I’m going out on a limb here. Monetary policy is certainly not my field. But it seems to me that UNCTAD (UN Conference on Trade and Development) has dropped a bombshell. A report released in Geneva last night calls for the creation of a new monetary system that is based on multilaterally agreed principles and rules in order to create needed macroeconomic stability for the globalized economy and for a level playing field for international trade.
In other words – to create a new international reserve currency!
The actual report is a hefty document of some 200 pages – Trade and Development Report 2009 (pdf) – the relevant section starts at page 121.
Another issue that has received renewed attention in the discussion about necessary reforms of the international monetary and financial system is the role of the United States dollar as the main international reserve currency. The current international monetary system, with flexible exchange rates between the major currencies, the dollar as the main international reserve currency, and free international capital flows, has failed to achieve the smooth adjustment of payments imbalances. This is the conclusion reached by the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System (also known as the Stiglitz Commission) (UNPGA, 2009).
[…]
However, an international reserve system in which a national currency is used as a reserve asset and as
an international means of payment has the disadvantage that monetary policy in other countries cannot be designed independently from the monetary policy decisions of the issuing central bank. These decisions are not taken in consideration of the needs of the international payments system and the world economy, but in response to domestic policy needs and preferences in the country of the reserve currency. This problem also exists in a multiple reserve currency system. Moreover, an economy whose currency is used as a reserve currency is not under the same compulsion as others to undertake the necessary macroeconomic or exchange-rate adjustments to avoid continuing current-account deficits. Thus, the role of the dollar as the main means of international payments has also played an important role in the build-up of the global imbalances in the run-up to the financial crisis.
While several blogs have made references to it, I have been unable to find MSM coverage of the issue, except Bloomberg:
The dollar’s role in international trade should be reduced by establishing a new currency to protect emerging markets from the “confidence game” of financial speculation, the United Nations said.
UN countries should agree on the creation of a global reserve bank to issue the currency and to monitor the national exchange rates of its members, the Geneva-based UN Conference on Trade and Development said today in a report.
China, India, Brazil and Russia this year called for a replacement to the dollar as the main reserve currency after the financial crisis sparked by the collapse of the U.S. mortgage market led to the worst global recession since World War II. China, the world’s largest holder of dollar reserves, said a supranational currency such as the International Monetary Fund’s special drawing rights, or SDRs, may add stability.
“There’s a much better chance of achieving a stable pattern of exchange rates in a multilaterally-agreed framework for exchange-rate management,” Heiner Flassbeck, co-author of the report and a UNCTAD director, said in an interview from Geneva. “An initiative equivalent to Bretton Woods or the European Monetary System is needed.”
Behind the bureaucratic language of the report there seems to be a very blunt message to the US and the Fed. What will the official US reaction be? It appears to me that this is a paradigm shift if ever there was one. I’d warmly welcome comments and discussion from users with relevant background on the topic.