On with the dolleuro

Sin­gle world cur­rency could add US$36 tril­lion to world­wide as­sets

Finweek English Edition - - Openers -

AS GOV­ERN­MENTS and cen­tral banks world­wide seek to co-or­di­nate their poli­cies so as to soften the blows be­ing de­liv­ered to economies ev­ery­where, it’s per­haps op­por­tune to con­sider the pos­si­bil­i­ties of a sin­gle world cur­rency. That is, of course, not a new idea. Six decades ago the great Lord Keynes, from whose think­ing the World Bank (WB) and the In­ter­na­tional Mon­e­tary Fund (IMF) were born, sug­gested a sin­gle world re­serve cur­rency “to be known as the ban­cor”.

In 1969, the IMF es­tab­lished the sys­tem of spe­cial draw­ing rights (SDRs) to sup­port the post-Sec­ond World War Bret­ton Woods fixed ex­change rate sys­tem. SDRs were based on a val­u­a­tion that in­cluded the price of gold and a bas­ket of ma­jor cur­ren­cies.

How­ever, the Bret­ton Woods sys­tem col­lapsed when Pres­i­dent Richard Nixon shut the gold win­dow at the US Trea­sury. That win­dow al­lowed for the free con­ver­sion by for­eign­ers of US$35 into an ounce of gold. Of course, gold then soared and the world has since ex­pe­ri­enced high lev­els of cur­rency in­sta­bil­ity.

Such in­sta­bil­ity pro­vides op­por­tu­ni­ties for spec­u­la­tion, as was the case when Amer­i­can fi­nancier Ge­orge Soros made a bil­lion dol­lars bet­ting against the Bri­tish pound in the early Nineties. It’s in­dica­tive of the dan­gers of such spec­u­la­tion that Soros gave back most of his pound win­nings when he bet in favour of the yen against the US dol­lar. Live by the sword, etc...

Soros – in his 1987 book The Alchemy of Fi­nance – ex­pressed his sup­port for a sin­gle world cur­rency, not that that de­terred him from seek­ing to profit from cur­rency in­sta­bil­ity. Those who agree with him point out that, with a sin­gle world cur­rency, an es­ti­mated US$400bn/year in trans­ac­tion costs would be saved. In a re­cent book – The Sin­gle Global Cur­rency – Amer­i­can econ­o­mist Mor­ri­son Bon­passe cites a stag­ger­ing fig­ure of $36 tril­lion that could be added to world­wide as­sets if a sin­gle cur­rency were to be adopted.

Any­one who trav­els will tes­tify to the ex­or­bi­tant charges cur­rency dealers – mostly banks – levy on buy­ing for­eign ex­change. Not only do they charge heavy and ap­par­ently un­reg­u­lated com­mis­sions, they also screw the buyer (or seller, as the case may be) on the ac­tual rate of ex­change.

Writ­ing in E-Com­merce Times, Theodore di Ste­fano, founder of Cap­i­tal Source Part­ners, points out that while a sin­gle cur­rency wouldn’t pre­vent trade im­bal­ances aris­ing, it would elim­i­nate the cur­rency as­pect of that. The prob­lem of a trade deficit, such as the US is now ex­pe­ri­enc­ing, would in a sin­gle cur­rency regime not be elim­i­nated but the cur­rency as­pect could be thus re­mov­ing a cen­tral cause of in­sta­bil­ity.

Di Ste­fano adds: “There are, of course, other eco­nomic con­cerns about any coun­try be­ing a net im­porter. But at least the im­pact of trade im­bal­ance will no longer be of con­cern re­gard­ing cur­rency im­pacts.”

Cur­rently hang­ing over the US and the world is the spec­tre of China pan­ick­ing over its tril­lion US dol­lar hold­ing of the green­back. Out of fear – or, per­haps, for other un­kind rea­sons – China could quite eas­ily send the US dol­lar tum­bling, adding to world cur­rency in­sta­bil­ity and thus hob­bling com­mer­cial ex­change and in­ten­si­fy­ing the world eco­nomic cri­sis.

It’s dif­fi­cult to com­pre­hend the di­men­sions of the world cur­rency mar­ket and it should be borne in mind this mar­ket is al­most to­tally un­reg­u­lated and a haven for ma­nip­u­la­tors all over the globe. Work­ing in con­cert but un­trace­ably so from dis­tant cor­ners of the earth, 24 hours a day, th­ese op­er­a­tors can gen­er­ate mas­sive swings in cur­ren­cies, par­tic­u­larly a rel­a­tively tightly traded unit, such as the rand, by their own buy­ing and sell­ing ac­counts or for that of their in­sti­tu­tional em­ploy­ers or, as is usu­ally the case, for both.

They would be loath to try such tac­tics in listed shares or bonds with gov­ern­ment and ex­change reg­u­la­tors keenly on the look­out for such shenani­gans. Jail time looms for those who try to ma­nip­u­late listed en­ti­ties.

But cur­rency trad­ing just can’t be reg­u­lated in the same way. Ac­cord­ing to the Pro­gres­sive Pol­icy In­sti­tute in Wash­ing­ton, such mar­kets turn over more than $3 tril­lion/day – more than 10 times the daily stock and bond turnovers and an as­tound­ing 100 times the value of all daily trad­ing in goods and ser­vices.

A sin­gle world cur­rency is, in terms of dom­i­na­tion of hold­ings by ma­jor cur­ren­cies, not so far-fetched a propo­si­tion. World re­serves are held as to 66% in US dol­lars, 25% in eu­ros, 3% in yen and 4% in ster­ling. That’s a to­tal of 98% – leav­ing 2% in 150 other coun­tries. Just merg­ing the euro and the US dol­lar into a sin­gle cur­rency would ac­count for 91%.

Dol­lar­i­sa­tion, or the sub­sti­tu­tion of the dol­lar for a lo­cal cur­rency, has been tak­ing place in many parts of the world, par­tic­u­larly in South and Cen­tral Amer­ica. In the case of the euro, the world has a highly suc­cess­ful lab­o­ra­tory ex­per­i­ment in a sin­gle cur­rency that turned into a solid and ef­fec­tive re­al­ity. Per­haps that’s what US pres­i­dent elect Barack Obama can do for the world. On with the dolleuro.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.