Some time ago, the question was raised on this blog, "What happens if there is a sudden shift the current balance of demand for US treasury notes...? What if central banks decided that they no longer required as many US dollars for their international reserve?" Certain contributors (not I) were pooh-poohed for merely suggesting such a thing. Well, now it appears there is renewed reason for concern.
China's central bank, which now holds about $1 trillion in US government debt, has just called for the creation of a new international reserve currency. Citing the current crisis as clear evidence of systemic risk to the international monetary system, the People's Bank of China has proposed creating a "super-sovereign" currency for international trade and finance, regulated by the International Monetary Fund, that would represent a "basket" of other currencies. Without mentioning the US dollar by name, they say,
When a national currency is used in pricing primary commodities, trade settlements and is adopted as a reserve currency globally, efforts of the monetary authority issuing such a currency to address its economic imbalances by adjusting exchange rate would be made in vain, as its currency serves as a benchmark for many other currencies... The frequency and increasing intensity of financial crises following the collapse of the Bretton Woods system suggests the costs of such a system to the world may have exceeded its benefits. The price is becoming increasingly higher, not only for the users, but also for the issuers of the reserve currencies.
The essay was released in English as well as Chinese, which is part of what makes it noteworthy. If nothing else, at least now the G-20 finance ministers will have something else to discuss over lunch next week.