Believe it or not, the idea of
recoupling is back in vogue,
thanks to the current global economic crisis, which has dealt a
serious blow to the decoupling theorists who only till recently made us
believe that the rest of the world economy had got detached from the US economy
and hence was immune to any future US economic shocks. But even as
recoupling is clawing its way back in to popular economic lexicon, some nations,
notably China and Russia, have made a strong pitch for a new global currency to
replace the dollar, which has enjoyed the status of global reserve currency for
the last seven decades but is now literally under siege owing to an ever
inflating US fiscal deficit. The anxiety of these nations, majorly emerging
economies, is not difficult to understand though. For, countries like China, Russia
and India are now sitting pretty on huge foreign currency reserves, of which dollar
is the dominant currency. The huge buildup in their dollar reserves
has been in the making owing to their strategy for long of accumulating forex
reserves, which were further fueled by rising portfolio inflows in recent years.
In fact, in the last two decades of globalization, financial
transactions among countries—involving
multiple currencies—increased by leaps and bounds. By the end of 2008, dollars
in central banks' reserves across countries accounted for 64% of total foreign
exchange. However, economic vices in the form of mammoth trade deficit,
fiscal deficit, high inflation, negative real interest rates and depreciating
dollar have put the US monetary policy under severe stress, thereby creating
uncertainty for countries which have seen their foreign exchange reserves
deplete in value. This, in turn, has created a perfect stage for political leaders,
especially from G20 nations, to raise their views on replacing dollar with a
single global reserve currency, may be backed by either gold or a basket of
internationally traded commodities, and which will have stable purchasing power.
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