First of all I would like to express my personal thanks to speakers and participants in the workshop on a sustainable financial system and developed SDRs. The presentations and the discussions were thought-provoking and they showed the need for more reflections and research, which most certainly will be taken on board in the white paper that is the planned outcome of the conference.
We clearly need to be more precise about the objectives the developed SDRs would meet. One goal for the developed SDRs seems to be to offer an alternative currency for cross-border exchange, the volume of which whould be mainly driven by the needs of the “real” economy and investments in “real” assets. However, already this seemingly uncontroversial goal raises immediate questions. What is the”real” economy and what is the value of “real” assets? If other goals are added, such as the balancing of current accounts and the stabilization of exchange rates the complexity increases further. In addition, if we among the goals want to include the role that SDRs could play in the necessary transition to a more sustainable economy and in the support of the development of the living conditions for the billions living in poverty we may reach a complexity level that is outside the reach of what now is possible. A “big-bang” solution may be attractive in the case of a new financial crisis, but as, for the time being, the “muddling through” scenario is slightly more likely, a more gradual approach could be favoured.
I have taken with me seven research questions from the workshop. They are in no way the only questions that can be raised and other participants may have other questions they have brought with them home, but I would like to share my seven questions with you for the purpose of promoting a common understanding of the challenges ahead.
1. What are the realistic alternatives to the USD as a reserve currency?
It is clear that China does not wish the RMB to take over the role as global reserve currency as they are – and probably rightly so – afraid to be caught in the Triffin dilemma and become unable to tackle the domestic interest problem. They may end up having no choice in the matter as history has shown that the switch from one reserve currency to another can be surprisingly fast.
Many see the development of three regional reserve currencies – the USD, the Euro and the RMB. But would this be a stable sloution? It is unlikely, as Carlo Jaeger discusses in his blog input. We need to look more into it and may add some insights from research in other areas to the subject.
The third alternative is a new global reserve currency and given that the other solutions have some drawbacks, this is a solution worth looking into.
2.Who creates the SDRs for commercial use?
Base money are created by central banks, but the overwhelming creation of commercial money is done by banks. Who would create the SDRs, which Governor Zhou is proposing to be used for commercial purposes? If banks would be allowed to create them, what would be the requests for reserves? There is a big difference between banking systems today as the UK is demanding 0 % in reserves, the US in principle 10 % and China above 20 %. What would be the optimal liquidity reserves in SDRs if banks are allowed to create them?
3. How could a smooth and gradual transition look like?
Governor Zhou’s proposal is sketchy on this point. He just recognizes the attractiveness of a gradual approach.
4. Would we need capital controls?
The truth is that financial markets with private creation of money have been inherently unstable sinch the 17th century with the exception of the decades after Bretton-Woods. Perhaps we need to reintroduce some controls to reduce speculation and focus the system on the main objectives.
5. Stabilize exchange rates
The status of the USD as rressrve currency is automatically pressing the USD upwards. The introduction of SDRs would relieve the USD from that pressure and rebalance the the exchange rates. A question: Would even a reintroduction of Bretton Woods in some form or the other be a possibility?
6. Do we need to balance the current accounts?
Keynes saw a rebalancing of current accounts as a major objective of his clearance union. As the exchange rates can be expected to be adjusted at the introduction of SDRs this problem can be expected to be reduced, and especially if a new “Bretton Woods” is introduced.
7. How about the store of value?
The Chinese are expressing concerns about the risk that the US is going to solve its debt problem by printing money. Given the gridlock in the US Congress it is a worry that seems reasonable. The USD was a reserve currency when Roosevelt unilaterally disconnected the USD from the gold standard and it was a reserve currency when Nixon decided to print money to pay for the Vietnam war. The USD as a store of value is a shaky proposition given the present debt levels. The SDRs could perhaps if connected to the real economy (in a wise way) offer a better store of value. A concern is that commodity markets are highly volatile and manipulated due to speculation and cartels.
Once again -thank you all for your contributions to the workshop and we are looking forward to your input to the white paper!
Best regards
Ulf (Dahlsten)
