A representative basket of currencies


Mark Thoma at Economist’s View offers a look at Jeff Sachs (in Scientific American) notions of the correctness of a ‘global’ basket of currencies to be used as a substitute for the US dollar.

China has now proposed that … nations peg their currencies to a representative basket of others rather than to the dollar alone. … U.S. monetary policy would accordingly lose its excessive global influence…

The U.S. response to the Chinese proposal was revealing. Treasury Secretary Timothy Geithner initially described himself as open to exploring the idea; his candor quickly caused the dollar to weaken in value—which it needs to do for the good of the U.S. economy. That weakening, however, led Geithner to reverse himself…

Geithner’s first reaction was right. The Chinese proposal requires study but seems consistent with the long-term shift to a more balanced world economy in which the U.S. plays a monetary role more coequal with Europe and Asia. No change of global monetary system will happen abruptly… We will probably move over time to a world of greater monetary cooperation within Asia, a rising role for the Chinese yuan, and greater symmetry in overall world monetary and financial relations.

Given how the WTO rules were developed, allowing freer flow of capital but not much else, how are we to view this sort of thing….good or bad? And will the new order happen with the little guy in mind?