Why I Was Wrong About the Need for a New Currency

A few days ago I wrote a post “Japanese defend dollar’s status while China tears it down” in which I defended the Japanese support of the dollar, saying it was in no one’s interest to see a change in the currency markets right now. I have to admit this was wrong-headed and short-sighted. In truth, the currency market, with the U.S. dollar as the principal reserve currency, is in great need of an overhaul.

When I wrote the post last Friday I said:

It makes no sense to talk the dollar down here and now and risk a disorderly fall. It certainly is not in China’s best interest as all their U.S. dollar assets will lose value.

But, if we are to move to a more stable world financial system, when is the right time? There probably is no ‘right’ time. So, in retrospect, I would say the Chinese are probably taking the right approach by aiming to, at a minimum, discuss the currency issue here and now – something I had advocated in the past.

I see the U.S. dollar as a weak currency due to excess consumption in the United States. Meanwhile, the Chinese currency, the Renminbi, is controlled by the State, leading to distortions in trade that most pundits believe create severe trade imbalances. While discussions about a new currency regime would probably not lead to any major changes in the short-term, making preparations now would lead to a more stability in the medium-term.

Comments

[nobby73:]

Dollar weakening seems to be a natural consequence of the current global economic situation and specifically the health of the US economy. It is not just excessive consumption, it is excessive debt that is the major factor. The problem is, the other central banks don't want to see their own currencies strengthen, so they are propping up the greenback, some more reluctantly than others. The G8 meeting was a joke, with utter unwillingness to address this issue and the media distracted by pompous talk of climate control - Jintao made the face-saving decision to go home when he was refused his requests to discuss the more pressing issue for the global economy.

As you say, there is never a 'right' time to discuss something like this, but as the longer the issue is brushed aside, the worse the risk of a sharp correction. The price distortions we are seeing in the markets in order to perpetuate this false reality threaten total disaster at a later date.

Jul 12 12:08 PM

[Alan Young:]

Now you're sounding sensible.

Jul 12 04:06 PM

[PlayForKeeps:]

The longer the world allows the US dollar to exist as the worlds reserve currency, the longer that they support our irresponsible habits and the longer that they get repaid with inflated dollars worth less and less. It is in the best interest of China and Japan to move away from the US dollar, albeit slowly. Unfortunately for the US, when this happens and we are no longer subsidized by Asia, we will fall on some very dark days, economically. Additionally, China has made it quite clear that they have lost confidence in the US dollar and economy and have gone on record suggesting a move away from the dollar and into an alternative such as SDRs. It is only a matter of time, and the longer that it is put off, the harder it will be.

Jul 12 08:37 PM

[Living4Divi...:]

You make sense, Nobby - the questions are: when and how will they make the move.

They seem to keep supporting the dollar.


On Jul 12 12:08 PM nobby73 wrote:

> Dollar weakening seems to be a natural consequence of the current
> global economic situation and specifically the health of the US economy.
> It is not just excessive consumption, it is excessive debt that is
> the major factor. The problem is, the other central banks don't want
> to see their own currencies strengthen, so they are propping up the
> greenback, some more reluctantly than others. The G8 meeting was
> a joke, with utter unwillingness to address this issue and the media
> distracted by pompous talk of climate control - Jintao made the face-saving
> decision to go home when he was refused his requests to discuss the
> more pressing issue for the global economy.
>
> As you say, there is never a 'right' time to discuss something like
> this, but as the longer the issue is brushed aside, the worse the
> risk of a sharp correction. The price distortions we are seeing
> in the markets in order to perpetuate this false reality threaten
> total disaster at a later date.

Jul 13 06:00 PM

[Ray Winter:]

The Chinese are reducing their US Dollar holdings at a significant rate by purchasing every type of mineral resource they can find throughout the world and hedging their reserves by investing in the West's Mineral Extraction companies wherever they can get support.

They are also extending their 'influence' by financing huge construction projects, especially in Africa, and all paid for in US Dollars.

Their pro-active use of their massive Dollar reserves is to forestall the day when the US Dollar falls from grace as the world's reserve currency, and is replaced by the Chinese currency.

In my view, what is taking place is a balance of power shift of monumental proportions from The West to The East. Time will show if that is the case.







o

Jul 14 06:17 AM

[coreopsis:]

This is not quite accurate: better to say that excessive consumption was financed by excessive debt. American consumption at the household level (McMansions, BMWs) and government level (Iraq war, transfer payments to households) were both financed by debt issued by the US government to the rest of the world. I wouldn't worry about Japan, which will go down with the US, but at least BRC (Brazil, Russia, China) and OPEC do not want the US exclusive right to print the global trade currency to continue, as well they shouldn't.

The sequence post Bretton Woods is: first, gold-backing, then dollar flooding through floating exchange rates, and hopefully, a multinational synthetic trading currency tied to the major trading countries. There really is no other plausible solution conceptually. Now we have to see how quickly and effectively the world can shift away from reliance on the USD. The sooner, the better.


On Jul 12 12:08 PM nobby73 wrote:

>
> It is not just excessive consumption, it is excessive debt that is
> the major factor.

Jul 14 10:53 AM