A global currency? No. A dollar substitute? Maybe.

The world needs a global currency because the dollar is becoming too risky, the head of China’s central bank argued this week.

The proposal has no immediate future. President Obama shot it down at Tuesday night’s press conference: “I don’t believe that there’s a need for a global currency.”

But in a rational and reasoned paper posted on the Web, Governor Zhou Xiaochuan of the People’s Bank of China sees “a light in the tunnel” in Special Drawing Rights (SDRs), created in 1969 by the International Monetary Fund (IMF). Over a “long time,” he argues, SDRs could replace the greenback as the primary currency that nations hold in their international reserves.

SDRs more stable

Now used in occasional accounting transactions between nations and international institutions, SDRs have steadier value than the dollar because they’re based on a pool of major currencies. International concerns about the greenback are rising because of America’s wide budget and trade deficits.

“The outbreak of the [financial] crisis and its spillover in the entire world reflect the inherent vulnerabilities and systemic risks in the existing international monetary system,” Mr. Zhou wrote. He called for creating “an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run.”

China has a strong interest in this issue. It holds perhaps $1.3 trillion of US Treasury and other dollar investments in its international reserves. These piled up rapidly in recent years as China sold far more toys, clothing, tools, and other goods to the US than it bought in the way of airplanes, machinery, paper, etc., from America.

US inflation ahead?

In an attempt to revive the American economy, Washington has been pumping vast amounts of dollars into the economy through extra federal spending and an extraordinarily generous monetary policy. This has aroused fears internationally that this policy might lead eventually to high inflation, in effect shrinking the value of dollar reserves. Foreigners withdrew capital from the US in record amounts in January.

There’s been talk that China itself might attempt to limit any losses on its stack of dollars by diversifying its reserves into euros and yen, or maybe even other currencies and commodities. But such a move could devalue the dollar on foreign exchange markets, result in Chinese losses on its dollar reserves, and threaten a global financial panic.

Zhou apparently recognizes chances of creating a really new international currency are probably zero. But by highlighting SDRs, Zhou, who has a doctorate in economic systems engineering from Tsinghua University, is recalling another period when the dollar was in trouble.

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