Multiple reserve currency system

The Straits Times reported several days ago that Prof. Barry Eichengreen of U.C. Berkeley in a speech in Singapore said that countries should not worry about the move towards a multiple reserve currency system:

THE move towards a multiple reserve currency system is inevitable and instead of fearing it, world economies should welcome it, a prominent American economist said yesterday.

This is because such an arrangement, which will include the United States dollar, the euro and the Chinese yuan, provides more stability than the single currency system now, said Professor Barry Eichengreen.

As far as I can remember, the world has never had a multiple fiat reserve currency system before, so one has to wonder how Prof. Eichengreen came to the conclusion that such a system would be more stable. If 1 central bank can destabilise a single currency system, how does giving more central banks the ability to destabilise a multiple currency system make it more stable?

Besides this, the analyses of the current USD reserve currency system by various economists have shown that the reserve currency country, in this case the US, under such a system has to run persistent trade deficits. If the analysis can be extended to a multiple-currency system, it will also imply that both the EU and China has to be ready to accept trade deficits. While I am not certain about the EU’s position, it would seem almost as certain as finding an ice cube in hell that China would countenance running a trade deficit. Premier Wen Jiabao’s statement that a 20% appreciation in the RMB could risk creating social unrest in China clearly showed that China is not ready to give up its export-led economic model.

On the other side of the issue, the US may also not be ready to give up the seigniorage privileges that come with being the sole reserve currency. Being able to buy oil and other precious items with printed coloured paper is an enormous advantage to the US, which also helps to support its global empire.

With Brazil withdrawing from the G20 process as a sign that countries appear determined to continue with the ongoing currency war, the current geopolitical reality is not exactly supportive of Prof. Eichengreen’s vision of a stable, multi-currency global financial architecture. The risk of a chaotic end to the current USD reserve currency system will remain as long as the Federal Reserve continues to debase the USD and countries are not willing to come to an agreement on how to deal with the global structural imbalances between the developed countries and the emerging ones.

Here in Singapore, the MAS has continued with its policy of allowing for a gradual appreciation of the SGD on a trade-weighted basis. This has the effect of ameliorating the negative effects of global monetary debasement. That said, if the rate of appreciation of the SGD is lower than the rate of monetary debasement of the currencies that form the basket against which it is measured, we will likely continue to see inflation in hard assets and resources. That would most certainly mean higher food and energy prices for us.