A Currency System for a Multi-Polar World

"The recent drama over whether the United States would default has weakened confidence in the American economy and underscored the already growing desire of many investors around the world, including many central bankers, for more diversity in their portfolios. Indeed, even policymakers in the United States might agree that the US dollar is vastly over-weighted, with an estimated 60 percent share of foreign exchange reserves. The euro has about a 25 percent share, which is modestly larger than the euro area’s share of world GDP; and most other currencies have shares lower than their countries’ shares of world GDP.¹ The problem is that Europe and Japan also have serious fiscal problems, and no other country is seen as having financial markets sufficiently large and sophisticated to take on a major role.

There is an obvious alternative, however: the special drawing right (SDR) issued by the International Monetary Fund (IMF). True, the SDR can never be an international currency in all respects unless countries are willing to cede monetary sovereignty to the IMF and join a global common currency union. That day will not happen in the foreseeable future and may never happen. Indeed, my forthcoming book with Marc Hinterschweiger, Flexible Exchange Rates for a Stable World Economy, amply demonstrates the high economic costs of fixing exchange rates between countries that are not committed to complete economic and political union..."

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