"The dollar is our currency, but it's your problem."

Written by Ralph J. Benko

Wednesday, October 10, 2012

Many complaints, and even challenges, are being registered by international officials as to the abuse of the status of the dollar, which is, by far, the primary reserve asset of central banks -- the asset against which their domestic currencies are issued.

Pravda.ru recently reported in an article entitled Can Russian ruble become international reserve currency

Russian Prime Minister Dmitry Medvedev has recently surprised the international business community by saying that the Russian ruble could become an international reserve currency in the near future. The current situation in the global economy suggests such a development. Experts tried to figure out to which extent it was possible and what the move could bring to Russia.

In a September Pravda.ru article pointedly headlined Russia to liberate the world from US Occupation

Russian President Vladimir Putin clearly expressed his attitude to the dollar as the world reserve currency. In fact, he offered the countries of the world to start building a large number of regional currencies as an alternative to the reserve system of the dollar. This is a strong step and a strong move, including the initiative to switch to mutual payments. He also said that Russia and China had already switched to the system and he urged other countries to follow the example. This shows that the world begins to change fundamentally, and Russia's role at this point is to become the leader in changing the world. I would say that Putin as the leader of the national liberation movement in Russia, demonstrated himself at the event as a leader and provider of ideas for the world national liberation movement against the system of occupation, which was formed after 1991 not only about Russia but also China and many other countries.

Last year, reported Reuters Africa from Moscow, Putin, before his return to power, 

Addressing economists at Russia's Academy of Sciences, Putin lampooned the Federal Reserve's $600 billion bond-buying spree for flooding the world with cheap dollars. The Fed's second round of so-called "quantitative easing" has been dubbed "QE2".

"Thank God ... we do not print the reserve currency. But what are they stirring up? They are simply acting like hooligans," Putin told the audience which included his veteran finance minister, Alexei Kudrin.

The Russian authorities are by no means alone. Brazil has been a vociferous critic of the Federal Reserve's program of Quantitative Easing.  From a recent article in The Rio Times Online:

RIO DE JANEIRO, BRAZIL – Finance Minister Guido Mantega has chided Western central banks over money-printing and other stimulus measures... [The] Finance Minister criticized Western countries economic approaches, in particular the U.S. over its quantitative easing program and devaluation of the dollar to benefit exports.

Brazil and Russia, of course, represent the first two of the "BRICS" -- followed, in the acronym, by India, China and South Africa ... the association of five leading emerging economies.  Together, they represent 3 billion people, with a nominal GDP of approaching $14 trillion (approximately that of the United States, with about 10% of the population) with $4 trillion in international reserves.  At a meeting held in China last April, reported Reuters Africa,

SANYA, China, April 14 (Reuters) - The five BRICS nations discussed reform of the international monetary system at a meeting in southern China.... [T]he five BRICS nations took another step towards cementing their global influence on Thursday, calling for a broad-based international reserve currency system "providing stability and certainty". [ID:nL3E7FE07J].  The five countries agreed to discuss the role of the SDR in the current international monetary system, including the composition of the SDR currency basket," Wu added.  And the development banks of the five BRICS nations agreed in principle to establish mutual credit lines denominated in their local currencies, not in dollars. [ID:nL3E7FE0AV]  Trade settlement in local currencies among the five countries will promote trade and investment liberalisation. It will lead to even closer business and trade ties among these five countries," Wu said.

Clearly the developing and industrializing world is perturbed by the Bernanke Fed's policy of Quantitative Easing.  The QE is reminiscent of Nixon Treasury Secretary John Connally's arrogant statement, in the same year as propelling America to renege on its commitment to the gold standard, that "The dollar is our currency, but it's your problem."  As recounted by Investments and Pensions Europe:

At the G-10 Rome meetings held in late 1971 Connally proclaimed to his astonished counterparts, "The dollar is our currency, but it’s your problem," having the intended consequence of driving yet another nail into the coffin of Bretton Woods and leading in short order to a roughly 20% depreciation of the dollar. The key outcome from Rome was broad agreement to achieve immediate settlement of monetary and trade issues (with the US dropping the 10% import surcharge). The G-10 ministers met again three weeks later at the Smithsonian Institute in Washington and came to an essential agreement on exchange rate policies, which Nixon humbly referred to as "the most significant monetary agreement in the history of the world".

Of course, history records that "the most significant monetary agreement in the history of the world" was a short-lived epiphenomenon -- as America descended into a long, painful, bout of stagflation -- one which created a context for the near-impeachment of Richard Nixon and the personal bankruptcy, in 1986, of ... John Connally.  The nightmare eventually would be resolved by the team of President Reagan and Fed Chairman Volcker.  These men took the steps to restore integrity to American monetary policy, ushering in the "Great Moderation" which emulated, if only for a generation, the operation of the classical gold standard.