Robert Mundell, professor of Columbia University and 1999 Nobel Prize Laureate in Economics, speaks at the recent Asian Financial Forum in Hong Kong. Image Credit: Reuters

Amman: Robert Mundell, an economist and a 1999 Nobel Prize winner, and current professor at Columbia University and advisor to the Chinese government, has called for a new global currency, saying that the dollar era had “gone with the wind”. He calls for a new international “cocktail or basket of major world currencies”.

Mundell who was visiting Amman last week, said that the main reason for 2008 financial crisis is that the US Federal Reserve had allowed major increases in the value of US dollar, which had deflationary effects and had exacerbated the country’s real economy further, conducive to the Lego-effect of decline in the world economies thereof.

“I call for the replacement of the US dollar as the major world currency system with special drawing rights (SDRs) backed by major currencies,” Mundell said.

He added that the new currency system should be based on ADRs (American Depositary Receipts), including the US dollar, the Euro, the Chinese Yuan, the Japanese Yen and the Russian Ruble.

“I suspect that the Russians would accept this because internationalisation of the Ruble would lead to over-evaluation and this will instigate long term competitiveness for the Russian economy,” said Mundell.

Blames ecb for euro:

Mundell blamed the European Central Bank for aggravating the Euro because of tolerating the Euro appreciation against the US dollar, which led to further debts to many EU countries.

He said that the Europeans missed a great opportunity to have a fruitful deal with the US Federal Reserve which would have made it controlled their currency from being strong against the US dollar. This has resulted in further debts to the Euro zone countries. The US Central Bank had managed to buy debts to boost the American economy while the Euro’s advance was destructive for the weak economies in Europe.

2008 Financial crisis:

Highlighting the main reason for the financial crisis of 2008, Mundell said that the Congress listed eight reasons; “yet, the main reason was none of them and it is the exchange rate of the US dollar to other currencies”.

As per Bretton Woods agreement before 1971 which resulted in the US dollar being the major world currency when the dollar was tied to gold at the time, and since the US had more than 75 per cent of world reserves, it was common sense that it had to control the trade exchange rates. However, this picture had started to change a few years later leading to vending of its gold reserves. At the time of 2008 financial crisis, the US had only 25 per cent of world reserves. “It is common sense to talk now about a new world currency,” remarked Mundell.

“The US dollar is now not backed by gold, but only by trust. And since most commodities and major goods such as oil and gas, major metals are exchanged based on the US dollar, it was quite logical that the US government had to increase its power through inflationary measures that made the US dollar less stable,” said Mundell, adding, this has driven scholars, world leaders and financial analysts to call for a new world currency to stabilise the global financial markets.”

Therefore, there is a necessity to issue a new global currency system called the “DEY”, which will be a basket of US dollars, Euros, and Yuan and Yen, said Mundell. He added that the new currency should be issued by a global central bank such as the International Monetary Fund (IMF).

“The new system should not be based on any single currency. It should rather allow the introduction of SDRs which are assets issued by the IMF, to make the world financial market much more stable, said Mundell, noting that these assets should have a value based on the national currencies of these major world currencies.

He said that the first step should be to stabilise exchange rates, then to issue to “DEY”, with specified weights.

“Though it might be hard to apply, this is the solution to any further financial crisis, and I am optimistic about this,” he said.