Future of Dollar As Reserve Currency – A Revised SDR System

The global economy faces an unprecedented policy dilemma which could lead to a severe crisis. The world economies have about 20 trillion worth of US dollars in the form of reserve money and in the wake of dollar instability are looking for diversification into other currencies. Even a modest realization of these desires could lead to a freefall in the value of the US dollar leading to worldwide currency instability. However, none of the countries in whose currencies the diversification would take place are keen on the process as they fear it would lead to further appreciation of their over-valued currencies. China, India and other developing countries continue to intervene to keep their currencies from appreciating quickly. This has lead to a catch-22 situation wherein a slight provocation from any direction could have the disastrous impact of generating global imbalances and possibly a severe slowdown in the global growth.