Global recession. Free trade. Security. Climate change. Afghanistan. Iraq. North Korea.
Barack Obama sure has lots to discuss on his maiden voyage to Asia as US President. Yet all this is just conversation compared with the real issue on Asia’s mind: a wobbly dollar that’s putting the region’s money at risk.
Think of this trip as a visit to America’s banker, and an unpleasant one. Asia wants assurances that the US can repay its fast-mounting debt and prevent a dollar crash. The reality dawning on Asia is that Obama can’t offer them such a pledge—not with US borrowing so out of control.
Dollar anxiety is reaching a fever pitch. It’s sucking the life out of key issues pertaining to the future, and it’s time to do something about it. Asia needs a plan to scrap its dollar addiction, and it can start in Singapore this week.
Let’s dispense with the fiction that the annual Asia-Pacific Economic Cooperation (Apec) group summit will achieve much. Trade frictions are rising, the US is mired in recession, Japan is experiencing deflation and big pacts on climate change or denuclearizing North Korea are non-starters.
The best way to use this summit is to discuss an exit strategy. Not an end to government stimulus efforts, but a dismantling of Bretton Woods II. The system of tying currencies to the dollar that emerged after the crises of 1997 and 1998 is doing more harm than good.
In 2009, Asia’s currency-reserve arms race is mostly about risk. The wisdom of amassing huge dollar stockpiles was once clear enough. It was about walling off economies in times of turmoil and not having to go hat in hand to the International Monetary Fund (IMF). Now Asia is trapped.
IMF crystallized the problem recently when it said the dollar is still overvalued. Considering the US’ debt load, near-zero interest rates and rising unemployment, the currency is clearly too strong. A weaker dollar makes sense and it’s what the global economy needs. Asia must deal with it.
Asia doesn’t have a policy infrastructure to oversee such an effort. Japanese Prime Minister Yukio Hatoyama’s desire for an Asian version of the European Union is great—it’s just a decade or more away. Apec is still an opportunity to pave the way for Asia to repatriate trillions of dollars and stop being America’s financier.
Within its means
It won’t be easy and, chances are, US treasury secretary Timothy Geithner would respond coolly. Yet the money could be used to deepen Asian bond markets and finance better roads, bridges, ports and power grids. It could fund vitally needed improvements in education and healthcare.
Just as Asia needs to stop parking its savings in the US, the biggest economy must learn to live without Asia’s money. It would force the US to live within its means.
Yes, this is a far-fetched idea. And there’s no widely accepted way to go about the process. The point is that we need to get radical if we are going to reduce financial imbalances. In Asia, that means letting currencies strengthen and the dollar weaken. Few things would do more to stabilize markets than this shift playing out in a smooth way.
We can wait until the dollar collapses and Asian central banks rush for the exits. Or we can devise a transparent process to avoid such a scenario. It may not happen without an Asian version of the Plaza Accord, the 1985 agreement to weaken the US dollar against the yen. Why would South Korea or Thailand wean themselves off dollars if China won’t?
Here, recent comments by World Bank chief economist Justin Yifu Lin about yuan appreciation derailing the global recovery are unhelpful. How a development economist could argue with a straight face that China’s beggar-thy-neighbour model is good for us all is beyond me. Now that Japan has learned to accept a stronger currency, China must, too.
Mere talk of Asia selling its treasury holdings could spook markets. Then again, so could signs Asian central banks are increasingly buying real assets, such as gold or other commodities. In that sense, the process of Asia diversifying away from the dollar is already getting under way.
That also goes for rumblings in China, Russia and the Gulf states about finding a new reserve currency. One of the most common suggestions is to expand the use of IMF’s so-called special drawing rights. Perhaps Asian central banks could talk with IMF about creating some kind of currency-reserve sales rights managed through the lender.
The mechanism here is almost less important than the stated goal. This issue will require a lot of brainstorming to pull off without roiling markets. Global imbalances will continue to fester unless drastic measures are taken.
When Obama arrives in Tokyo on Friday, he can expect to get an earful about the dollar. He should expect the same in Singapore, Beijing and Seoul.
Such chatter will take place behind closed doors, and officials will try to claim currencies weren’t discussed. But come on—no issue is more germane to Asia’s outlook, both economically and fiscally. It’s time to do something about it.
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