Decline of the U.S. Dollar: Asian Initiative to Create Commodity Based Currency? 32 comments
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No, I don’t have any inside information, but I believe that China and other Asian countries will decouple from the United States during the next five years, partly because the American economy will remain moribund, partly because American policy will continue to be incompetent, and partly because their own domestic market and financial systems will be able to bear the burden. Regional cooperation among Asian currencies passed a major milestone on May 3, as the Far East Economic Review reported yesterday:
On May 3, the finance ministers of the Asean Plus Three group—which consists of the 10 member countries of the Association of Southeast Asian Nations as well as China, Japan and South Korea—agreed in Bali on the governing mechanisms and implementation plan for the multilateralization of the Chiang Mai Initiative (CMI). What at first might sound rather unspectacular is in fact a major milestone on the road toward East Asian financial and macroeconomic cooperation.
The CMI was launched in May 2000 in Chiang Mai, Thailand, as a response to the Asian financial crisis. The idea was to provide short-term financial support for neighboring countries which experience balance of payments problems. The CMI consists of the Asean swap arrangement and a network of bilateral swap arrangements among Asean Plus Three countries. The Asean swap arrangement is now $2 billion in size, while some 16 bilateral swap arrangements have been successfully concluded among eight countries with a combined total size of $90 billion.
These bilateral currency swap agreements will now be transformed into a single regional pooling arrangement, comprising at least $120 billion of reserves. 20% of the funds will be provided by the 10 Asean members and the remaining 80% by the Plus Three countries. The Asean Plus Three finance ministers also agreed to create an independent surveillance unit to monitor and analyze regional economies and support CMI decision-making processes.
Less important than the specifics of the agreement is the fact that it includes all the countries of the region. This is a major challenge to the International Monetary Fund, which always objected to a regional Asian initiative outside its purview, as well as to the United States.
The Asian exit from the dollar will be turtle-slow and gradual. China and Japan between them have nearly $2 trillion worth of US Treasury securities and will do nothing to jeopardize their existing investment. But the collapse of governance in the United States and the Obama administration’s response have turned the US into a zombie economy, and the dollar into a zombie currency. The euro offers no alternative. Demographically Europe is dying, and Europe’s economic misery is worse than America’s. Robert Mundell, the 1999 Nobel Prize winner who might be China’s favorite Western economist, told Bloomberg News June 1 that the euro will decline substantially in the near future.
Apart from the problem of protecting a massive existing investment in the dollar, Asia has another problem in exiting from the dollar: there exists no natural alternative. An alternative would have to be constructed. With the United States the unchallenged world superpower, the US dollar became the unchallenged world reserve currency after the fall of Communism. But it is easy to forget how challenged the dollar was prior to the fall of Communism. The sharpest rise in the price of gold occurred in 1979 when the Soviet Union invaded Afghanistan, leaving the confused Carter Administration looking weak and feckless. Most European leaders at the time expected NATO to collapse and the Soviet Union to emerge as the stronger contender. That’s why gold doubled in price around the Afghanistan episode (click on chart to enlarge).
Lack of trust in central banks, individually and collectively, persisted into the end of the 1980s. Under Treasury Secretary James Baker III, the (first) Bush administration seriously considered the merits of a commodity-based currency standard, in which monetary policy would be guided by the movements in the auction prices of traded commodities. Robert Mundell advocated such a system. So did Richard N. Cooper, the former Undersecretary of State for Economic Affairs and Yale Professor, who wrote an influential study of commodity-based currencies for the CATO Institute. Another advocate was Manuel Johnson, Vice-Chairman of the Federal Reserve Board of Governors.
Interest in commodity-based currencies faded as the Reagan boom continued into the 1990s with low inflation. Nonetheless, the advantages of a commodity standard are clear in the context of lack of political agreement: it provides central banks with a means of targeting inflation in a far more sensitive and credible way than examining inflation indices, which are not only backward-looking but manipulable.
Asia may have passed a milestone in monetary cooperation, but China, India and Japan never will establish the sort of political rapport that allows for currency union along European lines. To link their currencies would require an agreement to employ an objective benchmark for monetary policy, and the obvious choice would be some basket of commodities.
