World: China’s wish for a ‘world currency’ is just that, a wish
Talk of a “world currency” has started with statements by China’s premier and the head of its central bank. But it’s a silly kerfluffle.
China now realizes that by buying up $2 trillion of other nations’ money it chose to perch on the end of a very rotten financial branch. It craves a safer position, but there really isn’t one. So it has sent signals of its discomfort. That touched off coded exchanges with U.S. officials, ones misunderstood not only by ordinary citizens, but by currency traders who should know better.
China purchased all this foreign money to keep the value of its own currency as cheap as possible. Once China had the money, it needed to hold these funds in some form. Most went into short-term U.S. Treasurys or other dollar-denominated bonds and some into bonds in euros, pounds or yen.
The United States is doing two things that threaten the value of these Chinese-owned assets. First, the Fed is increasing the base of the U.S. money supply dramatically as it lends money freely to keep AIG and other financial firms from going under. Second, the Treasury is borrowing unprecedented sums of money to fund huge budget deficits.
Two weeks ago, Chinese premier Wen Jiabao said these developments worried him. He has good reason for concern. It is always dangerous for one nation to loan money to another nation in the second nation’s currency. No one in their right mind would loan to Paraguay in guaranis or to Nigeria in naira. The U.S. president and Treasury secretary responded by reminding the premier that U.S. treasury bonds are considered the world’s safest investment. Over 220 years, our government has never failed to make a single interest or principal payment when due.
That is true and it is completely irrelevant, as Barack Obama, Tim Geithner and Wen all know.
The United States can always print Federal Reserve notes to pay principal and interest on its bonds. The question is what those greenbacks will be worth, either in terms of their buying power within the United States or relative to other currencies.
One purpose of this dialogue was for China to signal its citizens that a foreign power, the United States, is responsible for any economic ills that may come down the pike. And Wen reminded the U.S. government that China can create difficulties by simply not continuing to keep vast sums in the United States.
Obama and Geithner’s statements also served a domestic purpose, trying to reassure U.S. citizens that they know what they are doing. They are not willing to tell the public how bad a set of choices we face, between financial sector collapse and depression on one hand and inflation and a doubled national debt on the other.
And so Chinese officials voiced wistful fantasies of an international currency that would allow them to have their cake and eat it too. Such a currency, they dream, would allow them to promote their exports with a weak currency but never run the risk of losing the value of their foreign exchange holdings. For some new currency to displace the U.S. dollar as a reserve currency, you would need huge amounts of bonds denominated in that new currency. That isn’t likely unless there is a corresponding multinational government to borrow via such bonds. There is no chance of that happening in time to affect either the United States or China in the foreseeable future.
Economist Edward Lotterman teaches and writes in St. Paul, Minn. Write him at ed@edlotterman.com.
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