ST. LOUIS (MineFund.com) -- We expect Robert B. Zoellick to be the last American president of the World Bank for some time. His pending departure presages much greater changes for the international financial system that will not just be a product of the financial crisis.
Speaking last year at Johns Hopkins University's School for Advanced International Studies in Washington, Zoellick said: "Bretton Woods is being overhauled before our eyes". Whilst the media is emphasizing his comments on the displacement of the dollar as numeraire, we believe he is signaling a more profound change that could culminate in the eventual emigration of the global financial institutions away from Washington.
Physical relocation is a long way off, but Zoellick's term is drawing to a close quite soon. He was heavily supported by the Europeans as a compromise candidate to replace Paul Wolfowitz who was drummed out after a hysterical campaign by antagonists. It is quite possible that the Europeans, back by any number of anti-American factions, is waiting in the wings to install the quid pro quo for Zoellick. And the timing is ripe given the current Administration's post-modern multilateral sceances.
Part of the deal may have involved Zoellick working within the Washington elite to soften them up to accept parallel reserve currencies that might be more regionally based, but almost certainly reduces American discretion in international monetary affairs.
Notably, in March of last year, Zoellick told Reuters that although a strong dollar was important and should remain the principal reserve currency, "The question will be whether you have complementary measures". Zoellick's position continues to develop and he has been talking about the dollar as a "major currency" rather than the "principal reserve currency."
The tearing of Europe's fiscal wallpaper, otherwise known as the euro, has been inconvenient, but it doesn't change the long-range thrust.
Zoellick's use of the word "measures" is significant. He should have been asked to clarify that statement, but we can infer that the Group of Twenty (G20) has commenced the process of developing policies and mechanisms that constrain American power to abuse the dollar as the world's principal reserve currency.
In the absence of a gold standard, alternative mechanisms must be developed to prevent a recurrence of the 1960s tension and 1970s malaise. That process is now underway.
Quo Vadis China?
Whilst there is a great deal of concern about China's leverage over the United States because of the dollar assets it has accumulated, we should not forget that the purpose of dollar hoarding has been to prevent an inflation of the yuan - especially relative to the dollar. Asia holds nearly $5 trillion in forex reserves; primarily in dollars.
The problem for China and its Asian peers is that there is no credible alternative to the dollar yet. They are also acutely aware that they may be left holding depreciating or devalued dollars so they cannot afford to be passive. None of them will trust the other to manage a reserve currency, and nor would they trust and of the G20 countries for that matter. Consequently, the intermediate effect is likely to be a continued conversion into hard assets like commodities.
It then becomes obvious that the coterminous major challenge is the re-denomination of commodities. For as long as major commodities are priced in dollars, the dollar will remain the numeraire.
This is where China's ambitions lie. A while ago, Ha Jiming, Chief Economist at China International Capital, China's largest investment bank, noted that his country runs "a huge deficit against raw-material-producing countries." His solution for China is obvious (emphasis ours):
It makes sense even for a deficit country to trade in its own currency due to seigniorage (the profit made between the cost of printing money and its face value), convenience and, according to International Monetary Fund studies, improved terms of trade. Since payments of an international currency are frequently processed through the banking system of the issuing country, Chinese domestic financial institutions would also benefit from the wider global use of the yuan.
China's economic growth has elevated it to become the primary off-take partner for most raw materials. Add that to America's current financial and ballooning fiscal crisis, and it becomes plausible that China could force commodities it buys to be priced in yuan.
It would be a reserve currency coup - a relatively stealthy, non-confrontational, market-driven resolution to the dollar "problem".
Meanwhile, Ha is also a strong proponent of a global super-currency. However, he is opposed to floating exchange rates and is an advocate of managed rates. No prizes for guessing why if you're China. Ha favors a New Special Drawing Right - IMF funny money - as the super-currency. However, it's doomed to failure since the IMF would be responsible for liquidity and settlement.
Repricing commodities by, for and in China
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