In Search of the Next Reserve Currency 39 comments
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I first made mention of the dollar's status as world reserve currency changing in some way in 2004. Now, four years later, the path to this is easier to see (it may not happen of course, but things in the U.S. have deteriorated mightily). Here is a snippet from the FT on Thursday about the yen possibly filling that role.
I'm not sure what I think about the likelihood of yen becoming a world reserve currency just yet, as I believe the vast majority of the yen rally has come from unwinding/deleveraging/forced selling. If some country does share this role with the U.S. (I think that more likely) or supplants the U.S. (less likely in my opinion) it will make sense to own some of that currency.
Something that has helped the U.S. through all of this crisis is the need for dollars around the world. This contributes to the willingness to buy our debt for close to no yield. Were the U.S. not still the center of the universe I imagine things would be much worse than they are.
I think a country ascending to that status would be a very attractive hold.
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This article has 39 comments:
Obviously these criteria produce a mixed report card for the yen, won, yuan, real, euro, US dollar, peso, AU dollar, CDN dollar, pound, etc. Whereas the US used to have straight A's on this report card, the end of US manufacturing, depletion of US resources, aging demographics, and exploding government debt and liabilities with no controls in sight indicate a severe increase in risk. Yet, what currency can take its place? Every existing alternative is also flawed.
This realization is old news. It is what drove the commodities bubble earlier this year. Yet, those hedges proved to be better destructors of wealth than the currencies they were supposed to hedge! The losses in commodities brought everyone back to the dollar, but for how long?
A basket of foreign currencies and a portfolio of international companies seems to be the best we can do to reduce currency risk in these uncertain times.
cyclingscholar
The Dollar is the most important currency because only the USA had global power and a strong military.
Unless and until USA becomes weaker in total the the next best currency, things won't change.
It won't be the Yen - no military might. It won't the Swiss Franc - not enough in circulation. It won't be the Yuan - too much risk, political and economic.
So now we are goiong to use "a basket of curency"...?
Sounds like a currency CDO - what a great idea, NOT!
The ONLY "currency" that could possibly take its place alongside the dollar in the commercial scheme of things is gold.The GCC (major Gulf States oil powers) have great respect for gold..and IF they were to mandate all oil sales be paid for on a 90/10 (90% US$ and 10% gold)
basis until 2012..then 80/20 at that point just who would..or could..refuse????
This would be a very shrewd move by the Gulf oil powers..they'd protect themselves against this liquidity fest the Fed and Treasury are indulging in..and they could use the gold as the foundation for their transition to THE world banking power.....
When you look at the facts, the long term future of the dollar is erosion against other currencies.
As far as a "new international currency in ten years" I would suggest studying how long it took the EMU to come about and get to the point of a single currency. The only way it could happen in just ten years would be some sort of global martial law which if that were the case everyone would use the dollar.
If military might is the foundation of currency values, then what explains the rising value of the yen? Did the EU become militarily stronger in the first 7 years of this decade and then suddenly decline in the last few months? How about the Australian dollar which seems to rise and fall with the value of the mining commodities the Aussies produce rather than with their military capability?
Also, what military capacity would the US have if our oil was cut off by Venezuela, Saudi Arabia, and Russia? Airplanes, tanks, all but a few ships - forget about it.
The dollar has a lot going for it, including economic size, established regulation and laws, historical stability, and liquidity. However, it is nonetheless issued by a government that could not survive a day without borrowing from China and OPEC, whose current debt is spiralling out of control, whose future liabilities make an eventual 50% tax hike or currency devaluation inevitable (guess which is more likely), and whose country produces relatively little for export to the world compared to what it consumes from the world. Those are facts - not nationalistic currency-hating, and every other currency also has some flaw on my list of desirable attributes. That's why I suggest it would be wise to hedge. The assumptions of the past no longer hold true.
On Nov 28 11:34 AM sr9web wrote:
> The premise of this article is absurd. What is the world going to
> use... the Ruble? The Peso? The Loonie? The Euro?
>
> The Dollar is the most important currency because only the USA had
> global power and a strong military.
>
> Unless and until USA becomes weaker in total the the next best currency,
> things won't change.
>
> It won't be the Yen - no military might. It won't the Swiss Franc
> - not enough in circulation. It won't be the Yuan - too much risk,
> political and economic.
>
> So now we are goiong to use "a basket of curency"...?
>
> Sounds like a currency CDO - what a great idea, NOT!
The ME is the world's de facto oil bank, where nations borrow oil and repay their loans with dollars and defense spending. This is why the US defends the ME Arab states, in spite of our joined-at-the-hip political ties with Israel. The world's largest army defends the world's largest bank, it makes perfect sense. Fort Knox is now Fort Arabia/Kuwait/Iraq.
If Obama thinks we are leaving Iraq, he is an idiot. The dollar would collapse, as it would be an admission of military weakness by the US (as noted above) and it would be the middle of the end game for dollar-denominated oil.
