A cabal plotting against the dollar?

October 6, 2009

A report in Britain’s Independent newspaper that Gulf Arab states are in secret talks with Russia, China, Japan and France to replace the U.S. dollar with a basket of currencies for trading oil is almost certainly an exaggeration. It has already been denied by many of the countries allegedly involved.

Redenominating the currency for oil transactions is a hardy perennial. It crops up every few years in response to political concerns about U.S. hegemony in the Middle East and the threat to impose sanctions on a major producer (Iraq, Iran), or worries about the impact of dollar weakness on producer-country revenues.

No doubt renewed concerns about future dollar devaluation have prompted another bout of soul-searching among central bankers and lower-level finance ministry staff about the merits of diversifying oil invoicing and reserve holdings into a broader range of currencies.

Even at high level, there have been increasing hints that senior policymakers are thinking about the dollar’s role in long-term monetary relations. China’s central bank governor Zhou Xiaochuan openly discussed the need for diversification earlier this year. But it is very unlikely these informal discussions about very long-term objectives have reached the stage of formal policy planning. 

I wrote earlier this year that the financial crisis that erupted in 2007 was likely to prove a cataclysmic shift every bit as significant for the world monetary system as the outbreak of the World War One or the suspension of convertibility in 1971. It marks the ending of an era in which the U.S. dollar has been the undisputed reserve currency for making international payments and storing wealth.

The dollar is not about to lose its reserve status completely. But it will become less “special”. In future, it will increasingly have to share its reserve status with the euro, the yen and perhaps the currencies of other advanced economies. In time, it may even have to share its status with China’s yuan.

In fact the whole concept of a single reserve currency (the U.S. dollar) and a principal reserve asset (U.S. Treasury bonds) is set to undergo a profound shift. Policymakers, businesses and households will in future think about and hold a whole portfolio of competing reserve currencies and assets. Multipolarity in the world of security and economic relations is set to be matched by a world of multiple reserve currencies. 

 Outside the United States, most policymakers and analysts agree that the world’s reliance on the dollar as the sole reserve asset for trade and official exchange holdings contributed to the global imbalances and policy errors that culminated in last year’s financial meltdown.

In a re-run of the Triffin dilemma of the 1960s, the United States has been forced to run persistent current account deficits to meet global demand for liquidity and reserve assets. But the resulting build up of dollar denominated liabilities has led to widespread doubts about whether the United States can meet its obligations or may be forced to devalue.

In the wake of the crisis, it is clear the United States will have to devalue its way out of recession, cutting the purchasing power of U.S. households and businesses, while inflicting substantial losses on the foreign exchange holdings of overseas central banks.

As U.S. Treasury Secretary Henry Fowler noted in the mid-1960s: “Providing reserves and exchanges for the whole world is too much for one country and one currency to bear”.

But that does not mean that switching to a world of multiple reserve currencies will be quick or easy, and it will not necessarily solve the problem of fluctuating revenues for the major oil-exporting countries. 

The first problem for central banks concerns the transition: how to reduce existing dollar holdings and cut new purchases without triggering a loss of confidence and the very exchange losses they are seeking to avoid. For an individual central bank, it might be possible to reduce exposure gradually and in secret, but this is not really a solution for central banks as a group.

In the end they may have to accept some permanent losses on their reserve portfolios as the price for restarting global growth and ending their exclusive reliance on the dollar. Extinguishing the dollar’s reserve status (at least in part) will reduce some of the specialness and premium built into its value as a medium of exchange and store of value. Some losses on the central banks’ portfolios therefore appear inevitable.

But the timing of any shift is politically sensitive for both the United States and its creditors. China’s policymakers are wary about realising losses from their ill-fated reserve accumulation strategy. They are worried about a public backlash when it becomes clear that they have invested the product of the country’s hard-earned exports into devalued U.S. Treasury paper.

For the United States, loss of exclusive reserve currency status would be humiliating confirmation that the “hyper-power moment” is giving way to a more multipolar world. At a practical level it would reduce the room to manoeuvre for both the Federal Reserve and the U.S. Treasury. Senior U.S. officials are careful to reiterate their belief that reserve status will not be challenged, though many of them must privately realise the incongruousness of the United States being the sole issuer of reserve assets as its share of the global economy shrinks.

