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The Global Currencies Conundrum

Edited By John Ryan

This book discusses the emergence of a multi-polar currency system. With the US Dollar’s hegemony as global reserve currency in question, it examines the role of the Federal Reserve in its decline, the emergence of the Euro in a multi-polar currency system and the Chinese influence in this most important policy arena. China’s concerns about its US Dollar reserves are being amplified by the low returns of some of its investments in the United States. Today’s reserve currency system effectively results in China lending to the US at very low interest rates.
China needs to diversify out of the Dollar and it is this monetary policy that will fundamentally change the global currency scenario. China has been supportive of the Euro since its creation and is also lending support to the IMF’s special drawing rights. At the same time, Chinese policy targets the internationalisation of the Renminbi and with that the creation of a multi-polar monetary order.
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A reserve currency has to be stable to be effective. It is becoming apparent that the US Dollar is gradually losing the confidence of global markets. Since the financial crisis the Dollar privilege is not only ‘exorbitant’ but ‘extortionate’. Countries such as China are not willing to allow the US to exercise this extortionate privilege unconditionally.

The potential geopolitical implications of a Dollar decline are immense. The US would lose its privileged seigniorage position and with that the ability to achieve permanently higher returns on foreign assets than the returns paid to foreigners who invest in the US. So as the reign of the US Dollar as the world reserve currency is definitely being threatened, the shift in international trade is going to have massive implications for the US economy. Due to failures in Federal Reserve policymaking and the reckless accumulation of debt by the US government, the status of the US Dollar as the reserve currency of the world is now in decline.

The US Dollar has been used as an exorbitant privilege to further its geopolitical objectives. The Dollar’s primacy enables the US government and households to accumulate debts on a scale that in other countries would risk a crisis of creditor confidence. By being allowed to live beyond its means, the US can therefore more readily afford the armed forces that underpin its global role. This clout in turn enables the US to shift the onus of adjusting macroeconomic imbalances on...

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