Another country has been heard from on the subject of dollar dominance. India has joined Russia and China in pressing for reforms to the world’s financial system.
Suresh Tendulkar, an economic adviser to Indian Prime Minister Manmohan Singh, said he is urging the government to diversify its $264.6 billion foreign-exchange reserves and hold fewer dollars.
“The major part of Indian reserves is in dollars — that is something that’s a problem for us,” Tendulkar, chairman of the Prime Minister’s Economic Advisory Council, said in an interview yesterday in Aix-en-Provence, France, where he was attending an economic conference.
Singh is preparing to join leaders from the Group of Eight industrialized nations — the U.S., Japan, Germany, Britain, France, Italy, Canada and Russia — at a summit in Italy next week which is due to tackle the global economy. China and Brazil will also send representative to the summit.
As the talks have neared, China and Russia have stepped up calls for a rethink of how global currency reserves are composed and managed, underlining a power shift to emerging markets from the developed nations that spawned the financial crisis.
“There should be a system to maintain the stability of the major reserve currencies,” Former Chinese Vice Premier Zeng Peiyan said in a speech in Beijing yesterday, highlighting China’s concerns about a global financial system dominated by the dollar.
Fiscal and current-account deficits must be supervised as “your currency is likely to become my problem,” said Zeng, who is now the head of a research center under the government’s top economic planning agency. The People’s Bank of China said June 26 that the International Monetary Fund should manage more of members’ reserves.
Frankly, this is all beginning to sound like so much hot air. You know as well as I that there the alternatives are few and far between for any country holding dollars. The idea that the U.S. or any other country is going to allow some supra-national body to monitor its fiscal and current account deficits is a pipe dream.
No matter what store of value a country chooses to put its foreign reserves into, there is going to be some risk of adverse events. Any system that works towards lessening the risk to the holder of excess reserves has to at the same time work to the detriment of the supplier of the reserves. The supplier of the reserves has little incentive to voluntarily sacrifice to better the lot of the holder of the reserves since the asset it provides is in demand. Effectively, the supplier of the reserves holds the high cards.
No one is holding a gun to the heads of the BRICs. They can diversify whenever they wish. Selling their vast holdings of dollars quickly would of course work against their own currencies via-a-vis their exchange rate with the dollar. Since most of them tend to manage their currencies in a manner that undervalues them this isn’t an outcome that’s desirable from their viewpoint. So they find themselves caught in a paradox. Their solution at this time seems to be for greater external control of U.S. economic policy. That’s never going to fly so they need to figure out some other alternative or resign themselves to blowing more hot air.