Our man in New York tells us that U.S. Treasury Secretary Timothy Geithner was caught off guard by a question at a Council On Foreign Relations discussion there on China’s recent trial balloons about the need for a global reserve currency that wasn’t the dollar. This was odd, our man reports, as Geithner’s boss, the U.S. President, had emphatically dismissed the idea the evening before when asked something similar at a White House press conference.
We recall there was a bit of a flap when Geithner said during his confirmation hearings earlier this year that his boss believed China to be a currency manipulator. So there is some previous for the two not being on the same page, and the Treasury secretary does have quite a bit to occupy his mind at the moment. But that all sent this Bystander to re-read recent speeches of People’s Bank of China Governor, Zhou Xiaochuan, who has been one of those promoting the the idea of a new reserve currency based on the International Monetary Fund’s Special Drawing Rights, as we previously noted.
What caught our eye in his speech on reforming the international monetary system, was not so much that, or even China’s apparent willingness to buy SDR-denominated bonds, which would certainly help the evolution of SDRs into a recognizable currency, but Zhou’s notion that some countries’ foreign exchange reserves should be managed by the IMF.
Now it would be an extraordinary step for any country, especially China and the U.S., to give up sovereign control over part of their reserves — extraordinary to the point of incredible to our minds — though we can see how it would help provide an element of stability to world financial markets and also create the kernel of the wherewithal for something any new global reserve currency would need, a lender of last resort. That is the intriguing aspect of Zhou’s speech.
There is growing support for a increase in SDR allocation as a way quickly to lift the reserves of countries suffering balance of payments strain in the current crisis, and even to do so each year. The use of SDRs in a wider range of financial instruments and transactions is also more or less a mainstream idea among economists now. But the very airing of the idea that the IMF could play the role of global central banker, and that China would suggest it given the harsh words it has had for the Fund in the past, is a sign of something shifting deep down.