The end of dollar-denominated oil means someone else must step up to defend Arabia. To prevent this possibility, the US builds the world's largest military base in its new conquest; we will not leave until either the dollar collapses or the oil runs out.
Believe it or not Real Estate with low holding costs would also work.
en.wikipedia.org/wiki/...
decides otherwise.
Course. Reserve currency has some unfortunate side effects. When the entire world is buying your currency, it deflates your economy massively. Everything starts to become very expensive, particularly employees. So you have to find some excuse to print trillions. The military is a great way to do that. So the entire world basically finances your military ambitions.
rah rah rah sis boom bah we're number one!! NOT!
> The premise of this article is absurd. What is the world going to
> use... the Ruble? The Peso? The Loonie? The Euro?
>
> The Dollar is the most important currency because only the USA had
> global power and a strong military.
>
> Unless and until USA becomes weaker in total the the next best currency,
> things won't change.
>
> It won't be the Yen - no military might. It won't the Swiss Franc
> - not enough in circulation. It won't be the Yuan - too much risk,
> political and economic.
>
> So now we are goiong to use "a basket of curency"...?
>
> Sounds like a currency CDO - what a great idea, NOT!
On Nov 28 11:31 AM cyclingscholar wrote:
> For a country to have its currency be a reserve currency, the country
> must be politically, economically, and MILITARILY viable for a very
> long time horizon. This leaves Japan and the EU (or as i call it,
> the EEEEEEEuuuuuuuuuuuuuuw... out of consideration.
>
> cyclingscholar
And yes, the military is very expended. The US has an awesome military - but when they can't win in a country like Afghanistan or Iraq, how good is all that military might?
I also agree with Charlberg!! He said it best, "What is the 'military' value of paper currencies with no intrinsice value? Is the promise to pay that a paper note implies more convincing down the barrel of a gun? "
On Nov 28 12:12 PM American In Paris wrote:
> My American brethren need to shed this ridiculous nationalism bred
> of ignorance. The US is clearly in decline and overextended. Neither
> the Iraq nor Afghanistan wars have been won. Nor it is clear that
> a global reserve currency must be backed by great military power.
> The most likely scenario is three reserve currencies, not one, in
> the near future. The Euro is a strong candidate because the European
> economy is huge and more stable than its US counterpart. Indeed,
> Europe enjoys greater fiscal and monetary discipline, a higher savings
> rate, and smaller debt/income ratios than the US. Europe's net worth
> is growing whereas the US is the world's largest debtor nation (and
> growing). The net inflow of funds into the US since the early 1980s
> is not about funding America's economic future, but funding America's
> propensity to consume in excess of its income (a half trillion dollar
> a year defense budget and a 2% personal savings rate says it all).
>
>
> When you look at the facts, the long term future of the dollar is
> erosion against other currencies.
>
>
>
That said, I have no major comment on their likelihood of becoming the new reserve currency. Just don't count them out for military weakness.
AB
Somebody enterprising might even create a unit comprised of a defined mixture of 10 or 20 currencies, some precious metals to sell to those wishing to protect against gyrating exchange rates, inflation and volatile asset prices.
www.imf.org/external/n...
You can take that ear of corn, eat all of it but 1-2 kernels, and save those kernels for next year's planting. The remaining kernels can be consumed by the farmer and used to pay for expenses, but there will still be plenty left to be sold, and that's where the real wealth comes from.
The US used to have a manufacturing economy, which made it several levels above simply growing corn as in the simplified example above. However, the promise of a "knowledge economy" to replace manufacturing never happened, and in addition is not the way to go anyhow. A knowledge based business is great, but is actually just another layer above manufacturing. Manufacturing does not and should not be replaced. Perfect example of a nation that gets this? Japan!
So, what has become of the US? Well, rather than create wealth as in the simplified example above, we've become a nation of consumers. So, that's like importing all the corn and eating it. All the while relying on someone else to produce the corn. Consumption does not create wealth, unless of course you are a pig and are getting fat off the corn to be slaughtered! Then, yes, consuming corn is just fine, the wealth created is in the production of pork, which is more valuable than corn. Same for producing whiskey, rather than corn alone.
I see you have an extensive number of posts on your web site. I have not taken the time to read through all of them, which might clarify the comments you have made here, but perhaps you would be so kind to post another comment here to clear up some problems I have in understanding what you have said.
First, you said: "When the entire world is buying your currency, it deflates your economy massively. Everything starts to become very expensive, particularly employees."
When everyone is buying something, demand is high and and that thing is given a higher value. Thus the dollar has risen in value recently compared to other currencies, Concurrently, we are having deflation in such things as real estate and other hard assets, surrogate money (such as debt instruments and equities) and commodities. You attribute causation. Can you address several questions?
