What's the Big Idea?

What's the Big Idea? -- The End of Dollar Dominance?

By John Pomfret
Monday, March 23, 2009; 4:58 PM

Are the Chinese just worried about the sagging value of the $1.4 trillion in U.S. Treasuries they hold or are they really on to something? That's the big question now that China's central banker, Zhou Xiaochuan, has called for the greenback to be jettisoned as the world's dominant currency and replaced by a new type of benchmark controlled by the International Monetary Fund.

Zhou made his call in an essay that appeared on the website of People's Bank of China, China's central bank, on Monday. It was clearly timed to make a splash in the run-up to the G20 meeting that starts in London on April 2.

Calling the use of the dollar as the world's benchmark currency "a rare special case in history," Zhou urged the "creative reform of the existing international monetary system towards an international reserve currency." Zhou said the reserve currency, managed by the IMF, should be "disconnected from individual nations and is able to remain stable in the long run." Talk about a vote of no confidence on the future of the U.S. economy!

China's leaders are worried that actions taken in the United States to yank the U.S. economy out of recession could hurt China. As such, they have voiced fears about the estimated $1.4 trillion China holds in U.S. Treasuries. On March 13, Premier Wen Jiabao told reporters he was concerned about the safety of China's U.S. dollar assets and floated the idea that the United States should guarantee China's investments.

Chinese officials were further miffed a few days later when Federal Reserve Chairman Ben Bernanke announced that the Fed would buy hundreds of billions in Treasury securities -- which, China's leaders fear, could trigger inflation, thereby further decreasing the value of China's portfolio. (China's foreign portfolio apparently already has taken a huge hit. Major foreign stock plays and investments made in 2007 and 2008 have, by all accounts, lost billions.)

So, as they say, if I owe you $1,000, it's my problem. But if I owe you $1 trillion, it's our problem.

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