[OPE] Shi Jianxun on dollar hegemony

The front-page commentary in the overseas edition of the People's Daily said that Asian and European countries should banish the U.S. dollar from their direct trade relations for a start, relying only on their own currencies. (...) "The grim reality has led people, amidst the panic, to realize that the United States has used the U.S. dollar's hegemony to plunder the world's wealth," said the commentator, Shi Jianxun, a professor at Shanghai's Tongji University. Shi, who has before been strident in his criticism of the U.S., said other countries had lost vast amounts of wealth because of the financial crisis, while Washington's sole concern had been protecting its own interests. "The U.S. dollar is losing people's confidence. The world, acting democratically and lawfully through a global financial organization, urgently needs to change the international monetary system based on U.S. global economic leadership and U.S. dollar dominance," he wrote. Shi suggested that all trade between Europe and Asia should be settled in euros, pounds, yen and yuan, though he did not explain how the Chinese currency could play such a role since it is not convertible on the capital account. http://www.reuters.com/article/newsOne/idUSTRE49N1XX20081024

Probably this is more rhetoric than substance. Given large "capital flight" from other currencies into the US dollar, it's difficult to see how the US dollar is "losing people's confidence" right now. It is certainly possible for governments to diversify out of dollar holdings, but that is unlikely to happen very quickly, as I have argued before. Actually, governments have only limited grip on the world trade in dollars; it is difficult for them to prevent private companies from trading in dollars if they want to.

Selling off large US dollar holdings in favour of another currency presupposes that there are buyers/sellers who are either willing, or forced, to buy/sell these currencies. But since large sell-offs have a strong, direct effect on exchange rates, most likely dollar holders would move pretty cautiously and gradually in this area. In aggregate, a move out of dollars would probably hurt Chinese foreign trade more than aiding it, right now.

Effectively the US dollar functions as world money - another currency unit functioning as world money would require a process similar to how the Euro came into being. The main advantage of such a new world money unit would presumably be, that its value would be more stable, because it no longer depends on the relative economic strength of any particular country. But even if it was adopted after a lengthy process of negotiations, stronger economies would most likely gain more benefits from using it, than weaker ones. But that is just to say that "dollar hegemony" ultimately is not based simply on the "use" of the dollar in world trade, but on the size and strength of the US economy.

Jurriaan

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Received on Sun Oct 26 10:09:50 2008