ASTANA, Kazakhstan. “If it bleeds, it leads” says an old media industry maxim. So where the future of the world currency system is concerned, all eyes these days are on the badly battered euro. Almost all, anyway.
One observer who has been trying to see beyond the current euro crisis is the Nobel Prize-winning economist Robert Mundell. He is insistently asking what will replace the U.S. dollar as the cornerstone of the world currency system. He hit the theme again in the plenary session at this week’s Astana Economic Forum. The forum is the brainchild of Kazakhstan’s president Nursultan Nazarbayev and in its fifth year this year it featured no less than eleven Nobel prize winners, up from seven in 2011.
Mundell led a consensus among economic analysts and commentators at Astana in postulating that the dollar’s day is almost done (I plead guilty to abetting the crime, having addressed one of the side events on the intractability of America’s trade deficits). Mundell sketched out how a new world currency might look. He sees the greenback being replaced by special drawing rights (SDRs) backed by a cocktail of major currencies. These would include a downgraded but still important U.S. dollar, as well as the euro. It would also include — if somehow he can persuade Beijing and Tokyo respectively to go along — the Chinese yuan and the Japanese yen. The Russian ruble might also be included but again I suspect this won’t be an easy sale with the Russians, who like the Chinese and the Japanese seem to think that the internationalization of their currency might lead to overvaluation (or at least the end of undervaluation) and therefore long-run competitiveness problems.
In other news, Mundell lambasted the Fed for allowing a major increase in the U.S. dollar’s value during the financial crisis of 2008. This, he argued, was highly deflationary and unnecessarily exacerbated the pain for America’s real economy.
I would have liked to have discussed the issues further with Robert Mundell but the contact I have for him has gone temporarily AWOL. I will keep you posted.
In the meantime for a different view of various issues surrounding the dollar’s future, see this recent article by fellow Forbes blogger Charles Kadlec. Forbes staffer Steve Schaefer meanwhile tackles the latest twists in the euro drama here.