Even if the transition problem can be resolved, the other question is what currencies will share reserve status in future. The euro and yen both have some potential and are acquiring reserve-like characteristics, with some evidence central banks have begun to hold more of both currencies. But sterling, the Swiss franc and Australian dollar are too small to play more than a marginal role, and the reserve problem will not be fully resolved until China’s yuan becomes convertible for international transactions on both current and capital account.


For oil exporters, shifting from dollar pricing and invoicing to a basket of currencies would remove one source of volatility in export earnings. But as I have argued elsewhere, currency movements have been only a marginal influence on oil prices and producer-country revenues and account for only a relatively minor part of the overall volatility [ID:nLU733472].

Changes in global liquidity conditions, manufacturing growth, speculation and the relative market power of producers and consumers have all played a far more important role. Removing the instability associated with currency changes is therefore unlikely to produce the hoped-for stabilisation in producers’ revenues and purchasing power unless these other sources of volatility are also reduced.

In the end, the dollar’s exclusive reserve currency role will be gradually eroded over the next 10-20 years, just as sterling’s reserve status faded in the first part of the 20th century. But the coup de grace will be delivered by changing trade patterns and the growing economic weight of Asia in the global economy, rather than some secret “cabal” of oil-country and emerging-market ministers.


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what’s to worry about? the “value of the dollar” can only drop $.018 before it’s totaly worthless anyway. Just for giggles, compare the value of gold back in 1913 before we were “blessed” with the federal reserve and it’s current price. In 1913, a 5$ gold piece (which by the way cost $5) weighed between 128 and 135 grains depending on what games were being played at the mint. With 480 grains in a troy ounce, that gold piece weighed a little over 1/3 of an ounce. today 1/3 oz of gold is worth about $275. Every time the federal reserve cranks up their presses they destroy the value of the dollar that much more. If you really want a chuckle, read through the Constitution and find the part about the dutie of congress reguarding our currency. If you can do that without crying, you’re a better man then I.

Posted by Mtn_Trvlr | Report as abusive

What about all that gold that SUPPOSED to be at fort knox? at todays rates(over a thousand U.S. DOLLARS an ounce),. doesnt any econmist have any ideas about it?? or…are those rumors true about high security convoys leaving the repository at odd hours of nite. a soldier who wrote his family about this hasnt been heard from since

Posted by tom cavanaugh | Report as abusive

All the chatter of, by, and against the Federal Reserve aside, the value of the dollar is not it gold backing or the lack thereof, nor in the amount of debt held in dollars. At the end of the day, only one thing concerns the holder of a dollar, and that is whether it is safer to hold a dollar than a ruble or yuan. And that isn’t about how many dollars have been printed, it’s the qualitative notion of the backing of the faith and credit of the US government. When the government of the US looks weak and that the Rule of Law might not hold up against fiscal and social shenanigans, that’s when the dollar gets pounded. The rest of the graph is ambient noise. That this is so is evident when the Chinese first announced their outrage at US debt and then quietly resumed buying treasury notes from the US. After 200 years, it’s still the ONE safe place to put your money because of comparative freedom and transparency in the markets.

Posted by Geotopia | Report as abusive

If you’d bought dollars for sterling in 1913 (the apparent “golden age” of the dollar since when everything has supposedly been downhill) you – or your offspring – would be very very rich today.

Posted by Charles Janeway | Report as abusive

If banks want diversified holdings, they really only need to offer the option to their depositors. If banks offered the option to convert deposits, and then made similar transactions as needed to meet deposit requirements for individual currency accounts, the bank’s holdings verses depositor holdings would not be affected by fluctuations in currency, while banks would come to have diversified reserve holdings. Everything would be public regarding the transition, and customers would be impressed with their banks, not feel betrayed by them. Banks intuitively should have reserves in the nominal currency of their depositors’ deposits.

Banks would probably even profit from offering the option, because they would naturally charge a conversion fee, probably a set percentage of the conversion rate, to cover short-term fluctuations in currency. Some banks already offer currency conversions, at time of sale, when customers use bank cards in foreign countries. Adding multiple currency accounts would merely elaborate on that service, while making currency conversion type investments more widely available.

The only difference between such a system and the image painted by the article is that currency diversification would be decided by depositors, not banks, which eliminates the underhanded feeling of it, but introduces the concern for consumers’ competence. Still, it would be neat to be able to get foreign currencies from my own bank. It would certainly make me feel better about doing international business, and could potentially improve the global economy significantly, simply with it’s psychological encouragement of international commerce.