This is a five, perhaps a ten-year project, to be executed very gradually and very carefully as the Treasury’s largest foreign investors gradually reduce exposure to the US market and create their own financial markets. A useful comparison would be to England, whose role as reserve-currency provider attenuated gradually over thirty years. America has a dose of the British disease, using the finances of the state to protect superannuated industries in order to curry favor from large trade unions. Were this to continue, the logical consequence would be British-style decline. Asia will rely on its own 3.5 billion people as an internal market, and create its own monetary arrangements.
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On Jun 04 09:50 AM cjared@yahoo.com wrote:
>
>
> The American dollar will remain the world currency. Period.
On Jun 04 10:52 AM joe black aka TheReaper! wrote:
> Mercantilist Asia , a plague upon the Anglo world . Their Mercantilist
> ways are what brought the dollar down , they don't want to trade
> , they want to sell and dominate . The only thing they want to buy
> is commodities , and they buy them to make things to sell to the
> Anglo world .
>
> I learned by experience competing with Asians for decades , that
> you cannot beat them . Trying to beat them is like trying to exterminate
> rats or cockroaches .
>
> You've all heard the term , "the great race to the bottom" haven't
> you ? That is what we are in , a race to the bottom , and every time
> you buy some thing "Made in Asia" you are adding to the problem .
>
>
> Already you can see the results , people with a house full of Asian
> junk and no job . You dear reader have no clue that you are in WW3
> , but their are no bullets . This is an economic war and you are
> losing it . Think about that the next time you buy "made in Asia"
> .
>
> TheReaper!
By way of expanding upon point one made by SW, last month Beijing completed the last of a series of so-called currency swaps—providing yuan to other central banks for use in trade with China—with Argentina, Hong Kong, Indonesia, Malaysia, South Korea, and others.
These arrangements remove need for these trading partners to use the dollar as an intermediary currency in dealing with China. And, more recently, Beijing denominated a bilateral trade deal with Brazil in the two countries' currencies, rather than in dollars.
To achieve its long term goals, which could be as far off as 2020, the Yuan will need to be convertible and widely held in the form of bonds. I think the Chinese are feeling their way around the first challenge by exploring how they wish to value their own currency, whether through linkage to commodites, SDR's or other combinations.
With respect to laying a broader foundation for its bonds, China recently took the unprecedented step of allowing HSBC and a second private bank to underwrite and sell yuan denominated bonds inside of China. This is a big step towards expanding their credit markets and pursuing their long-term goals.
On Jun 04 10:52 AM joe black aka TheReaper! wrote:
> Mercantilist Asia , a plague upon the Anglo world . Their Mercantilist
> ways are what brought the dollar down , they don't want to trade
> , they want to sell and dominate . The only thing they want to buy
> is commodities , and they buy them to make things to sell to the
> Anglo world .
>
> I learned by experience competing with Asians for decades , that
> you cannot beat them . Trying to beat them is like trying to exterminate
> rats or cockroaches .
>
> You've all heard the term , "the great race to the bottom" haven't
> you ? That is what we are in , a race to the bottom , and every time
> you buy some thing "Made in Asia" you are adding to the problem .
>
>
> Already you can see the results , people with a house full of Asian
> junk and no job . You dear reader have no clue that you are in WW3
> , but their are no bullets . This is an economic war and you are
> losing it . Think about that the next time you buy "made in Asia"
> .
>
> TheReaper!
But, Mr.. Goldman seem to read a litttle too much out of this Chiang Mai Initiative. It was a long way coming, but it is not as far along as David thinks. It is at least not yet positioned as some basis for some future challenge to the USD.
As of now, CMI is still just a response from the '97 Asian Financial Crisis, when East Asia was hit very hard, and many felt they were exploited by western powers behind the IMF when they were down. The CMI is still defensive in nature, a pooling of reserves so that East Asian countries don't have to go begging for IMF money on unreasonably harshed terms when hard time strikes.
Also ASEAN+3 does not include India, as David imply. The '3' are China, Japan, South Korea. As of now, the Chiang Mai Initiative does not cover 3.5 Billion Asian people, just 2.4 Billion EAST Asians. India still have a lot of problem with its immediate South Asian neighbors, and is not yet as well integrated to East Asian economies as it can be in the future.
