Alternate currency systems

The US received a number of advantages in being the world's reserve


currency, especially in the years following the breakdown of the Bretton


Woods system – the US cost of financing was much lower than that of other


countries, allowing it to run greater trade


and financial deficits than those possible for other


countries.

However, such a system encourages economies to run excessive deficits, leaving inflation as the


only escape. The current global currency system is unsustainable –


it has not been effective in dealing with the financial


crisis; the US has a large deficit


that it may need to inflate its way out of; and emerging economies have had the incentive to


continually undervalue their currencies against the USD to make their exports more attractive, now believing that they would


not succeed if they allowed their currencies


to appreciate naturally.

Then what is the alternative?

Restoring the gold standard is impractical – a pure gold standard tends to


be deflationary, while a not-so-pure gold standard based on derivatives could


be manipulated like the current currency system.

A global currency is another possibility, and was suggested by John Maynard Keynes. However, current problems


with the eurozone highlight how unrealistic it is to have a single


currency representing relatively independent economies, with widely varying


industries and political systems To be successful, a common


currency would require a loss of sovereign power to a certain degree, with one


agency overseeing trade policy, including limiting surpluses and monetary


policy to avoid inflationary temptations.

Another alternative was suggested in early 2011 when the IMF issued a report on Special Drawing Rights (SDR) as a replacement


for the USD as the world’s reserve currency.







In 1969, SDR's were created as a more limited


global currency. They can be converted into a required currency at exchange


rates based on a weighted-basket of currencies.


When the IMF issues funds to economies, they are typically dominated in SDRs, the largest such issue being the


equivalent of USD250 billion in April 2009 in response to the private-lending


collapse in the financial crisis.

It is argued that they would be a less volatile alternative to the dollar,


despite not being a tangible currency.







Increasing the global role of SDRs and issuing more SDRs would reduce the


current problem of recessionary bias – during and after financial crises, the


burden of adjusting to payments imbalances falls on nations running large


deficits, the US in particular – by allowing central banks to


exchange the SDRs for hard currency, rather than exchanging dollars.


This would also reduce the need for countries to accumulate reserves,


facilitating a reduction in the global imbalances that result from countries


stockpiling USDs. And, the smaller scale of SDRs would help


sustain the recovery of the global economy without leading to inflation. That


being said, the final point is dependent on the IMF members limiting the


introduction of SDRs into the market over the next few years.







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