Posted by Dennis Barrett | Report as abusive

The Federal Reserve System, like the World Bank, is a blight on the U.S. and world economies, and tantamount to financial subversion and economic sabotage. Allowing the U.S. economy to become a system of debt, and again, the World Bank continuing this theme across the globe, has made wage slaves of us all.

Each time another tenth is committed to debt, each in turn becoming 10 loans, and allowing the U.S. Government to increase their spending by reducing the value of the dollar in your wallet rather than suffer public disdain over increased taxes. Inflation is a fancy term for the decrease in the value of the dollars in your wallet as a result of Government spending monies they don’t have (bonds/bills issued, new money printed, the base value remains unchanged = your dollar buys 3.5% less each year).

The Federal Reserve and Corporate systems are a disease, and our country has it bad – a terminal case in my opinion. Find capitalism or profit motive (aka greed) in the U.S. Constitution… that’s a falsehood. We are a Federal Republic made up of Governing States, which we the citizens control, yet we have no control. The vote has been replaced with the dollar, and politics is merely a distraction, every predetermined and paid for by Corporation granted citizens’ rights by your own Supreme Court.

Our country was bought by the corporations decades ago, and their short sighted fiscal year thinking is evident in the poor state of our economy. End the Federal Reserve system, end corporate ownership of everything from life to thinking (water and air are next), and restore our society to one based on natural cooperation, conservancy, and balance, where we actually make something of value and earn our standard of living. Debt to fund short term desires, fueled by an ever increasing consumption of our natural resources, will bring about our early demise.

Posted by Thinker | Report as abusive

In 2000 Saddam Hussein had the audacity to start selling Iraq’s crude oil on the international market for euros. No matter how “monstrous” Saddam may have been, the reason we invaded Iraq was not to avenge 9/11, find WMDs, overthrow a “monstrous” dictator, or grant Iraq the “blessing” of democracy. We invaded to protect the global primacy of the paper Federal Reserve Note. Alfred Adask

Posted by Drew | Report as abusive

Mtn_Trvlr, I’m glad you are not my banker or accountant. At 480 grains per Troy ounce I make the $5 gold coin at around 132 grains just over a quarter, well short of the 160 grains for one third of an ounce. That makes the rest of your calculations and rant devoid of credibility

Posted by Mark Rowe | Report as abusive

One of the best articles in a long time. Just one or two things:

“Providing reserves and exchanges for the whole world is too much for one country and one currency to bear”. – did this actually happen and does it hold water ? From what I understand, a reserve currency holds only benefits which are marginal. Again, why the need for a reserve currency at all ?

‘But that does not mean that switching to a world of multiple reserve currencies will be quick or easy, and it will not necessarily solve the problem of fluctuating revenues for the major oil-exporting countries’ – OPEC ‘fluctuates/manipulates’ output in barrels, the dollar does not fluctuate THAT much. The last time I checked the Saudi Riyal was pegged at 3.75 to the dollar.

Gold, as an asset, presumably has a credit in the Capital account, so I would not be surprised if there are transfers to the financial and current account. Maybe that soldier got a golden handshake and promoted to a captain in Afghanistan.

Posted by Gaspard | Report as abusive

It matters very little whether Oil is ‘priced’ in a basket of currencies or if oil bourses are sometimes denominated in local currencies. AS long as the oil countires have to convert to dollars to buy the things they want, the dollar remains the reserve. This is a phenomenon way beyond the ability of squabbling nations to change.

Posted by Tom Perry | Report as abusive

Having the dollar as the world reserve currency comes with many advantages:

1) Gives the dollar credit, no pun intended, even when the US govt decides to print money from thin air.

2) The fact that all commodities are priced and traded in dollars forces people to buy dollars to trade. This automatically shields the dollar by providing a perpetual artificial demand for the dollar.

3) The ability to print dollars freely at will and run up ridiculous deficits allows the US to wield a big economic (and political) stick at institutions such as the IMF, WB, UN etc. By using this stick the US influences policies of such institutions in it’s favour.

Without these advantages it would be very difficult for the US to maintain its superpower status in a world where the geopolitical landscape would have been quite different.

Posted by disillusioned | Report as abusive