The Foreclosure Crisis Has Weakened the Dollar

The foreclosure crisis has weakened the dollar to such an extent that ahead of the G20 summit in London in April this year, China has suggested that it should be replaced and no longer be considered as the reserve currency of the world.

China has openly given the call for a new global financial system having a new currency. It will be akin to the Special Drawing Rights of IMF as its anchor. China also wants to take away the focus from UK – the country that is hosting the summit. The British Prime Minister wants to make use of this opportunity to launch a new system (Bretton Woods) that would take over the existing order, which is clearly crumbling.

There is no doubt that USA is far from happy with all this talk and maneuvers. So far its dollar was the undisputed reserve currency of the world. In reply to China’s suggestion about a new currency Obama said, “I don’t believe that there’s a need for a global currency. The reason the dollar is strong right now is because investors consider the United States the strongest economy in the world with the most stable political system in the world.”

The Treasury secretary Timothy Geithner and the chairperson of the Federal Reserve Ben Bernanke took the same stand. At a Congressional hearing upon being queried by the Republican Michele Bachmann (Minnesota) if they would “categorically renounce the United States moving away from the dollar and going to a global currency”, both replied in the affirmative.

It is clear that USA would try its best to stop the moving away of the dollar from being the international reserve. But how far it will stop the trend is a moot question. Already the world has started to ask awkward questions especially after Geithner admitted that the US government lacks the authority to take over those sick banks that pose continuous threats to the entire economy. Geithener also agreed that the entire financial system of USA is fragile and needs urgent overhauling.

This poses the question – if America cannot put its own house in order how can it give an assurance to the world and safeguard the stability of its dollar? When the financial system stumbles generally the currency collapses. Currently all the jumbo banks of USA are in troubled waters. There is the increasing threat of widespread insolvency. The Federal Reserve Board has kept them running on a life support system.