IMF economists review reserve currency alternatives
Thu Nov 12, 2009 7:22am EST
[link to www.reuters.com]
PARIS, Nov 12 (Reuters) - Policymakers should consider ways of shifting from a dollar-centric global monetary system to one with a wider range of reserve assets and some form of insurance that would reduce reserve accumulation, IMF economists say.
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Many of the ideas aimed at attenuating demand for reserves would only partially address the problem, however, and there was still a need to consider alternative reserve currency systems in place of the currency dollar-based one, it says.
Alternatives ranged from a system of multiple or competing reserve currencies with no dominant one, a system based on the IMF's SDR unit of account that pools the main reserve currencies or a totally new global currency that trades alongside others.
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More radically, another option would be a new currency used in international transactions and issued by an international monetary agency "quite different from today's IMF", the paper says.
"Disconnected from the economic problems of any individual country and with a balance sheet backed by the membership of the institution, this currency could serve as the global risk-free asset."
"However, a solution of this nature seems so impossibly taxing of national sovereignty that it would be tempting to dismiss it as utopian.
"Yet, a monetary institution with even more demanding features -- the ECB -- is celebrating its 11th anniversary this year. If an SDR-based system were to emerge at some stage, taking the next step to a sui generis global currency may seem less of a giant leap than from today's vantage point."
Report of the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System
September 21, 2009
[link to www.un.org]
Transition to new system
53. The reform of the global reserve system could take place through a global agreement or through more evolutionary approaches, including those that could build on a series of regional initiatives.
54. If a large enough group of countries agreed to pool reserves in a system they agreed to create and to hold a common reserve currency which they would stand ready to exchange for their own currencies, a regional reserve system—or even a system of near-global coverage—could be established without the agreement of all countries. So long as the new currency is convertible into any hard currency that is itself convertible into other currencies, it could serve effectively as a reserve currency. The countries participating might also agree to reduce, over time, their holdings of other reserve currencies.
55. Membership in this new "Reserve Currency Association" could be open to all who subscribe to its Articles of Agreement. The advantages of participation are sufficiently great that it is likely to grow over time, embracing more countries that hold a greater fraction of their reserves in the new global reserve currency. Eventually, even the United States would probably find it desirable to join. Thus, gradually, through a stable, evolutionary process, we can achieve the creation of a new Global Reserve System, an alternative to the current system. Of course, there is also a risk of adverse selection—as long as participation is voluntary, soft currency countries would be more willing to participate, and convertible global currencies outside the scheme could remain the preferred currencies.
56. Existing regional agreements might provide an alternative way of evolving towards a Global Reserve System. Regional mechanisms have advantages of their own, and can be based either on swap arrangements among central banks or on foreign exchange reserve pools. Given the reluctance of governments to give up control over their reserves, swap arrangements may be more acceptable. Reserve pools offer, however, other advantages, such as the possibility of allowing the reserve fund to borrow during periods of stress, and, as noted, to issue a currency or reserve asset that could be used at a regional or global level. In the 1980s, for example, the Latin American Reserve Fund (FLAR) was allowed to issue Andean pesos.4 This asset, which has never been used, was expected to be used in intra-regional trade, with periodic clearing of those held by central banks. The Chiang Mai Initiative, created in 2000 by members of ASEAN, China, Japan and the Republic of Korea, is another important example of regional cooperation.5
Were this initiative to evolve into a reserve fund, it could back the issuance of a regional asset that could actually be attractive to central banks in other parts of the world to hold as part of their reserve assets. However, if the Chiang Mai Initiative is to play a more effective role in stabilization, it would be necessary to eliminate the requirement that countries would need to have an IMF program to qualify for access to its swap facilities.
57. A common criticism of regional arrangements is that they are not effective in providing diversification for protection against systemic crisis, as regional members are more likely to be adversely affected at the same time, implying that they are a complement to, rather than a substitute for, a global solution. Although the ability of regional arrangements to address external shocks depends on negative events not being correlated across participating countries, they could still be useful if shocks affect member countries with different intensities or with varying lags, since this would allow some countries to lend their reserves to those experiencing more severe or earlier shocks. Furthermore, lending at the onset of a liquidity squeeze could prevent a crisis in a given country from affecting other countries, thereby reducing the correlation produced by contagion. More generally, a country would
4 The Latin American Reserve Fund was created by Andean countries in 1978 and was then called the Andean Reserve Fund. Its current members are Bolivia, Colombia, Costa Rica, Ecuador, Peru, Uruguay, and Venezuela.
