Like the Chinese, the folks at Disney World peg their currency to the dollar. Hand them $1 U.S. and you receive one Disney dollar, complete with a picture of Mickey Mouse or his friends, plus the signature of Disney's official treasurer, Scrooge McDuck.
That transaction now seems superfluous. The U.S. dollar is rapidly transforming into a Mickey Mouse currency. This has led to a rising call for the creation of an alternative to the dollar in the form of a new world currency. It would be an enormous mistake to discount these calls as a sideshow. The odds of a world currency emerging have never been higher.
The calls are coming from many corners. Nobel Prize-winning economist Joseph Stiglitz chaired a United Nations panel that recommended the creation of a global reserve currency. Zhou Xiaochuan, governor of the People's Bank of China, proposed that the International Monetary Fund take over the global leadership role traditionally ceded to the U.S. And Russian President Dmitry Medvedev handed out minted coin samples of a new world currency at the recent Group of Eight meeting in Italy.
These calls are worth paying attention to for a number of reasons. The arguments for a world currency are much better than you might think. An alternative to the dollar clearly has a promising market that can develop even if it is opposed by the U.S. And the idea of a world currency is most attractive to those who devoutly believe in multilateral institutions and the Canon of Lord Keynes--beliefs that are hardly in short supply in Barack Obama's White House.
Let's look at each point in turn.
The dollar (and to a lesser extent the yen and euro) primarily serves as the world's reserve currency. This means that nations around the world accumulate dollars, and dollar-denominated assets such as U.S. Treasuries, to provide a buffer stock against bad macroeconomic news.
From the point of view of dollar customers, this practice has two big problems.
First, countries playing the game are giving the U.S. and other developed nations a large low-interest loan. The Stiglitz panel estimated that developing countries loaned $3.7 trillion to developed countries in 2007 alone. No rational development policy could defend such a capital flow.
Second, the U.S. and almost every other developed nation are on unsustainable fiscal paths, with soaring deficits and likely severe financial problems down the road. Developing nations that hoard dollars probably will experience big losses.
So it is easy to see why developing nations in particular might want to band together and pursue an alternative strategy that diverts the monetary spoils away from the U.S.
Zhou and the Stiglitz panel have independently described how this might occur.
The IMF issues something known as Special Drawing Rights. These are analogous to a currency and were originally intended to replace gold as an international unit of account. The SDR market, limited until now, could easily be expanded, especially if a number of countries band together and announce that they would hold a large fraction of their reserves in the IMF currency.
If such a move were to gather steam, Keynesians would have yet another reason to celebrate the resurgence of their ideas. When the Bretton Woods system was set up, tying world currencies to the dollar, John Maynard Keynes proposed that the world establish an international currency unit that he called the bancor. A key attraction of the bancor was that it was to relax the pressure on distressed countries to run budget surpluses during recessions in order to ease the fears of antsy investors.
Keynesian White House
Pressures for such policies persist to this day and likely have a number of sympathetic ears in the Obama White House. Paul Volcker has expressed support for the idea and can't possibly be alone in that view. This is, after all, the administration that put all of its cards on the largest Keynesian stimulus package in U.S. history. Such devout faith in Keynes seems incompatible with vehement opposition to adopting the bancor.
Given these forces, it seems likely that a world currency will emerge sooner rather than later. Here's how it might happen:
Countries such as China and Russia will seek to expand the market for the world currency, perhaps by divorcing themselves from the dollar and investing heavily in bancors. After the developing world follows suit, nations will begin to peg their currencies to the bancor. Eventually, even the U.S. may well join in.
If that comes to pass, our currency transactions will be analogous to what happens today at Disney World. Only this time, the U.S. dollar will truly be the funny money.
Kevin A. Hassett is a senior fellow and the director of economic policy studies at AEI.