Death Of The Dollar?

Death Of The Dollar?

Economics: Markets were shocked when Treasury Secretary Tim Geithner said he's "quite open" to the idea of replacing the dollar as the world's reserve currency. No wonder. Both the world and the U.S. would be worse off.

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The idea of replacing the dollar, ardently pushed by China and Russia, seems to be linked to the world's current economic crisis, which many blame on the U.S. Both China and Russia have been accumulating hundreds of billions of dollars in reserves, and are feeling a bit, well, overexposed as a result.

With a few days to go before President Barack Obama travels to London for the G-20 financial meetings, the United Nations has its own ideas on this subject. In a report released Friday, it suggests replacing the buck with something like the International Monetary Fund's SDR — a quasi-currency based on a basket of currencies.

To be sure, there would be some advantages to this. For one, countries that trade with the U.S. would no longer have to stockpile dollar-based assets. They'd have the SDR-like currency instead.

And the U.S. would be less burdened running monetary policy for the rest of the world, letting us focus more on U.S. policy.

So much for the benefits. The list of drawbacks is a lot longer.

For example, the dollar will inevitably fall as other countries sell off their dollar-based assets. Witness the selling stampede set off by Geithner's ill-considered remarks.

If the dollar stays weak, it will boost inflation pressures in the U.S., and make it harder for us to finance our debt in global markets. It's always better to pay for something in your own currency.

Then there's the question of faith: Who wants a world currency managed by the same people — the IMF — who failed to foresee our current crisis, and who let the 1997-1998 Asian financial and Russian ruble panics turn into a world financial meltdown?

Worse, the desire for a dollar alternative suggests other nations are alarmed at the jaw-dropping levels of spending contained in President Obama's 10-year budget, which will boost U.S. debt from 40% of GDP now to 80% by 2019 and cause interest rates to soar.

Seeing this mess, other countries worry we'll just inflate our way out of this mess simply by printing more money and making the dollar worthless. They recall we did this before — in the 1970s.

Abandoning the greenback would mark a final step in the dismantling of the post-WW II monetary order, with the dollar as its anchor. This is just what Russia and China — and the U.N. — want.

Wherever the dollar reigns supreme, U.S. diplomacy carries maximum clout. By delinking the world from the dollar, China, Russia and others hope to shrink our political and cultural influence.

Obama would be wise not to listen to his Treasury chief and oppose a new global currency.