Whether USD will lost its world reserve currency status quickly or slowly depends mostly on the US economy itself. Americans seems to regard USD's Reserve Currency status as a priviledge, a birth right. The reality is that Reserve Currency has its responsibilities. Countries expect the Reserve Currency to be rock solid, stable, and always strong. It requires big shoulders and big stomach to support such a Reserve Currency by one country. With shaky finance and deep levels of debts, American may soon find that the burden has become too much to shoulder by ourselves.
On another project in China, some of our procurement swere in RMB (yuan) and some were in US$.
One can just imagine, what would happen if all Chinese manufacturers insist on being paid in RMB (yuan) or give a discount if payment is in RMB (to reduce their foreign exchange risk). In no time flat, RMB will be in great demand just like US$ now. Little by little, China can make RMB the de-facto reserve currency.
The Canadian dollar tracks commodity prices, and is strongly integrated with the US economy. So what you are in effect looking at when you do this is the value of the US economy relative to a basket of commodities.
The verdict? Growth in the US economy has been non existent for the past decade. Growth in the S&P500 value up to 2008 were simply corrections for the deterioration in the value of the dollar.
It will be a gradual process, with initiatives like this.
On Jun 04 10:46 AM SW Richmond wrote:
> The trend is obvious. China will lead Asia in engaging the following
> strategy as a means of separating themselves from excessive Western
> economic influence:
> 1. Gradually but relentlessly increase the use of "alternate" currencies
> for foreign trade, with the "alternate" being an alternate to USD
> such as the Yuan. (Already in progress)
> 2. Gradually but relentlessly shorten the maturity exposure they
> carry to US denominated debt in general, and Treasuries in particular
> (arguably in progress)
> 3. Plan for growth by using some of their forex excess reserves
> to stock up on the commodities they will need for the decades of
> growth they have in front of them. (already in progress)
> 4. Domesticate growth by using some additional quantity of their
> excess reserves to internalize their economies and markets via economic
> "stimulus plans". (already in progress)
> 5. Gradually but also relentlessly expand their naval capabilities
> and naval presence in oceans that are critical to their "national
> interest", such as the Pacific and the IO including the Persian Gulf,
> pressuring the US Navy to give ground. (already in progress)
> 6. Pursue cooperative economic and (soon) security agreements with
> Russia. (already in progress)
>
> They will do these things gradually because both time and money are
> on their side. The growth potential of China alone dwarfs the West.
> Resource demands from a growing China (1.3 billion souls) will be
> staggering. Any resistance from the US will be met by Timmy being
> recalled to China for more "meetings".
As for the dollar being replaced anytime soon, it won't happen. For better or worse, the dollar is the world standard, just as the Spanish reale was the standard two hundred years ago. The abundance and value momentum of a currency is what makes it a standard, and there is no other currency held in vaults in every treasury around the world that is held as much as the US dollar. To switch to a new standard would disrupt the economies of too many countries and really throw the world economy into a tailspin. Not in my lifetime.
Commodities are not only a "purchased good" - they are also a speculative investment. Surely the price of oil during 2008 didn't reflect inflation as a whole for the world. Gold has had its turbulent times as well. Ditto for, well, just about any commodity at some point.
If the pricing of commodities ONLY reflected the purchases for creating other goods, and hence their prices, then that would be fine. Alas, in our complex world, that is not the case.
It seems to me the value of money is a messy business. Thinking the grass will be greener with some other system is just wishful thinking. I do think in the longer term that it would be healthy to get away from the USD being the main reserve currency. Just don't think commodities are all they are cracked up to be.
Heck, if you want commodities as your currency, just trade your paper money for a basket of your preferred commodities today and sell them off to buy something as needed.
We give them paper they give us all kinds of stuff. Of course we wouldn't need a growing Keynesian funded governments if we didn't need to use deficit spending to maintain full employment. Now there are plenty of arguments to be made about the Federal Reserve, socialism, etc...for our demise. But how about considering the simple fact that foreigners have been hoarding dollars for 30-50 years now. If they'd just buy stuff back from us with those dollars:
1) We'd have smaller governments and more productivity.
2) They would have to be worring now about currency debasement.
We including them will all get exactly what we deserve as a group. Economics is simply the study of the reality of the exchange of goods and services. There is no free lunch and that law can't be changed. There is always a cost to all actions.
