I. Rising wind forebodes coming storm
The United States, the world currency hegemon, has recognized that the effort of using diplomatic means to pressure China one-on-one to appreciate the Renminbi (RMB) has failed.
The speed of starting an international currency war against the exchange rate of the RMB is accelerating.
The US House of Representatives last month overwhelmingly passed a bill designed to punish the undervalued RMB. The bill authorizes the government to impose retaliatory tariffs against products of “countries that engage in exchange rate manipulations”. What can be expected is that if China does not substantially increase the value of the RMB, the United States will for some time in the future impose tough economic sanctions and practice trade protectionism against China. Not only that, the situation shows that the United States is stepping up its effort of launching an international force to upgrade the US-China bilateral dispute into a joint action of global pressuring on China. Recently the European Union (EU) has joined the ranks of strongly criticizing the RMB exchange rate.
When US Treasury Secretary Timothy Geithner on October 6 talked about the issue of the RMB exchange rate at the Brookings Institution in Washington, he said that the issue of the exchange rate is “the central existential challenge of cooperation internationally”. He said that the United States will continue to promote the resolution of the exchange rate issue through multilateral channels.
On October 8, the annual meeting of the International Monetary Fund (IMF) and the World Bank (WB) began in Washington. The US Government suddenly proposed to link the share adjustment with the exchange rate reform and use this as the bargaining chip for pressuring the RMB appreciation. Prior to this, Geithner had issued an ultimatum to the IMF saying that if this international organization were not able to take a more effective position on China’s exchange rate, it would lose its US support on a series of issues. "That is the deal on the table", he said.
Geithner expressed that when large economies with undervalued exchange rates acted to keep the currency from appreciating, that encourages other countries to do the same and would endanger the global economy.
In fact, since the reform of the RMB exchange rate mechanism in 1994, the real effective exchange rate of the RMB has appreciated by 55%, whereas many major currencies in the world have devalued. The reform of the RMB exchange rate mechanism further deepened after July 2005 and the RMB has cumulatively appreciated 22% against the dollar. But the US trade deficit has not decreased because of this, instead it continues to rise. In fact, the people with insight around the world, including many authoritative economists in the United States, have been aware of the root problems of the heavily indebted, non-revivable US economy, global trade imbalances, asset bubbles and inflation dangers. These problems are not due to the RMB or the exchange rate of any country’s currency. Instead, they are due to American self-assured currency hegemony and the inevitable consequences of falling into the deep, unsustainable, structural type of economic morass of living beyond one’s means at the expense of others.
On October 6, while attending the China-EU Business Summit in Europe, Chinese Premier Wen Jiabao said that if the RMB appreciates too rapidly, "It will be a disaster for the world" and he called on countries not to pressure the RMB appreciation. However, it seems that the US has escalated the exchange rate war with China into an uphill battle involving a global currency strategy and has no intention of taking it lying down.
The G20 summit will be held on November 11 this year in Seoul, Korea. The United States has declared that it will mobilize different nations at the meeting to pressure China on its exchange rate reform. The climax of the confrontation is approaching. Will China be able to withstand the pressure to avoid the huge economic upheaval caused by the sharp appreciation of the RMB?
China is the world's second largest economy. Once the United States encirclement of the exchange rate against China turns the trick, it will be like teaching China a lesson to warn other countries and the US will gather great momentum. Other big and small economies will be forced to bow down and the world will be the US’ oyster.
Today the target is directed at China's exchange rate. In fact, Europe, Japan, South Korea, Brazil… are all a pack of Uncle Sam’s subjects. How should the international community respond to this?
II. Times call for the World Currency Primary
Using the dollar’s privileged position as leading international currency, the United States has harvested abundant seigniorage and implemented "twin deficits" in fiscal policy and trade to support its national budget deficit and lavish over-consumption. If this fundamental situation cannot be changed, the future international financial crisis is bound to repeat more frequently, intensify, and finally turn into a general world currency crisis of no return. Let us leave aside the international moral responsibility for the moment. Even if it is in the US self-interest, this seeking quick relief regardless of the consequences is no different from an accelerated suicide. It will not guarantee the US global hegemony nor sustain the "American way of life". The catastrophic consequences would be disastrous. Unfortunately, the present decision-making system of the US government is wallowing in this "heroin economy" and not being able to get out of the "drug addicts" policy. In fact, it can only do nothing by muddling along and following routines without knowing where it would end.
