India and Russia challenge US Dollar in run up to G-8 Summit

Over long term, US Dollar may not be the safest investment.  That, everyone knows.  What must be done – at least at the macroeconomic level is still a big question.

China and Russia have called for a multi-national currency – something like a global currency that is not dependent on the economic situation in any one country.  It is no secret that the current bad state of US Dollar has a lot to do with how economy has been managed here in the US.  Now, in the run up to the G-8 Summit, India and Russia have suggested that reliance on US Dollar for currency Investments may be inefficient.

Russian President Dmitry Medvedev says it the best:

“In the long term, we must also think about a single unit of payment such as the International Monetary Fund’s Special Drawing Rights,” a unit of an account linked to a basket of currencies.  We cannot be hostages to the economic situation of a single country, as is happening today with the United States.”

Suresh Tendulkar, an economic adviser to Indian Prime Minister Manmohan Singh, is meanwhile advising the PM to reduce investment of the country’s currency reserves in US Dollars and start diversifying them.  He likened holding US Dollars to “Prisoner’s Dilemma” – from Game theory where rational choices lead to negative results overall.

I concur with Tendulkar that investment of India’s Reserves should be diversified.  But the issue, as correctly stated, is what is the alternative?  There are many who allege that US has used its US Dollars to boost its economy by using its mililtary leverage – specially in case of the Oil producing countries in the 1980s.  Today, that leverage may not be there anymore.

So, which way should the world economy move to?

Reference Links:

1. Russia and India Question Reliance on Dollar Before G-8 Summit