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UN Report Pushes for an International Reserve Currency

Anthony Randazzo
September 8, 2009, 9:45am

From the Telegraph (HT: Drudge):

In a radical report, the UN Conference on Trade and Development (UNCTAD) has said the system of currencies and capital rules which binds the world economy is not working properly, and was largely responsible for the financial and economic crises. It added that the present system, under which the dollar acts as the world's reserve currency, should be subject to a wholesale reconsideration.

Although a number of countries, including China and Russia, have suggested replacing the dollar as the world's reserve currency, the UNCTAD report is the first time a major multinational institution has posited such a suggestion. In essence, the report calls for a new Bretton Woods-style system of managed international exchange rates, meaning central banks would be forced to intervene and either support or push down their currencies depending on how the rest of the world economy is behaving.

As the report notes, there has been talk of a possible international reserve currency recently. The reality is that there really isn't anything stopping the rest of the world from dumping dollars or even creating some kind of new reserve currency. (It should pointed out that if this ever did happen, what would be most likely is the creation of more extensive "Special Drawing Rights" (SDRs) that are, simply put, accounting devises, not actual currency like Euro).

So why hasn't the world done this yet? Essentially because the world largely still feels that America is the most stable economic system. It's not that people think Europe is going to implode any time soon, but the continued use of the dollar around the world is like a price signal, it is people (and nations) voting with their wallets that, at the end of the day, they believe the United States is less likely to collapse than anyone else.

Of course the recent troubles have severely puctured that trust—thus the debate. But the reality is that Europe hasn't exactly been the most precient or stable either. Obviously there are still a billion questions about China's future that no one is looking to the yuan as the stablizer. So the dollar stands.

The question the UN is trying to push forward is whether this is a good idea moving forward. And we shouldn't necessarily assume that the best scenario moving forward is a dominant dollar. But what would be bad is having a group of self-established enlightened leaders assert themselves where the market is plenty capable of sending signals.


Anthony Randazzo is Director of Economic Research


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