The United States is trying to use international forces to pressure the RMB appreciation. This is only to pass on the conflicts (the unemployment rate and the double deficits remain high, the midterm Congressional elections are approaching...) for self-paralysis and temporary relief. It is not contributing to the treatment of chronic diseases in the structural imbalance of the world trade and is least effective in helping the US economy return from the wrong track and act in the nick of time.
Any kind of sovereign currency acting as the international currency is naturally unreasonable since there is a fateful unsustainability associated with it. This kind of international currency can only be a special transitional case in history.
History has chosen the dollar. In the "non-system system" after the Bretton Woods system was over, the dollar is still charged with the task of being the major international currency to support and contribute to the huge success of globalization. But following the negative effects that are becoming more and more pronounced the current international monetary system has become the instability and crisis-prone source of the global economy. The current round of global financial tsunami triggered by the US sub-prime mortgage crisis shows strongly the fatal ills and unsustainability of the existing world monetary system. These have given birth to the urgent historical mission of seeking a road of fundamental reform.
On March 23, 2009, Governor Zhou Xiaochuan of the People's Bank of China published an article entitled "Thoughts on the Reform of the International Monetary System". He pointed out that “The current crisis warns us again that we must creatively reform and perfect the existing international monetary system to promote the international reserve currency in the direction of perfecting a stable currency, an orderly supply and an adjustable volume in order to fundamentally safeguard the stability of the global economy and the financial markets”.
Since this round of the financial crisis, during each of the previous major international economic conferences, almost everyone proposed a historic reform to use a more equitable, responsible and effective alternative world currency to replace the dollar hegemony. We all know that if the reform is not carried out as soon as possible, after the financial turmoil, the chronic long-standing abuse will continue and the global monetary system will deteriorate more. The future adjustment will become increasingly difficult and is bound to accelerate into a large, deep and comprehensive currency crisis. But exactly what can be used to replace the dominating dollar that has been both loved and hated by the world?
In order for economic globalization to achieve complete success, it is necessary to establish a unified world currency, the World Currency, that has a legal status, is de-linked from national sovereignty, issued with no reserves, freely tradable and freely convertible. Only this can thoroughly solve the world currency chaos and eliminate the helplessness of the weak currencies being bullied by the strong currencies. However, this great unified world currency can only truly rise on the horizon when the world is or is close to achieving a utopian status.
A unified World Currency is still an unrealistic and unattainable ideal.
So, can we seek to build a “World Currency Primary” (WCP) for the benefit of the entire human family under the realistic condition that countries (and regions) in the world maintain their own independent sovereign currencies? This WCP should effectively alleviate the global financial turmoil, meet the fundamental interests of all countries including the United States, reflect the general direction of reforming the international monetary system and end the privileged position of a certain strong sovereign currency.
There have been waves of calls to reform the international monetary system. Unfortunately, apart from revisiting the old idea of the scrag-like "special drawing rights" (SDR), there has been no monetary proposal that makes the exact sense of a super-sovereign international reserve currency.
The SDR has been shelved for 30 years and has not yet grown out of its infancy. In essence, it is still a composite of several sovereign currencies and serves as an instrument for international payments. The inherent genetic defects determine that it cannot become a full sense of rationalized world currency. At best, it can only be a foil that is better than nothing. Thus, other than in the fields of regional monetary cooperation, etc., that can show special prowess, how to compete with the US monetary hegemony? A tough job that requires hard thinking!
Since gigantic waves have hit the economy, the current situation calls for a workable road map of the WCP, which can weed through the old to bring forth the new and progress with the times. To this end, the authors try to seek inspiration from regularities of the monetary developments, explore and propose the entry point and framework design of the WCP from a three-dimensional historical and global view; the approach starts from the root and begins by summing up experiences, reviewing current difficulties, pulling knowledge together, making evaluations according to the situation and progressing step by step.
On September 1, 2009, the monthly online journal www.ChinaUSFriendship.com of the China-US Friendship Exchange (CUSFE) published simultaneously the Chinese and the English versions of a paper entitled "Where does the Supranational International Currency of Constant Value Come from? -- New Concept and Framework of the World Currency Primary " written by the authors and translated into English by CUSFE’s Chairman Dr. Sheng-Wei Wang.
