Investor concerns about continued large budget deficits and runaway inflation have led many to question the dollar’s status as the world’s principal reserve currency. Indeed, some important developing countries have recently put forth proposals for a new international currency that is meant to compete with the greenback as a reserve currency. Is the dollar doomed as a reserve currency in the short run? What about the long run? What, if anything, can the administration and the Federal Reserve do to maintain the reserve currency status of the greenback?

1. Is the Dollar Doomed? John Williamson Senior Fellow, Peterson Institute Presentation at the NABE Webinar, 06/29-10

2. Introduction Elaboration: Is the Dollar Doomed as a Reserve Currency? At present: Dollar is the dominant but not the only reserve currency Other reserve assets are: Other currencies: euro, sterling, yen, Swiss franc, in the future perhaps the RMB The IMF’s Special Drawing Rights (SDRs) Gold Might any of these threaten the role of the US dollar?

3. Prospects of the Euro Until recently, was common to talk of the likely emergence of a Multiple Reserve Currency System with a major role for the euro Despite the disadvantages of the MRCS (e.g. instability) Now the big concern is the future of the euro Greece and the other PIGS Even if debt has to be restructured eventually, can be done as well in a monetary union as without Euro will survive when market jitters die down But the prospect of a MRCS will not.

4. The Prospect of a Return to Gold Gold is still a reserve asset About 10% of all reserves when gold is valued at market prices I.e. another very large price increase (x9) would be needed before gold would again become the dominant reserve asset Disadvantages: Arbitrary and perverse wealth redistribution Incentive to undermine the new system.

5. Would an SDR System Make Sense? Three Classic Advantages: Seigniorage Stability Adjustment—other countries would have less need to earn reserves, chance for US to improve its current account. Allocation of $200 billion per year the right order of magnitude. Adequate for precautionary reserves even if it can’t be used for intervention, problem is lack of desire to hold large R in this form.

6. Concluding Remarks Unseating the dollar requires a convincing alternative Dollar likely to have at least one more round of expansion SDR may be more logical, but it currently lacks champions Who are likely to emerge only after Dollar System shown to be inherently crisis-prone.