Is There a Way to Sustain Stable Growth of the World Economy Even If the US Dollar Loses its Position as the Key Currency?

How to Have Stable International Financial Market with Fewer Crises

To answer this question we must make it clear that there are two important perspectives from which the answer will be different.

Theoretically speaking, it is quite possible to create a non-sovereign state currency as the key international currency, such as SDR, if we can reach consensus in the international society. Many people argue that this is only an illusion and will never come true. However, the creation of the Euro showed that some day in the future if the integration of the world economy reaches to very high level and problems caused by Triffin Dilemma become insolvable, we may need to create a world central bank and a world currency.

If we come back to the reality, in the foreseeable future, to create a non-sovereign state currency to replace the US dollar world be very difficult and will solve the problems more than the problems create the US dollar being used as key international currency. So at present there seems no way out to giving up the US dollar as the key international currency.

De facto US dollar standard does provided convenient means of international exchange and enable many countries to export to the US market and help to expand the global trade. This is one of the important sources of economic growth. However, it provides possibility for the US irresponsibly neglect its current account deficit and the US dollar exchange rate. As long as there is not any replacement of the dollar as the key international currency for the time being, the US could offset its deficit in the international account by providing the dollar to continuously import other countries cheap goods and services. By doing so, the US could use inflationary monetary policy for its own interests while neglect asset bubble. However, excessive debt, both public and private in the states would eventually lead to adjustment. When the resources price jumped up, other products and service prices would rise and inflationary monetary policy would have to change. Once the monetary policy adjusted, financial market would respond, so subprime loan crisis started to break out. Then the whole world has to follow the US to simulate the economy with inflationary monetary and fiscal policies again and started a cycle of bubble creation again. In this process, the US could reduce its debt burden in terms of debt to GDP ratio while the rest of the world should suffer to share the cost. This is why after broke-out of financial crisis, international society reach consensus of urgent need to reform the international financial system.

The present problem is that although we have the consensus to reform, but we have no consensus on the way to solve the core problem. We have several other currencies also internationalized, but none of them are able to play the role that the US dollar is playing at present. No currency is strong enough to provide the same confidence as the US dollar. What is more is that the currency issuing country could not provide the same liquidity as the US, which enable the rest of the world to export and gain economic growth. The Euro seemed to have parallel strength to the dollar, but the financial market deepening is far from being able to meet the demand for international reserve and the trade policy adopted by the EU countries is mercantilist and could not support the rest of the world?s demand for market. Other currencies, such as Pound Sterling and Japanese Yen all have even less capacity than the Euro. Even if some day we may have one currency to replace the US dollar as key international currency, Triffin Dilemma still exists.

Then what should we strive for? My suggestion is that we establish a mechanism of exchange rate stabilization among main international currencies. By doing so, we put the responsibilities to international currencies to maintain their currency values while they enjoy the role of international currency. At same time, we need to enhance SDR function as international reserve currency and promote the multiplication of international currencies. If we can take these steps, there could be more competition among international currencies and the key currency will have to take responsibility in maintaining the currency value, namely the exchange rate. As a result, we will have a more stable international financial market with fewer international financial crises.

 

（作者为上海社会科学院世界经济研究所副所长，研究员）

 

来源：日本 PHP 研究所《全球论坛》电子版2009-08-24