Time to reduce dollar's hold

Updated: 2013-10-14 06:32

By Giles Chance (China Daily)

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An irreconcilable divide lies at the heart of the breakdown between the two political parties. The US Constitution gives the Senate and House of Representatives considerable power over lawmaking. As Republicans control the lower house in Washington, they can force the government to shut down because they can deny it the authority to borrow more.

There have been many government shutdowns before in the US, as the parties have struggled with each other to agree on spending priorities and government borrowing. None has lasted more than a few days. This time, though, the shutdown could last much longer. The Republicans want to force Obama to give in to their demands - and they could go to extreme lengths to do that. They even welcome the idea that the US could default on its debts, if it helps them achieve their goals.

The US is still the country of the immigrant, a person who rejects established values and leaves his country to find a new home where he can enjoy freedom and independence. The balances inside the Constitution, whereby Congress can hold the president to account while the president can veto laws passed by Congress, were designed to prevent any one element of government from becoming over-powerful. The founding fathers succeeded in that aim, but they also created a foundation for constant struggle between the president and the two houses of Congress. At a time of economic weakness and decline, when firm leadership is needed both for the US and the world, political struggle may signal the end of the US' position as the dominant global financial power.

The issue for the major lenders who have a stake in the US' financial position, such as China, is whether the US is a trustworthy borrower and, beyond that, whether the US should occupy the dominant position in global finance that it does today. The made-in-America financial crash of 2008 was a direct result of the dollar's role as the global currency. This role forces the Federal Reserve to print dollars for export to other countries for use as a store of value and for business transactions. The creation of dollars far beyond its own needs encourages the US to over-borrow and overspend.

In 1945, the US was the only large country left standing with enough strength to support a world recovery after World War II. The principal architect of the post-war financial system, the British economist John Maynard Keynes, foresaw the dangers of having one country's currency used by the whole world. Instead, he wanted a world currency and imagined the International Monetary Fund to be the organization that could issue and manage it. But the US, then in the driving seat, wanted the dollar to reign supreme. Now, 70 years later, the dollar's supreme role is out of date. The guardian of the system has become too weak economically and financially to support the system.

China should gradually reduce its current dollar holdings as a matter of financial prudence and steadily work with others toward a new global financial architecture. Progress will be gradual and slow, because the US will not give up its dominant financial role without a struggle. But the government shutdown in Washington demonstrates that now is the time to start that process.

The author is a visiting professor at Guanghua School of Management, Peking University. The views do not necessarily reflect those of China Daily.

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