It's All About the Benjamins

As an American, I of course love the fact that the dollar is the world's reserve currency. I just took a trip to Costa Rica, and was able to pay for almost everything in greenbacks. Globally traded commodities like oil are priced in dollars. It's the de facto language of global finance. And since every country needs some dollars for international transactions, the U.S. has access to lots and lots of cash, enabling us to borrow cheaply.

So naturally, all this talk of the dollar losing its preeminent status worries me a little. A small furor began on Monday when Zhou Xiaochaun, China's central bank governor (i.e. their Ben Bernanke), released an essay calling for an "international reserve currency that is disconnected from individual nations." Translation: "Now that you guys are printing money to prop up your banks, we expect inflation in the U.S., which will erode the value of the $1 trillion in U.S. currency we hold and cause us to lose our shirts. We want to diversify." (You can find more background on this idea in Rana's post yesterday about her conversations with Joe Stiglitz and Jim Rogers.)

That might have been the end of the story -- developing countries make audacious statements all the time -- except that everyone's taking the idea very seriously (including Joe and Jim). Treasury Secretary Tim Geithner said he's "very open" to a global reserve currency; after he said that, the dollar's value plunged, and he had to backtrack. That wasn't enough to quash the issue, though. UK Prime Minister Gordon Brown says that currency issues will definitely be on the agenda at the upcoming G20 meeting.

So naturally I've become a little worried that I might have to bring renminbi or yen on my next Costa Rican vacation. Luckily, I thought to check in with Brad Setser, an economist at the Council on Foreign Relations and an expert on China and currency and just an all-around smart guy. On his blog, he writes that "The United States shouldn't -- in my view -- be opposed to the development of an Asian reserve currency, or a set of Asian reserve currencies, that generally float against the dollar and the euro."

Setser rightly points out that after World War II, European nations pegged their currencies to the dollar -- just like China does today. They eventually gave up on the dollar as a reserve currency, and moved first to the German deutschmark and, eventually, the euro. "That hasn't been bad for the U.S.," says Setser. "Moves in the euro/dollar [exchange rate] have allowed needed economic adjustments between the U.S. and Europe to take place." In other words, if China were less dependent on buying dollars, it might be a good thing for both countries.

I don't see the dollar going away anytime soon, but it wouldn't be an unadulterated bad thing if it were a little less important than it is today.