Uncle Sam should take global responsibility as dominant reserve currency country

BY  | FROM  | 2016-12-23 13:13

The U.S. Federal Reserve raised the benchmark interest rate by 25 basis points to a range of 0.50 percent to 0.75 percent on Dec. 14, and indicated three rate hikes next year, raising concerns from other economies that they might suffer from its negative spillover effects.

As the world's largest economy and distributor of the primary international reserve currency -- the U.S. dollar, the United States boasts an economy accounting for nearly one quarter of the world gross national product. Its currency is used for 60 to 80 percent of the international payment.

With great power comes great responsibility. Let alone for decades the United States has enjoyed general economic prosperity and stability thanks to its "global banknote printing machine" status -- using its paper currency in exchange for real resources, products and services from other countries, transferring domestic financial risks to the rest of the world, and overdrawing money through currency devaluation.

Benefitting much from the rest of the world through its dollar dominance, it's only fair for Uncle Sam to shoulder its global responsibility as an international reserve currency provider instead of a sovereign currency provider, and take into account the global ripple effects, not just its national interests when making monetary decisions.

The Fed's rate hike will first broaden the interest margin between the dollar and other major currencies such as euro and the Japanese Yen, exacerbating investment arbitrage activities in the international financial markets, intensifying the struggles of exchange rate and trade.

Second, the rate rise is bound to stimulate a sustained capital outflow from emerging markets to America due to the strong dollar, worsening the economic situation of the countries which overly depend on external financing and are insufficiently capable of paying a debt.

According to Guo Shengxiang, dean of the Australian think tank Academy of APEC Creative Finance, historically speaking, every time the U.S. dollar flows back to America, world economy took a hit.

In the 1990s, for instance, the Fed adopted a monetary tightening policy to squeeze bubbles out of its burgeoning Internet industry. As a consequence, the then economically vibrant Southeast Asian region suffered a supply shortage of U.S. dollars, leading to the Asian financial crisis in 1997.

Third, the outflow of the U.S. dollar from emerging economies will cause the devaluation of their sovereign currencies, resulting in inflation in their domestic markets.

To stabilize the exchange rate and avoid inflation, the central banks of those countries will have to raise the interest rate as well, yet with a consequence of rising financing cost and dragging economic growth.

In return, the financial and economic turbulence in developing countries will be sent back to the United States through trade and financial channels, endangering America's economic recovery and financial stability.

In that sense, it's in the common interests of all for Uncle Sam to enhance communication and coordination with other economies on financial policies, and prudently handle the pace of rate hikes.

Earlier this year, the G20 Hangzhou summit also urged major economies to eliminate the uncertainties of their macro economic policies and increase transparency, so as to minimize the negative overflow effects.

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