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Monday, March 3, 2008

JAPANESE PERSPECTIVES

No place for celebrity currencies in global jungle


Just recently I took part in a very interesting discussion program for NHK television in which economists and strategists from around the world came together to debate the state of the global economy and what kind of a beating the financial markets were liable to take as a result of the ongoing subprime securitization crisis.

The discussion eventually gravitat- ed toward currency issues and we found ourselves talking about the next global key currency.

Has the dollar finally had it as the reigning key currency?

If so, what will take its place? Is the euro now ready to take on that role?

And what of Asia? Will it have a common currency of its own? Or will either the yen or the renminbi come to hold the dominant positionin the region's currency pyramid?

All these fascinating subjects were discussed with much vigor and intensity.

But it was toward the very end of the discussions that the really interesting remark was made. It came from a Chinese expert who was taking part from Beijing via satellite. His answer to the key currency question was simple. He said that 20 years from now, the renminbi will have become the world's key currency.

Well, why not? At the rate that the Chinese economy is expanding at the moment, it will have become a gigantic economy with extensive trading links in the two decades in question.

Indeed its currency reserves are already the largest in the world. And China now has its very own sovereign wealth fund. It is well on the way to creating for itself a globally diversified portfolio of financial assets. The size of the claims it will no doubt build up around the world would certainly give it a good launch pad for making a currency empire.

All of the above is not in dispute. That said, however, being a key currency nation is not just about wealth accumulation and empire building. In the world of currencies, the key currency is the undisputed celebrity. You are in demand everywhere. Everybody wants to shake your hand. You can buy everything on credit. It is a highly privileged status that the celebrity currency enjoys.

Yet as all celebrities come to know only too well, stardom comes at a price.

You are constantly in the limelight. You have no privacy. Your life has to be an open book. You have to be able to explain everything. You have to be on call for all kinds of photo opportunities and crowd-pleasing events. One scandal and you are a fallen idol. People do not take kindly to fallen idols. The higher the expectations, the harsher the treatment if you make a mess of things.

A key currency has to have scarcity value. A celebrity who is always on show is no longer a celebrity. At the same time, there has to be enough of the key currency around to satisfy everybody's demands. Not too much but not too little. The fine balance between scarcity and liquidity is something a conscientious key currency nation must constantly keep in mind.

This is a tough requirement. The lives of celebrities are never really their own. A celebrity always has to think of the wider implications of his or her actions.

Is China ready to take on the kind of scrutiny, responsibility and accountability that a celebrity currency role requires? Is anybody else, for that matter?

The global jungle feels simply too large and awesome for one key currency to hold center stage. Currency stardom may now actually be an altogether outdated concept. We shall see, in 20 years' time. Maybe.

Noriko Hama is an economist and a professor at Doshisha University Graduate School of Business.


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