The Chinese and English versions can be separately accessed as follows:
On the same day, the Beijing Huaxia Publishing House published a new book The Path to the World Currency, co-edited by Charlie Fei, Zhongjia Pang and Shen Yang, which launched together the new concept and framework of the WCP with the above-mentioned paper. The introduction of this Chinese book can be read from the People's Daily as follows:
This book made an in-depth analysis of the chronic disadvantages, ills and unsustainability of the current international monetary system with the US dollar at its center. It expounds that the creation of a super-sovereign world currency is the only way for the currency development in the globalization era and focuses on the important positions and roles of the US and China in this epoch-making era of big changes of the monetary system. The book also proposes the new concept and framework for an operable WCP.
The authors based their analysis on the reality of about 200 sovereign currencies independently used by all countries and regions to initiate the proposal of setting up a Union of World Currency (UWC) within the framework of the United Nations (UN). Under the UWC, there would be a Bank of International Settlement (BIS), equivalent to the World Central Bank (WCB), tasked to issue a supranational WCP of constant value as a means of international common payment to go hand in hand and in collaboration with a variety of sovereign currencies.
Different countries and regions would be free to apply to become Member States of the UWC according to their own circumstances and schedules. As a prerequisite, the applicants must agree to only use the WCP for international trades between the Member States.
The UWC requires the Member States to implement the managing rules set up by the UWC. The inflation rates, fiscal deficits, trade deficits, government debts, interest rates of government bonds, exchange rate fluctuations and other important economic indicators of the Member States must meet the required standards. But the UWC would not interfere in the domestic monetary policies of the Member States.
The WCP would establish a "baseline value" by using the method of the Purchasing Power Parities (PPPs). It is commonly referred to as the fixed "anchor", under which the original exchange rate of the WCP is determined. After a series of correction factors, the revised WCP becomes the readily available exchange rate. These corrections take into account inflation, taxation, interest rates and other factors, in particular during the transition period when the results obtained by the PPP method exhibit large differences from the traditional market approach and conducive amendments are necessary.
The WCB, according to the needs of the Member States, would issue and distribute to them the reserve amount of the working capital in the WCP. Each Member State, in accordance with the WCP exchange rate, would pay to the WCB an amount in its local currency equal to the proceeds of the WCP amount as collateral.
The credit payment protection of the WCP, as a special credit currency, comes from the purchasing power of the equal-value local currencies turned in by the different Member States.
The exchange of the local currency with the WCP is not a one-time deal, but rather a collateral relationship as a protection of the purchasing power and requires keeping an equivalent value with the purchasing power at all times. To this end, in accordance with the change of the purchasing power of the local currency, the Member State must add or subtract local currency regularly in order to maintain beyond any doubt a WCP unit that has a constant purchasing power in any Member State of the world.
The BIS that receives the above-mentioned local currency should deposit it back to the government (Ministry of Finance or the Central Bank) of that country and collect interest payable at a fixed interest rate.
This interchange relationship between the government of the Member State and the WCB is in a sense similar to the relationship between the US federal government and the Federal Reserve, which issues bonds in exchange for Fed's currency. The difference is that the WCB has a unique mechanism to protect the purchasing power in order to maintain the WCP purchasing power constant.
In order to ensure that under the auspices of the UN, the WCP system can deal with all kinds of unexpected special difficulties, we suggest that major countries that are the core (it may be the G20 or a wider group) of the permanent members of the Security Council should sign an International Monetary Safeguards Agreement to establish an appropriately-sized International Monetary Security Fund. The contracting Member States will be required to provide funds and take actions under obligation upon the request of the UWC to play a major role in global governance, problem solving and crisis management to protect the long-term stability and continuing normal operation of the WCP.
This is perhaps the easiest implementable world monetary system that we can imagine. The system uses the existing database of the International Comparison Program (ICP) to establish a valuation benchmark. It will not replace any sovereign currency nor interfere in any national monetary policy. There is no longer need for foreign exchange reserves or other forms of asset reserves nor is there any special requirement. As long as there is a consensus, it is ready to start.
What we need is not a destructive revolution, but a gradual and smooth transition for a positive reform with the least “entropy” increase. Fortunately, the current round of financial turmoil is not yet a global currency crisis. Therefore, the reform of the world monetary system does not have to be a chaotic movement of national salvation. Instead, it is possible that with the support of large countries and the entire world together the reform can start in an orderly and calm manner.
Once the WCP is implemented, the world will no longer expect to be subject to currency hegemony and seigniorage. Foreign reserves and arbitrage of exchange will be things of the past, while problems due to international exchange rates will disappear completely. The turbulence in the global financial markets will be eliminated and the future of the globalization will become more fair, transparent, healthy and effective. The world currency will be upgraded and developed on the cornerstone of a lateral integration (regional monetary integration) to reach the great long-term goal of "one world, the same currency".