1. Why is the relationship between the rise in the dollar and deflation not coincidental?
2. Why not attribute the massive economic deflation to the collapse in credit (surrogate money) rather than the rise in the value of the dollar? 3. Is there any argument to be made that the rise in demand for the dollar is a result of the deflation and not the other way around?
4. Are there historical similarities to the current situation?
5. Have there been past deflations associated with rise of the dollar?
6. Conversely, have there been past inflations correlated with fall of the dollar?
I have gone to www.fxstreet.com/rates.../
for some information. Looking at the monthly chart (last 100 months) I see the dollar falling from 9/11/2001 to mid-2004 (about 33%). The dollar then rose for the next 12 months (about 14%). From mid-2005 until October, 2007 the dollar fell again (about 20%). In the past 12 months the dollar has risen again (about 22%).
During these time periods, the rate of inflation (by time period) was: 9/11/2001 to mid 2004 = approximately 2.2%; mid-2004 to mid-2005 = approximately 3.1%; mid-2005 to October, 2007 = approximately 3.2%; last 12 months = approximately 4.4%. What I see in this small data set is a positive correlation: the dollar is rising when inflation is the highest. Does a larger data set (longer history) show something different than this correlation of rising dollar with higher inflation (less deflation)?
I look forward to your reply. I think the questions I have asked may require much more analysis than suitable for a comment, but maybe you could hit a few high points.
>KIT 2 Comments Nov 29 01:27
> AM USD goes to 40 cents CAD goes to $2.20 as a commodity based >currency. Hmm 70% of our exports are to the USA they cant afford us. >70 % unemployment in Canada... CAD falls to 30 cents.
The next G20 meeting will stir the pot.
By the time you add back all the hidden and deferred costs, we spend close to $1 trillion per year on "defense". We've been doing that (in today's dollars) for the last 60 years. Do you really think we have gotten $60 trillion of benefit from our various wars, incursions, and meddling in other countries' affairs?
Only some of these conditions are in prospect now and the Euro is a long way from being ready, even if the UK joins it.
We do need a world reserve currency to support globalisation and prosperity and it would be better if its 'owner' did not exploit it as shamelessly as the US has done. What would a basket look like?
The Euro is not as stable as its cracked up to be. The bailout of AIG was done specifically to salvage European banks, Europe as it turns out was far more vulnerable to the meltdown than even the US, only losses in the US are more visable.
There are also nations in Europe who reject the Eurozone, while seccession of states in the US are drastically less likely than exit from the Eurozone.
Ultimately, the US is still measurably the most productive nation per capita and I think that goes a long way into determining the reserve currency in most people's eyes. Its not about who can produce goods but about where and how those goods are bought. That will be the US for a long time coming.
On Nov 28 10:46 AM Chris B wrote:
> I would very much like to hedge my exposure to the dollar, and now
> seems like a wonderful time to do it. Yet, I'm only interested in
> currencies with long-term advantages, as I am not a currency trader
> and I need to hedge for the long term. Long-term advantages include
> huge industrial export production, low long-term government liabilities,
> sophisticated and democratic rule of law and regulation, a proven
> system for inflation control, youthful demographics, economic size,
> natural resources, and low existing government debt.
>
> Obviously these criteria produce a mixed report card for the yen,
> won, yuan, real, euro, US dollar, peso, AU dollar, CDN dollar, pound,
> etc. Whereas the US used to have straight A's on this report card,
> the end of US manufacturing, depletion of US resources, aging demographics,
> and exploding government debt and liabilities with no controls in
> sight indicate a severe increase in risk. Yet, what currency can
> take its place? Every existing alternative is also flawed.
>
> This realization is old news. It is what drove the commodities bubble
> earlier this year. Yet, those hedges proved to be better destructors
> of wealth than the currencies they were supposed to hedge! The losses
> in commodities brought everyone back to the dollar, but for how long?
>
>
> A basket of foreign currencies and a portfolio of international companies
> seems to be the best we can do to reduce currency risk in these uncertain
> times.
Interest payments delay the "destruction" of the principal, and of course you can't pay the principal on a bond until maturity.
The reason credit is used is because it is impossible to predict the velocity of money in any year. It would not be possible to restrict or expand the money supply based on any aggregate year without dire consequences.
It is in fact municipal governments issuing bonds to avoid taxation that will be the next meltdown. Once municipal bonds start to default, we're in trouble. The Federal government can issue bonds with impunity.
On Nov 29 08:29 PM grouphero wrote:
> As of these years, the US$ will still be the currency to hold onto
> in case of crisis. USA owes other countries too much money and nobody
> would like to see it fail before they can can back those money with
> good return. Superficially, it looks like USA is taking advantage
> of this and enjoy easy credit but it won't last long and eventually
> USA will have to pay for it. In what form it is difficult to say
> as most credit nations still haven't figure out a good way out as
> is evidenced by the current crisis situation. The self destruction
> of the US economy by its leaders may be a possible outcome with more
> and more leading industries subsided, the path is already laid. So
> wait and see.