5 This initiative works as a system of bilateral swaps by member central banks, which are in the process of becoming multilateral. The system has not been used so far. ASEAN has a swap arrangement of its own that has a longer history.
benefit from the regional arrangement if the variability of the regional reserve pool is lower than that of its individual reserves and if potential access to the pool reduces the possibility of attacks on individual members. These regional arrangements thus act as a mechanism of collective insurance that is substantially more powerful than self-insurance. Statistical analysis by the UN Economic Commission for Latin American and the Caribbean supports the benefits that accrue from this approach, by indicating that correlations of relevant macroeconomic variables among countries in the region may be lower than usually assumed.
58. Regional initiatives could become part and parcel of the global reserve system. Some have suggested that the reformed IMF should be a network of such regional reserve funds. Such a decentralized system would have many advantages, including the possibility of better solving problems associated with crises in the smaller countries at the regional level. The system would also be attractive for medium and small-sized countries that could have stronger voices at the regional level. One way to link regional and global arrangements would be to make contributions to regional arrangements one factor to take into account in determining SDR allocations.
Last Edited by candlestick on 11/12/2009 at 9:29 AM
candlestick User ID: 784872 Philippines 11/12/2009 10:20 AM
Re: GLOBAL ECONOMY: A SUI GENERIS GLOBAL CURRENCY, A NEW GLOBAL RESERVE SYSTEM
Report of the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System
September 21, 2009
[link to www.un.org]
6. Many believe that the problems of the current reserve system could be eliminated by creating a supranational international reserve currency. Indeed, the idea of an international reserve currency issued by a supranational bank is not new. It was broached more than 75 years ago by John Maynard Keynes in his 1930 Treatise on Money and refined in his Bretton Woods proposal for an International Clearing Union.
7. There currently exist a number of alternative proposals for a new global reserve currency, for how the system might be administered, how the emissions of the new currency might be allocated, and how the transition to the new system might be best managed. Considerable discussion will be required for the international community to decide the precise arrangements. However, this is an idea whose time has come. This is a feasible proposal and it is imperative that the international community begins working on the creation of such a new global reserve system. A failure to do so will jeopardize prospects for a stable international monetary and financial system, which is necessary to support a return to robust and stable growth.
page 110
Last Edited by candlestick on 11/12/2009 at 10:23 AM
candlestick User ID: 784872 Philippines 11/12/2009 10:48 AM
Re: GLOBAL ECONOMY: A SUI GENERIS GLOBAL CURRENCY, A NEW GLOBAL RESERVE SYSTEM
Report of the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System
September 21, 2009
[link to www.un.org]
29. The increases in the U.S. national debt and the size of the balance sheet of the U.S. Federal Reserve have led to concerns in those countries holding large dollar reserves about the stability of the dollar as a store of value. In addition, the low (near zero) return on dollar holdings means that they are receiving virtually no return in exchange for the foreign exchange rate risk which they bear. However, any attempt to reduce dollar holdings will produce the Triffin dilemma noted above, provoking the collapse in the value of their dollar holdings that they fear.
30. These are among the reasons to adopt a truly global reserve currency. Such a global reserve system can also reduce global risks, since confidence in and stability of the reserve currency would not depend on the vagaries of the economy and politics of a single country.
31. The current crisis provides, in turn, an ideal opportunity to overcome the political resistance to a new global monetary system. It has brought home problems posed by global imbalances, international instability, and the current insufficiency of global aggregate demand. A global reserve system is a critical step in addressing these problems and in ensuring that, as the global economy recovers, it moves onto a path of strong growth without setting the stage for another crisis in the future.It is also a propitious moment because the United States may find its reserve currency status increasingly costly and untenable. The dollar can be a reserve currency only if others are willing to hold it as such, and as the return falls and the risk increases, greater reservations about the dollar as a reserve currency are being expressed. The dollar reserve system is likely to fray, if it is not already doing so. Moreover, the U.S. has embarked on a response to the crisis that will involve large domestic imbalances and also potentially large external imbalances, with unpredictable implications for the international reserve system. Thus, both the United States and foreign exchange reserve holding countries may actually find it acceptable to introduce a new system. The former would be able to take policy decisions with less concern about their global impact; the latter would be less concerned about the impact of U.S. policies on their reserve holdings.
page 115
candlestick User ID: 784872 Philippines 11/12/2009 9:58 PM
Re: GLOBAL ECONOMY: A SUI GENERIS GLOBAL CURRENCY, A NEW GLOBAL RESERVE SYSTEM
Friday, 6 Nov 2009 - The dollar will get "utterly destroyed" and become "virtually worthless", said Damon Vickers, chief investment officer of Nine Points Capital Partners. Due to the huge wage disparities between the United States and emerging markets like China, Vickers said that may resolve itself in some type of a global currency crisis.
"If the global currency crisis unfolds, then inevitably you get an alignment of a global world government. A new global currency and a new world order, so we may be moving towards that," he said.
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