What is your nation’s GDP? Answer will be definitely some dollars. Next if I ask which is the hard currency of the world? Answer will be again Dollar. At present global monetary system is heavily dominated by one single currency, the US dollar. This dominance allows America to attract large Quantum of liquidity in good times, and spread away the debts through bonds and other vehicles for the bad times.
There are two major disorders in the current financial regimes. One is that emerging nations like, China, India, and Brazil— have saved too much and the other is that mature economies US, UK have saved too little. Brazil and India have floating exchange rate but Chinese Yuan is creating troubles.
Lot has been written about China’s excess savings rate: financially regulated market, Weak domestic demand, lack of a social safety net, tremendous state control on funds, and biggest is their exchange rate policy.
Now for the consuming economy US, their excess consumption was largely due to the housing bubble which made citizen consider them self richer than they really were. Another crucial economic phenomenon is, that the US invested its money abroad at high returns, while the rest of the world invested in the US at low returns. This is credited to two factors. First, the US financial sector was matured and good at managing risk and could therefore get a high return by selling insurance, financial products and diversification to the rest of the world. Second, investors all across the globe thought that the US was a safe heaven and accepted to put their money there at a low rate of return but now the dollar is fast losing its image of “safe haven”.
The housing balloon has deflated. The American and European Financial sector is in trouble. The real estate boom is over. Falling dollar is a ominous sign for nations who have huge stockpile of dollars. The absence of a credible alternative to the dollar means that, despite its declining value, no single currency can replace it.
A better alternative would be that nations coordinate with each to adopt a mixed system in which the major currencies form some sort of an alliance to coordinate their exchange rates (Dollar, Euro, Yen, Yaun, Pound) and other currencies choose either to peg to them or free float.