By Goh Eng Yeow, Markets Correspondent

IT TOOK China three decades to gather US$2 trillion (S$3trillion) in foreign reserves, as it transformed itself into the world's manufacturing hub through the hard work and ingenuity of its people.

By contrast, some economists estimate it will take the United States central bank from now until the end of the year to effectively print this same vast sum to buy up the US government bonds which financed the enormous loans made to troubled institutions such as American International Group (AIG).

For the past 60 years, the greenback has been the world's dominant reserve currency. This wide use of the greenback has enabled the US to keep the borrowing costs on its enormous debts down, simply by selling huge tranches of bonds in its own currency to investors.

The move by the Federal Reserve to buy the bonds itself is one way to achieve what economists call 'quantitative easing' - or expanding the money supply via the central bank funding the debt of its own government. The objective is to flood the system with extra money to stimulate spending and defuse the threat of a deadly downward spiral in prices.

But this effective printing of money - even though it might not be in the form of notes and coins - has made big US government bond buyers such as China extremely nervous.

The 'printing' of money, known as 'seigniorage', traces its origins to Roman emperors who chipped off the edges of coins to create more money to finance their endless wars against barbarians. Some economists view seigniorage as a tax on savers. It penalises them for holding cash as its value gets eroded by governments inflating their way out of paying debts by printing money.

When taken to excessive levels, as in Germany in the 1920s after losing World War I, it can lead to hyper-inflation - prices of essential goods spiralling out of control as paper money becomes worthless.

Currency traders are also worried that it could cause a souring in the appetite for the huge debt being issued by the US and Britain to revive their ailing economies.

Last week, a chill ran through the City of London when a routine auction of British government bonds - known as gilts - failed to be taken up completely. As Britain has taken a similar route as the US in stimulating its economy, the wider implications of the gilt under-subscription were not lost on credit markets.

This explains why a paper by China's central bank governor Zhou Xiaochuan, rooting for a new reserve currency, is attracting so much attention.

The US has long opposed such an idea. President Barack Obama noted that while his country might be going through a 'rough patch', it still commanded the world's biggest economy.

But the brief roller coaster experienced by the greenback last Wednesday, between two comments by US Treasury Secretary Tim Geithner on the subject, illustrated financial markets' nervousness over the issue.

Mr Geithner had first said that he was 'open' to China's proposal that the greenback should be superseded as the reserve currency. He then qualified this by saying that he expected the dollar to be the reserve currency 'for a long time'.

Still, it would be an error to dismiss Mr Zhou's idea as a pipe-dream. Until 10 years ago, nobody believed European nations could have banded together to launch a common currency, governed by a single central bank, given their very different national agendas. But the euro has now become an accepted fact of life in much of Europe.

Establishing a new global currency, however, will take considerable time to get off the ground, even with the strong support of China.

In the meantime, quantitative easing brings with it fresh dangers. Its supporters claim that the liquidity from printing so much money can be drained away by central banks later on, with the monetary institutions selling the bonds they have accumulated.

But others have argued that this is a painful exercise politically. For the US Fed, this would entail selling US$3 trillion of government bonds at a time when Washington needs more cash to forestall a contracting economy.

And pulling back the liquidity can be painful. In 1937, actions taken by the Fed to drain excess reserves from the US banking system caused the US stock market to plunge and the US economy to nose-dive.

Any move it makes along similar lines today would have grave consequences beyond US shores.

Against this backdrop, leaders from 20 big industrialised countries will be meeting in London this week to discuss the global credit crisis. Given the verbal barbs already flying before the meeting, the rest of the world can only keep their fingers crossed, as they await its outcome.

This article was first published in The Straits Times.