better.
More:
The dollar's correction is not just natural; it is helpful. It will lower the risk of deflation in the US and facilitate the correction of the global "imbalances" that helped cause the crisis. I agree with a forthcoming article by Fred Bergsten of the Peterson Institute for International Economics that "huge inflows of foreign capital to the US facilitated the over-leveraging and underpricing of risk".* Even those who are sceptical of this agree that the US needs export-led growth.
Looking ahead:
Finally, what can replace the dollar? Unless and until China removes exchange controls and develops deep and liquid financial markets - probably a generation away - the euro is the dollar's only serious competitor. At present, 65 per cent of the world's reserves are in dollars and 25 per cent in euros. Yes, there could be some shift. But it is likely to be slow. The eurozone also has high fiscal deficits and debts. The dollar will exist 30 years from now; the euro's fate is less certain.This view may be too complacent. The danger of a collapse of the dollar is small and of its replacement by another currency still smaller. But a global monetary system that rests on the currency of a single country is problematic, for both issuer and users. The risks are also growing, particularly since the emergence of "Bretton Woods II" - the practice of managing exchange rates against the dollar.
Right out of Great Powers (the solution to the previous problem becomes the new problem):
In a floating exchange-rate regime reserve accumulations should also be unnecessary. But, after the financial crises of the 1990s, emerging countries decided they needed to pursue export-led growth and insure themselves against crises. As a direct result, three quarters of the world's currency reserves have been accumulated just in this decade.
A good definition of globalization's stunning recent expansion: 3/4s of the world's reserves were accumulated since 2000!
Strong finish:
I arrive, by a somewhat different route, at the same conclusion as Mr Bergsten: the global role of the dollar is not in the interests of the US. The case for moving to a different system is very strong. This is not because the dollar's role is now endangered. It is rather because it impairs domestic and global stability. The time for alternatives is now.
As always, as close to brilliant as it gets in punditry.
(Via WPR Media Roundup)
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