My guess is that they will hoard until we turn the printing presses on overdrive. Then all the sudden not only will our government be printing but they will begin to spend those dollars and everything dollar denominated will see their prices rise. Hyperinflation is the only outcome if we continue on this course.
Our behavior needs to change but so do those who continue to fund our debt. If they would actually buy something other than oil with those dollars things would balance out better.
As things are now, even if China and Asia purge themselves of Treasuries they don't purge themselves of US dependence because their entire economies are set towards exporting to the US and reaping surpluses from trade imbalances. It's not about their reserves, it's about the continued trade imbalance that is destabilizing to the dollar and to global markets. If the US deficit was 100% US funded and there was no trade imbalance there would not be a problem even if Asia owned $2 trillion in US debt. With balanced trade a country can be as inflationary as they want. Then the only ones who suffer are their own people with devalued currency if they wish to overinflate.
I would also like to point out the fact that China benefitted immensely as their bonds all appreciated when interests rates dropped to Zirp. Maybe the US should complain that they should give back some of the windfall they got from that before they start complaining too much about bonds rising back to normalcy. If you win $100 playing roulette and then sue the casino when you loose $100 you won't get too many sympathy votes.
All around, China should look at it's own errors before it starts blaming others. We need a free open and responsible China if we are to have a stable global economic structure. That means a free floating RMB and open market for imports as well as exports. That's what the WTO should enforce but is not doing a good job at. The world suffers as a result.
The only way inflation can exsist is in a money-debt system. In a credit-money system it is impossible to have inflation.
On Jun 05 01:23 AM Moon Kil Woong wrote:
> Currency swaps in Asia were implemented a long time ago when Asia
> faced previous currency crisis. That however, doesn't mean they will
> all Kow Tow to a unified currency or any semblance of it. In fact,
> if China refuses to appreciate their currency then the US will inevitably
> end up depreciating. The ends must balance sooner or later.
>
> As things are now, even if China and Asia purge themselves of Treasuries
> they don't purge themselves of US dependence because their entire
> economies are set towards exporting to the US and reaping surpluses
> from trade imbalances. It's not about their reserves, it's about
> the continued trade imbalance that is destabilizing to the dollar
> and to global markets. If the US deficit was 100% US funded and there
> was no trade imbalance there would not be a problem even if Asia
> owned $2 trillion in US debt. With balanced trade a country can be
> as inflationary as they want. Then the only ones who suffer are their
> own people with devalued currency if they wish to overinflate.<br/>
>
> I would also like to point out the fact that China benefitted immensely
> as their bonds all appreciated when interests rates dropped to Zirp.
> Maybe the US should complain that they should give back some of the
> windfall they got from that before they start complaining too much
> about bonds rising back to normalcy. If you win $100 playing roulette
> and then sue the casino when you loose $100 you won't get too many
> sympathy votes.
>
> All around, China should look at it's own errors before it starts
> blaming others. We need a free open and responsible China if we are
> to have a stable global economic structure. That means a free floating
> RMB and open market for imports as well as exports. That's what the
> WTO should enforce but is not doing a good job at. The world suffers
> as a result.
Back in late1970s, my first boss in America was a Chinese professor. He was Dean of School of Engineering at CWRU. He was also a president of China/USA scientific society. He was a very capable scientist & businessman. He also was smart, honest, and hard-working. During my long career, I worked with Americans, British, Germans, Russians, Indians but he was one of the best. Consequently, the "China miracle" was not a surprise for me at all.
An assumption that Chinese will tolerate US government recklessness and totally irresponsible economic & fiscal policies for long is a gigantic pipe-dream.
Webster's unabridged dictionary defines 'governance' as
"Exercise of authority; control; government . . ."
Does Goldman mean that the US government has withdrawn its troops from all 130+ countries in the world where they are stationed (including Iraq and Afghanistan)? Hasn't happened.
Does Goldman mean that our social security checks won't be deposited this month and that Medicare will stop paying our medical bills? I don't believe that this will occur in my lifetime.
Does Goldman mean that all the TSA personnel have lost their jobs and people can take anything they want into airplanes? Hasn't happened either.
Whatever Goldman may have intended to write, his actual statement is pure nonsense but highly imaginative.
How much of the rest of his argument is the same?
Incidentally, there are lots of good comments above.