By Mike Dolan
LONDON, Oct 16 (Reuters) - As the dust settles on the global
credit crisis, a new world financial order may be emerging - but
one possibly more dependent than ever on the United States
protecting the dollar's position as dominant reserve currency.
Odd as that may seem against a backdrop of Washington toying
with a sovereign debt default, some economists feel there may be
few other credible options.
Far from ebbing in importance, they reckon the dollar's role
may even have to increase as a necessary home for a swelling
"savings glut" fuelled by ageing societies and growing caution
among developing nations about foreign capital dependency.
Deutsche Bank strategist Sanjeev Sanyal dubs this latest
order 'Bretton Woods III' - the first being the post-World War
Two gold standard that ended in 1971 and the second a symbiotic
build-up of both U.S. deficits and dollar reserves and bonds by
the export-fuelled emerging markets boom between 2000 and 2008.
Sanyal's key point is that a third iteration of these clearly
unbalanced but potentially durable international systems is
being driven by ageing demographics across the world that will
drive savings higher and almost all economies toward surplus.
As age profiles rise and savings grow even in the newer
developing countries over the coming decades, the older rich
world heading to retirement will not necessarily be dissaving to
match, he argues, preferring in many cases to save to excess
into retirement as precaution.
But a finite world can't all be in surplus at the same time.
Some countries - or one very large one in the shape of a
relatively youthful United States - may just have to absorb the
excess and continue to run higher deficits in net foreign asset
positions for much longer than many have assumed lately.
"We feel that the onus of providing the countervailing
deficit will eventually fall on the United States," wrote
Sanyal, adding credit market gauges and long-term inflation
expectations still show deep-seated faith in the dollar.
If that's sustained, then this 'savings glut' funnelled
stateside - first identified by Federal Reserve chief Ben
Bernanke in 2005 - will then likely keep U.S. borrowing costs,
global investment returns and the dollar exchange rate depressed
for many more years to come.
However, if the United States thinks that's untenable or is
unwilling to run such large deficits to balance the world,
there's a major headache for everyone.
"In some ways, this is analogous to the debate over the debt
ceiling," says Sanyal. "In this scenario, world demand may
flounder and the savings glut will further depress the real cost
And this brings us to the anxieties of the moment.
Washington's latest stuttering budget impasse and
self-imposed debt cap has left the rest of the world unnerved by
the prospect of repeat threats to U.S. credit quality and the
role of dollar securities as the safest long-term store of
At last count, more than 60 percent of the $11 trillion of
world hard currency reserves were estimated to be banked in
dollar assets - with the bulk of world commodities and goods
trade also denominated in the U.S. currency.
Finance chiefs meeting at the International Monetary Fund's
annual gathering last week queued up to warn of the implications
of open fiscal warfare in the meeting's host city.
G20 finance ministers and central bankers collectively
called for "urgent action" on the stalled budget.
Indian central bank chief Raghuram Rajan warned U.S. default
could mean "U.S. collateral is no longer good." Singapore's
finance minister Tharman Shanmugaratnam said default would leave
a vacuum where "it's not clear where the safe haven is."
The biggest foreign holder of dollars, China, has been most
vocal. Vice Finance Minister Zhu Guangyao demanded on Tuesday
the United States take "concrete action" to resolve its budget
and assume responsibility to uphold global financial stability.
European Central Bank policymaker Ewald Notwotny said it was
"extremely dangerous" when the fiscal politics of a country
printing the world currency were driven by "very narrow domestic
So even a postponement of the debt ceiling deadline leaves
very high stakes around the globe.
And if the dollar's pivotal role in the evolution of the
international system persists, so will the tension.
In a report entitled "Will the U.S. exorbitant privilege
destroy itself?", Commerzbank economist Ulrich Leuchtmann said
the very nature of the U.S. budget row would damage the dollar.
"U.S. politicians one day might damage the dollar's status
as the world's reserve dominant currency, whatever they will do
to solve the current crisis."
(Editing by Ruth Pitchford)