SDR as successor to the greenback? Not so fast
A lot of sense and nonsense has been talked about the yuan possibly emerging as the future global reserve currency.
China itself has given a clear 'no', suggesting instead that a bigger role should be given to a synthetic currency, the special drawing right (SDR).
It is clear that Beijing wants to challenge the US dollar's leading role without having to accept the global responsibilities of having the yuan take over. That is why various Chinese authorities have pointed to the SDR as the alternative global currency.
It is easy to understand China's frustration over the dollar. Its economy has grown at record rates, allowing the country to accumulate record foreign-exchange reserves. But the reserves are diminishing in real value because most are invested in dollars that are worth less every year.
Brazilian economist Ricardo Amaral claimed that today a 1947 US dollar is worth 8 cents, or only 1 cent if the dollar is valued with consistent methods of calculating inflation.
Any surplus country seeking to diversify outside the dollar faces difficulty finding a currency strong enough. As George Soros said, 'the dollar is a very weak currency, except for all the others'.
Britain lost its position as the world's largest economy to the US in 1872, but not its place as the biggest exporter until the start of the first world war, when the switch in net debtor and creditor roles began with wider use of the dollar as a reserve currency. It was not until after the second world war that the pound was supplanted by the dollar.
China will not become the largest economy until 2015 to 2030, and Beijing is not prepared to relinquish controls over the yuan to allow the full convertibility required of a global reserve currency. It is questionable whether the world can afford the mess of prolonged final agonies of the reserve dollar. The rapid rise in oil prices last year was at least partially caused because oil is quoted in terms of the weak greenback.
As it is, there has been a switch among reserve-holders into shorter-term US treasury instruments; the average maturity of the debt is 4 1/2 years. This leads to the potential spectre of a disorderly fall in the dollar unless Washington can get its fiscal act together quickly.
Surely, it is possible for the mature economies to devise a new reserve currency that global trade and economies can function without being heavily dependent on the dollar?
This is a $64 trillion question, to which the SDR seems the obvious answer. But would Beijing be prepared to increase the yuan's convertibility to satisfy the minimum needs for inclusion within a new SDR?
Even if it would, there are major questions of responsibility and authority. By whom and how would decisions be taken to issue SDRs?
In some ways the SDR as the ideal reserve currency is similar to having Esperanto as the world language.