The authors do not think the above-mentioned program has been fully thought through and expounded, but hope to promote the reform of the international monetary system to enter into a substantive phase of discussing specific programs instead of remaining protracted, wasting time and allowing the currency hegemony to act cynically and impertinently.
Will the world currency hegemony, the United States, support this reform?
Today the US is in a very difficult historic period of making adjustments, but should never underestimate its extraordinary ability to self-correct. The ancient rise and fall cycle of empires does not apply to the United States.
Currently, while the whole world is facing difficulties and together trying to deal with the catastrophic global financial crisis, the current monetary system led by the US dollar should be managed to maintain its effectiveness. This is both the US position and also a broad consensus around the world. Once the global economic situation is stabilized after the chaos, under the irresistible driving force of the reform, the international community will not continue to tolerate following the same old road. It will for sure accelerate the expansion of the regional monetary cooperation and the joint effort of creating a super-sovereign currency to fully challenge the dollar hegemony. This historical trend is moving forward inexorably and will not allow the mainstream of American government and public to fall into the opposite trap against the trend of historical progress. They can only get rid of the fatal attraction-like drug addiction of the currency privileges and play the role of supporter and leader that they should play in this great reform of international monetary system. Only this is consistent with the long-term interests of a prosperous and developed great nation. In other words, the United States has no other choice.
III. Planning together the World Currency Primary – the ultimate grand winning strategy
Against the backdrop of a raging international exchange rate war against the Chinese RMB, the People's Bank of China Governor Zhou Xiaochuan explained on October 8 in Washington at the annual meeting of the IMF and the WB that China's currency reform will be gradual and orderly; it will not adopt under pressure the so-called "shock therapy." He also expressed that China will gradually reduce the external concerns of the RMB exchange rate by adjusting the method of economic growth and reforming the social security system to expand domestic demand.
But the international war launched by the United States against China on the exchange rate is on the rise. Other than confining itself to the facts, defending itself, parrying passively and even using the so-called "spreading silver bullets for support," how many options of positive response does China have?
The authors think that where the struggle is fiercest creates the greatest opportunity. Why does China not follow the times and trend, leverage its strength, regain the initiative and elevate the subject of the exchange rate to the highest level of discussion to dispel the irresponsible suppression of currency value appreciation and make it imperceptible?
The authors suggest: According to Governor Zhou Xiaochuan’s proposal on March 23, 2009, which has touched global hearts and minds and echoed widely, China should play the key card of reforming the international monetary system, from which it can launch a connected action with the whole world together to issue the WCP. China should take the initiative to control the opening discourse and hold the moral high ground on the big stage of the global economy; it should guide the reform of the international monetary system to turn to the noble right way of facing the cause of the fundamental essentials.
On the surface, this seems to be countering the United States, a rival show, but in fact, it is far from necessarily so.
The United States cannot stop the inevitable trend of historical development. The United States needs to make a psychological adjustment to the changing world situation, welcoming good policy ideas and trying to make a leap in understanding. In fact, the creation of the WCP will not exclude the legitimate interests of the United States, which must fully respect its leading role and participation rights. Particularly important is that the best interest of the United States itself is precisely to get rid of the currency privilege and return to fair competition. Only by doing so, can the United States fundamentally break away from the curse of a fateful sinking into vice as pointed out by the Triffin Dilemma (the important argument about the unsustainability of a country's sovereign currency as the international reserve currency). The United States with an unusual natural advantage can then revitalize its great strength in the global competition of the real economy and continue to maintain itself as the core of the great powers in the world's political and economic order.
Since drug addicts will not take the initiative to knock the door of the drug rehabilitation center, pushing or even a fierce blow to the palm can mean alert and salvation to the United States. The whole world working together on the birth of the WCP can hopefully usher in a great turning point for the US economy to have more grace and talent. This would produce for the United States a magic drug cure to make it like a phoenix rising from the ashes and being reborn from the fire. From a historical view point, China’s advocacy of establishing the WCP with the world together is the most precious gift given to the United States to benefit without limit.
So, in reality this is not a struggle about overwhelming each other, but an ultimate grand winning strategy that will benefit China, the United States and the well-being of the entire human family.
China has the responsibility, the strength and the obligation at this critical moment to play the historic role of guidance and remedy for self-help and for saving the world.
October 9, 2010
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