Written by Laurence Brahm - Published by South China Morning Post on 05/05/2009

When China’s central banker, Zhou Xiaochuan, proposed to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies”, he was making an all-too-obvious reference to displacing the US dollar.

The idea was summarily dismissed by US President Barack Obama, who insisted that Group of 20 nations should, instead, throw more money at stimulus packages. Debate erupted among China observers and global economists alike. Some said that Dr Zhou’s statements were his own and did not represent Beijing’s view. This is misleading: under China’s current administration of absolute political correctness, there are no “independent” viewpoints. Dr Zhou’s role, as central banker, was to float the idea publicly.

Mr Obama should take the idea seriously. Stimulus packages alone will not solve the global financial systemic disorder which, to a great extent, has arisen amid overspending in what is effectively a global credit pyramid scheme.

So why has the global currency idea emerged at this time? Some speculate that it represents China’s emerging new-found confidence in its own system amid the global financial crisis and collapse of the Bretton Woods system.

While such considerations may be factors in China’s assessment of the situation, Dr Zhou’s views probably reflect the leadership’s more basic pragmatism and self-serving, short-term interests. With US$2 trillion in foreign exchange reserves, China is the largest holder of US dollar-denominated financial assets.

Obviously its leadership should be concerned at this time. Dr Zhou’s comments sparked a global debate over issues that have been incubating for a long time among many economists; that the Washington consensus is a defunct theorem in need of replacement, not just repair. Nobel Prize-winning US economist Joseph Stiglitz called for replacing the US dollar as the reserve currency. “The global reserve system has been fraying for a long time. It’s hard to be a strong reserve currency when that currency is highly volatile,” he told the UN, which he advises. Effectively, the US dollar-based system forces poor countries to lend to rich countries at virtually zero interest rates, rather than using reserves to stimulate their own economies. This, in turn, creates a base for further instability.

David Rothkopf, a senior economic official in the Clinton administration, rejects the Washington consensus. “One of the reasons that the IMF has fallen onto such hard times is that it was seen as forcing the developing world to accept an orthodox recipe for capitalism that was politically difficult to swallow,” he said. “This view – ‘the Washington consensus’ – was a tough sell even before Washington made itself anathema to the world with Mr Bush’s foreign policy.”

Andrey Denisov, Russia’s deputy foreign minister also leans heavily towards global financial regime change. “This proposal is aimed at a practical realisation of the idea about a new global accounting unit or a new global currency,” he said. “It is a question which should be discussed to create a consensus.”

In response, US Treasury Secretary Tim Geithner said the dollar will remain the world’s dominant reserve currency and Mr Obama declared the dollar “extraordinarily strong”. Denial is usually the first reaction to a terminal disease.

The current financial regime cannot continue to be propped up by more stimulus packages based on assumptions of the infallibility of Adam Smith and John Maynard Keynes – which are mostly illusory. It is unsustainable and passes on the dangers of  global financial instability to the next generation, with a compounded risk. In this case, China and Russia have a longer- term view. It is time for a new global consensus.

Laurence Brahm is a global activist, international mediator, political columnist and author. He is the leading advocate of a fresh development paradigm - The Himalayan Consensus - an innovative approach to development.

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