Dominique Strauss-Kahn, managing director of the International Monetary Fund (IMF), thinks the establishment of a new global currency would not only challenge the US dollar’s dominance but also protect the world’s financial system from future shocks and instability,
Speaking at a lecture in Washington D.C. this morning, Strauss-Kahn said that while some observers believe that the currency system is working well (citing the resilience and safe-haven status of the dollar), he takes a more pessimistic view.
“While the world as we know it did not end in 2008, it was only through extraordinary international policy cooperation that a far worse outcome was averted,” he noted.
“Moreover, the recovery underway today is not the recovery we wanted. Unemployment remains at record highs, with widening income inequality adding to social strains.”
Even worse, the IMF boss warned, global imbalances are back, with problems that arose prior to the crisis, including large and volatile capital flows, exchange rate pressures, and rapidly growing excess reserves – coming to the fore again.
“Left unresolved, these problems could even sow the seeds of the next crisis,” he stated.
Strauss-Kahn explained that fears about the health of the international monetary system mostly has to do with volatility.
There is “a sense that money sometimes flows around the globe in too-volatile a fashion and that countries need a more stable, more predictable external environment in order to prosper”, he said.
As such, he suggests that currencies of some leading emerging markets currencies, like China’s renminbi, be added to a basket of currencies administered by IMF would be one way or increasing stability to the global system.
Using the [Special Drawing Rights] to price global trade and denominate financial assets would provide a buffer from exchange rate volatility, Strauss-Kahn said, and issuing SDR-denominated bonds could create a potentially new class of reserve assets.
China (which holds trillions of dollars in reserves) has repeatedly voiced its concern over the status of the dollar. Last month, the president of Russia Dmitry Medvedev proposed that the BRIC currencies should be included in the SDR basket. Similarly, President Sarkozy of France agreed that the yuan should be included.
Increasing the role of the SDR would clearly require a major leap in international policy coordination,’ Strauss-Kahn added. “For this reason, I expect the global reserve asset system to evolve only gradually, and along with changes in the global economy.