China Calls For an International Currency

The current global economic regime utilizes the US dollar as its 'reserve currency.' Reserve currency simply refers to the currency that foreign central banks purchase with their extra revenue. Lately, the Chinese and Russian governments have called for a new currency to be used for reserve currencies. They argue that when central banks diversify into reserve currencies, they should purchase SDR's (special drawing rites) instead of US dollars. Theoretically, countries would try to quit using the US Dollar for excess reserves if they thought the United States was going to go bankrupt.

An SDR is simply a bond (an IOU) that is issued to governments that give more money to the IMF (International Monetary Fund) than they have to. For example, the United States has over $2 Billion of SDR's. The SDR is weighted by the US dollar, the Japanese Yen, the Euro and sterling silver.

Most economists believe that China and Russia's push for a different reserve currency is all talk and no bite. Economists point out that if China and Russia actually believe that the United States is going to go bankrupt they could simply quit buying US bonds with their reserves and instead purchase the Japanese Yen, Euro, silver, and less amounts of the US dollar. By doing so, China and Russia would achieve the exact same diversification as purchasing an SDR.

Instead, economists believe that the call for a new reserve currency is political posturing. Next year the IMF is meeting to determine the NEW weight of SDR. If the Russian and Chinese governments can get their currencies into the SDR there will be many advantages for their countries. It is believed that these governments are trying to question the US dollar just enough so that IMF countries will see a need to diversify the SDR with Russian and Chinese currency.