G-20: dumping the devalued dollar for a new global currency?

Treasury Secretary Tim Geithner

The favorite U.S. financial cocktail of fiat currency, inflationary monetary policy, and massive deficit spending that has been the staple of U.S. economic policy for decades could soon result in a hangover that the dollar might not survive. Already new concerns are being raised as to what might happen is China and Japan refuse to continue buying U.S. debt. Tiger Management founder and chairman Julian Robertson told CNBC:

“It's almost Armageddon if the Japanese and Chinese don't buy our debt. I don't know where we could get the money. I think we've let ourselves get in a terrible situation and I think we ought to try and get out of it. If the Chinese and Japanese stop buying our bonds, we could easily see [inflation] go to 15 to 20 percent. It's not a question of the economy. It's a question of who will lend us the money if they don't. Imagine us getting ourselves in a situation where we're totally dependent on those two countries. It's crazy.”

In addition, there are serious worries that Japan will stop buying U.S. short-term debt.  These concerns are certainly warranted because the Treasury is unable to find a market for the long-term debt, and as history shows, borrowing for the short-term is far riskier and poses substantial threats, possibly undermining chances at any near-term recovery.  Thus, continued U.S. short-term borrowing without the ability to finance that debt by finding another party to buy it could very well be problematic.

The situation is compounded now that Chinese central bank governor Zhou Xiaochuan, has called once again for the dollar to be replaced by a new global reserve currency.  Currently the Chinese central bank is the largest holder of dollar reserves with over two trillion on hand. China, along with other G20 nations, is concerned over the devaluation of the dollar that has been exacerbated the current collaboration between the Federal Reserve and the U.S. Treasury, coupled with unrestrained Congressional spending.  The concern isover creating even larger deficits, now estimated at over $9 trillion, without counting future obligations that are estimated at over $80 trillion, and the practice of monetizing the debt. Monetizing the debt will ultimately result in very stiff inflation. In March, Chinese Prime Minister Wen Jiabao stated that he was “concerned about the safety of our assets,” and called for a new world reserve currency.

What is all the more worrisome, or at least should be, is the fact that Treasury Secretary Tim Geithner’s remark in late March that the Obama Administration was “open” to the idea of a new “sovereign world reserve currency” that would replace the ailing dollar, as suggested by China. Geithner immediately backed away from his comment and stressed his support for the dollar, but one has to wonder whether he is sincere and, if so, whether the U.S. will muster the intestinal fortitude to defend the dollar amid the massive push from virtually all other members of the G20 who prefer a new world currency.

There is also the concern that Washington wants the G20 to agree to a "framework for sustainable and balanced growth" that would include monitoring by an international group such as the IMF that would have a say over policies it deems unfair to lesser developed nations, or that are viewed as contributing to further "systemic imbalance." In other words, what the Administration is proposing is that nations including the U.S. should cede the sovereignty of their financial system to the oversight of a world governing body, something for which the Constitution does not allow.

The replacement of the dollar as the global reserve currency could likely have a devastating effect upon any chance of near-term economic recovery for the United States. Oversight of continued global economic decline by a body, which is itself overseen by the United Nations, is not comforting.

The dollar has lost 97% of its purchasing power since the Federal Reserve System was established in 1913, with most of that value being destroyed when the U.S. permanently came off the gold standard in 1971. Decades of poor fiscal policy, easy money (inflationary monetary policy), and deficit spending are now about to make their disastrous effects felt.  Perhaps Mr. Bernanke and Mr. Geithner ought to listen more attentively to the advice given by Dr. Ron Paul if they are sincere about working to restore strength to the dollar and a robust stability to our economic system

AP Photo Lefteris Pitarakis

For more info:  Inflationary Monetary Policy