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New World Money

March 26, 2009

The Globo: The New World Currency?

Yesterday while watching Bloomberg news I caught an interesting bit of economic gossip floating around. According to Bloomberg, and various other news sources, the governor of the People’s Bank  of China (Zhou Xiaochuan) is calling for the creation of a global tender to replace the US dollar as the standard in reserve currency. Of course Russia quickly jumped on board to this idea as well, but US financial experts Ben Bernanke and Timothy Geithner aren’t buying it.

I think a largely this is a political power move by China. A week ago Chinese Premier Wen Jiabao said that he was worried about the status of the falling dollar, mostly because a large amount of his countries assets lie within US treasury bonds. While this places China in strong a position to criticize the US economy, this action nothing more than the dragon flexing its muscles. As Marcus Glee points out in his article, were China to cash out on US bonds the dollar would drop and the Yuan would sky rocket. That would spell good-bye to cheap Chinese labor and goods, and hence wipe out China’s export business. Peter Harthcher of the Sydney Morning Herald said it best in his article, “This is the financial version of the doctrine of ‘mutually assured destruction’ that kept the US and the Soviet Union from launching their nuclear arsenals at each other during the Cold War.” But global power plays aside, is a global currency really a good idea?

To better understand the effects of a global currency, let us first examine the Euro: the fairly new universal mint of Europe. I can remember when I had first heard of the Euro way back in the day. At first the idea was completely crazy to me, but the more I thought of it, the more it made sense. All of those nations are so close to each other, and instead of having to constantly worry about exchange rates having a single dollar erases a lot of hassle for businesses, trade, and tourism. Again, the largest benefit from switching to a European currency was for ease of business. And easier business transactions across national borders stimulates the European economy by making international more attractive. But the world is separated by oceans, mountains, and time-zones. A single European currency is understandable due to the sheer proximity of the countries, but does it make sense to make cents global? In one word, yes. The world is becoming a smaller place, and the exchange of ideas and goods are increasing exponentially. In my opinion, it’s only a matter of time before the coin goes global. So the next question is, is globalization a good thing?

Unfortunately I don’t have a clear answer to that question. Ask the Indian who now has a job thanks to AT&T outsourcing work to Delhi and they’ll say “yes”. Ask the American who lost his job to that Indian who will work for less, and they’ll say “no”. The bottom line is when more wealthy countries export jobs to other countries those nations gain capital and begin to develop more. Many countries rely on US and European business to keep their unemployment rates down. This reasoning is why so much of the world is fearful of the newly found protectionist policies that the US is beginning to turn to.

I think globalization can work, but should only be enacted if it benefits the human race at large, and keeps two things in mind: it can create economic stability in ALL countries, and all litigation keeps the well-being of the world’s citizens as the priority. In 1997 the United Kingdom Treasury created a document outlying “five [economic] tests” that must be passed if their economy was to converge with the Euro. I won’t lay them out here (you can check them out yourself), but they basically state that in order for the UK to adopt the Euro, it must be able to do so in a “sustainable and durable  way”. Clearly this must be the first test that all countries can pass before a global currency can be created. I urge you to watch Life and Debt, by Stephanie Black, and you will get a better idea of why it’s so important to have a solid economical and industrial infrastructure before being thrown into the flames of the IMF. Lastly, one of the strongest arguments against a universalized currency is that the centralized bank may not always have the best interests of all countries involved, and those involved lose the democratic voting power to hold those making the decisions in check. This is an excellent argument, but I think it only works if the bank/comity making the decisions doesn’t make morally balanced actions. But in the same way that all religions are linked through a single moral vein (treat others as you would treat yourself), so can a globalized bank find a universal coda of business and lending that benefits everyone, regardless of culture or creed. There is no clear path out of the economic jungle that we’re in right now, but offering equal growth opportunities for everyone should be the main priority. Or as  Luis Inácio Lula da Silva, the current President of Brazil, stated in an article in the Financial Times, “I am not worried about the name to be given to the economic and social order that will come after the crisis, so long as its central concern is with human beings.” A global currency can work in the future, but for now we still have a long long way to go.

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