China wants to ditch the dollar

It's kind of funny how the IMF (International Monetary Fund) has gone from irrelevance to center stage in just a matter of months. Following quickly on the heels of last week's news that the Federal Reserve plans to print up another trillion dollars came this announcement that a UN panel wants to replace the greenback with a shared basket of currencies.

Today, according to this Reuters report (hat tip MA), China loudly seconded the plan.
Earlier today, China’s central bank governor, Zhou Xiaochuan, offered a bold proposal to overhaul the global monetary system and replace the dollar with the IMF SDR (Special Drawing Right).

The SDR, an international reserve asset created by the IMF in 1969 but little used since that time, has the potential to act as a super-sovereign reserve currency, eliminating risks inherent in any single currency used for that purpose.

In a speech that took the unusual step of being issued in both Chinese and English, Mr. Zhou was careful not to mention any "specific" currency that the SDR might replace.

Mr. Zhou commented:

The outbreak of the [credit] crisis and its spillover to the entire world reflected the … systemic risks in the existing international monetary system.

The world needs a reserve currency that is disconnected from individual nations and is able to remain stable in the long run.

The role of the SDR has not been put into full play due to limitations on its allocation and the scope of its uses. However, it serves as the light in the tunnel for the reform of the international monetary system.

The price is becoming increasingly high, not only for the users, but also for the issuers of the reserve currencies. Although crisis may not necessarily be an intended result of the issuing authorities, it is an inevitable outcome of the institutional flaws.

It appears that the days of exorbitant privilege may be numbered.

In addition Mr. Zhou also proposed the following steps:

-- Set up a settlement system with other currencies so their SDR can be widely accepted in global trade and financial transactions. Currently, the SDR is largely an artificial unit used by governments and international institutions.

-- Actively promote the use of the SDR in trade, commodities pricing, investment and corporate bookkeeping.

-- Create financial assets denominated in SDRs to increase its appeal. The introduction of SDR-denominated securities, which is being studied by the IMF, would be a good start, Zhou said.

-- Expand the basket of currencies forming the basis for valuing the SDR to include currencies of all major economies.

That upcoming G20 meeting might get a little testy...