A whole lot depends on the outcome of the power struggle developing between the Obama Administration and Wall Street. Starting out, Wall Street is weakened by the crisis, and Team Obama has strong popular support and growing populist sentiment on its side in this conflict of interests, which amounts to significant political capital for the president and a great deal of leeway for his team to act quite radically to clip the financiers' wings.

If Wall Street is still dominant after the dust settles, then the global push will be on for a reserve currency to replace the dollar. This could even lead to war, since it would mean the end of US and Western dominance of the global economy. The masters of the universe will try to counter that eventuality at any cost, and they still wield huge power and influence, as well as having a lot of allies among the ruling elite. This is the kind of push comes to shove that can easily get out of hand as vested interests play king of the mountain.

On the other hand, if the Obama Administration can get a bridle on Wall Street and convince the G20 to institute comprehensive financial reform globally, then the dollar has a lease on life, perhaps for the thirty or so years that the Russians foresee.

A rash move of offloading massive amounts of dollars into the currency markets would be the equivalent of China (or any other large holder) throwing itself into the volcano. And that's why it hasn't happened.

The issue becomes when these nations have nothing left to lose from it. There seems to be a consensus - particularly in Asia - that the dollar will lose value because of our borrow and spend ways. There is already a movement to diversify foreign currency reserves among the large holders.

What would a prolonged recession in the US that keeps consumer spending low do to the Chinese view of buying treasuries? So long as Americans are spending on Chinese goods, it works out for the Chinese...not so much if the wallets are clamped shut.

And then there's the thought of watching what is effectively their money being poured into Wall Street with little to show for it. It also seems that the biggest proponents of the change are nations that stayed somewhat removed from the neo-liberal free for all that the US has been prescribing for more than a decade (depending on definitions).

The geo-political angle needs to be considered as well. A young president with a plate full of problems and looking a little out of sorts is just about the time that i'd spring the idea if my goal was to assert my own power, or attempt to start shifting the balance of power.

But beyond all that, it needs to be done. True, it would hurt the US's ability to do whatever it wanted, whenever and however. But our behavior is very much like the trust funder who knows no boundaries nor honest effort. We do need to be cut off, or we'll never grow up and begin to act responsibly.

@ the press conference in an interesting way. It was definitely the sort of thing which probably came across OK in tone to restless Chinese central banker types - though he also almost hissed at Fox' Major Garrett that he doesn't support a global reserve currency.

In any case we will see how they try to keep that fancy European "central bank" system working first.
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Hongpong.com

"There is already a movement to diversify foreign currency reserves among the large holders."

Lex, Who are the buyers? You got evidence?

The ROW (Rest of the World) is now voting on Obama's econsomic team. And it isn't as rosy as Wall St's response.

Posted: 25 March 2009 1350 hrs

WASHINGTON: The United States on Tuesday defended the use of the dollar as a key global currency, shrugging off China's calls to ditch the greenback as the international reserve currency.

President Barack Obama told a White House press conference that "the dollar is extraordinarily strong right now," and although the United States was "going through a rough patch" at present, it enjoyed a "great deal of confidence" from investors.

"I don't believe there is a need for a global currency," Obama said.

But People's Bank of China Governor Zhou Xiaochuan's call to replace the dollar, installed as the reserve currency after World War II, with a different standard run by the International Monetary Fund was a "serious" proposal, a senior IMF official said.

Meanwhile, a top economic official from the European Union, whose single currency is gaining an increasing share among central banks as a reserve currency, said the dollar remained unchallenged as the dominant reserve unit.

US Federal Reserve chief Ben Bernanke and Treasury Secretary Timothy Geithner said at a Congressional hearing that they would not allow the dollar to be stripped of the premier reserve status as suggested by Beijing.

At the hearing, a lawmaker asked the two financial chiefs: "Would you categorically renounce the United States moving away from the dollar and going to a global currency as suggested by China?"

Geithner immediately responded, "I would."

"And the chair?" the lawmaker asked, turning to Fed chairman Bernanke.

"I would also," Bernanke said.

China is the largest creditor to the United States, being the top holder of US Treasury bonds worth US$739.6 billion as of January, according to US figures. It is also the world's largest holder of US dollars as a reserve currency, at more than one trillion dollars.

In such a dominant position, "China appears to be growing more and more assertive over it's rights," noted currency analyst Andrew Busch of BMO Capital Markets.

more

March 25 (Bloomberg) -- Recent gains in yuan forwards show traders are betting China will scale back U.S. Treasury purchases after calling for a new international reserve currency, according to UBS AG.

latest Toxic Asset Plan

Boggles my brain that in THIS marked deflationary period, with debt being a growing enemy, that borrowing or printing more offers a solution. During deflation assets fall in price beyond many loans/mortgage amounts, making debt an extreme enemy with jobs decreasing, and everything except debt becoming more reasonably price (possibly within the grasp of people getting housing much cheaper.)

Yes realize that Central banks keep spewing plans to introduce inflation, but it isn't working--deflation is stubbornly staying with world markets. Cash is King during deflationary times. Did you put enough aside to weather that period--six to twelve months before changes will start taking place? Despite claims that inflation is the enemy--that's NOT true--inflation won't start until markets correct themselves--predicted by knowledgeable people beyond 2010. Dead cat bounces are currently taking place, but they won't last.

Central banks around the world far prefer inflation because they are able to exert control--but are totally unprepared and helpless against deflation. Massive injections of cash isn't working. Why aren't central banks trying something different that eases the credit crunch? Perhaps because countries realize there hasn't been an accurate tally of toxic assets?

China was a saver, western countries were not. Betcha their economic survival is enhanced. Reserve currencies could easily change possibly driving down the worth of the US dollar, affecting currency markets around the world. China should not re-value the Yuan--they've wisely elected to play a waiting game--with savings in the bank, they can afford to do so.

Question
Is Tim Secretarty of the Treasury of the United States or is he Secretary of the Treasury for the Council on Foreign Relations.

In these press conferences he is often sitting in front of that large blue Council on Foreign Relations logo.

AFP

A UN panel of expert economists pressed Thursday for a new global currency reserve scheme to replace the volatile, dollar-based system and for coordinated steps by rich countries to stimulate their economies.

"A new Global Reserve System -- what may be viewed as a greatly expanded SDR (Special Drawing Rights), with regular or cyclically adjusted emissions calibrated to the size of reserve accumulations, could contribute to global stability, economic strength and global equity," the panel said.

As part of several recommendations to tackle the global financial crisis, the panel also noted recovery would require all developed countries, in the short term, to take "strong, coordinated and effective actions to stimulate their economies."

And it stressed the need to "lay the basis for the long-run reforms that will be necessary if we are to have a more stable and more prosperous global economy and avoid future global crises."

The commission, led by US economist Joseph Stiglitz, a frequent critic of globalization and unbridled free markets, is primarily aimed at finding solutions for developing countries.

On the monetary front, Stiglitz, the 2001 Nobel economics laureate, told a press conference here there was "a growing consensus that there are problems with the dollar reserve system.

He noted that such a system was "relatively volatile, deflationary, unstable and (had) inequity associated with it."

"Developing countries are lending the United States trillions dollars at almost zero interest rates when they have huge needs themselves," Stiglitz noted. "It's indicative of the nature of the problem. It's a net transfer, in a sense, to the United States, a form of foreign aid."

...continued