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Thanks to the Deficit, the Buck Stops Here
Discussions on the design of the new system are already underway. The United Nations' Commission of Experts on Reforms of the International Monetary and Financial System -- a body I chaired and which included economists, former and current government officials, financial sector participants, central bankers, and business leaders from Asia, Europe, the United States, Africa, and Latin America -- has argued that a new global reserve currency system may be the most important reform to ensure the long-term health of the world's economy; it also suggested how to design an orderly transition from the dollar-based system.
In its interim report in June, the commission described a number of alternatives. Some involve building on the International Monetary Fund's "special drawing rights," or SDRs -- a kind of "IMF money" -- but making the issuance of this global reserve money annual and more predictable. (Currently, issuances of SDRs are small and episodic.) Other proposed reforms are more complex and ambitious, such as issuing new global reserves in ways and amounts that could be used to stabilize the world's economy or to invest in "global public goods," such as helping developing nations reduce greenhouse gas emissions.
The United States has resisted these changes, but they will come regardless, and it's better for us to participate in the construction of a new system than have it happen without us. The United States has seen great advantages with the dollar as the world's reserve currency of choice, particularly the ability to borrow at low interest rates seemingly without limit. But we haven't seen the costs as clearly: the inevitable trade deficits, the instability, the weaker global economy. The benefits to us are likely to shrink, and rapidly so, as countries shift their holdings away from the dollar.
It is happening already, and the process is likely to accelerate. Chinese authorities, for example, have openly expressed concerns about the value of the country's vast dollar reserves. Not surprisingly, China and other nations holding lots of U.S. debt support efforts to build a new system.
America should show leadership in helping shape this new structure and managing the transition, rather than burying its head in the sand. We may have preferred to keep the old system, in which the dollar reigned supreme, but that's no longer an option.
Joseph E. Stiglitz, the 2001 Nobel Prize winner in economics, is a professor of economics at Columbia University and former chairman of the Council of Economic Advisers during the Clinton administration.