Word: dollarization
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SDRs were created to supplement the Bretton Woods currency regime, which was built around a dollar linked to gold. After President Richard Nixon decoupled the dollar from gold in 1971 and allowed it to float freely in currency markets, the subsequent dollar crash led to talk of establishing the SDR as global reserve currency. That faded when the high interest rates set by Federal Reserve Chairman Paul Volcker to throttle inflation lured foreigners back to the dollar in the early 1980s...
Since then, we've had an international monetary system in which the dollar is the main store of value. When countries want to protect themselves from the vagaries of global financial markets, they stockpile dollars the way nations in previous eras hoarded gold. This stockpiling has enabled the U.S. government to borrow almost without limit in global markets and until recently allowed American consumers to do the same...
Over the short term, this can seem like a positive; we can get away with running a federal deficit that could hit $2 trillion this year only because of the dollar's status as global reserve currency. But borrowing trillions isn't really a ticket to long-run prosperity. In fact, the current economic crisis may have been spawned by huge imbalances in global trade and capital flows that are in part the product of the dollar's special status. Global demand for dollars supplanted demand for U.S. products and services, argues Columbia University economist and longtime SDR fan Joseph...
Shift those foreign dollar reserves into SDRs, the reasoning goes, and global finance suddenly becomes much more balanced. By no longer needing to load up on dollars, countries like China would have less incentive to run big trade surpluses with the U.S. This line of thought goes back to English economist John Maynard Keynes - the source of seemingly every important economic idea of this crisis-racked time - who first proposed what he called "supernational bank money" in 1930. During the economic turmoil of his day, he kept refining the idea and proposing odd names for the currency - first "grammor...
...create $250 billion in new SDRs marks a "major step" toward establishing the SDR as a global reserve currency, says Stiglitz. It's only a step, albeit enough of one to prompt Republican Representative Michele Bachmann of Minnesota to make the claim that Obama was out to ditch the dollar. Actually, the dollar would live on in an SDR-dominated world. It would no longer reign supreme, but neither would the yen or the euro or the yuan. Which might be the best long-run outcome the U.S. can hope...