The Renminbi as a Reserve Currency (Part 1)

Earlier this year, NYU professor Nouriel Roubini attracted worldwide attention by speculating in a New York Times op-ed that the Chinese Yuan, or Renminbi (RMB), might someday supplant the U.S. dollar as the world’s main reserve currency. Chinese officials have been quick to embrace the notion, regularly floating either its negative (the U.S. dollar should not be the global reserve currency) or positive (the RMB should be) formulation in their public pronouncements. Just a week ago, a leading Chinese economist told Bloomberg that “Eventually, the yuan should be demanded as a reserve currency,” but noted that China was still far away from this goal.

It’s no surprise, then, that the Renminbi’s prospects as a reserve currency is one of the issues I am most frequently asked to speak or consult on. In particular, people are eager to understand how recent moves by China to swap currencies with other countries and establish offshore clearing markets fit into the equation, and whether they represent significant steps towards a more prominent international role for the RMB. These are some of the topics I’d like to address over the next few days.

First of all, however, it’s worth defining what we mean by “currency reserves” and why countries keep them. It may help to begin by noting the obvious: everyone needs to live and function primarily in their own country’s currency. Americans need dollars, Europeans need Euros, Indians need rupees, and so on. We only need a foreign currency when we want to pay someone who requires it to live and function somewhere else, where that currency is used. Each country’s currency is like a special kind of commodity that allows us to offer something of immediate value to people in that country’s economy. Certain actual commodities like gold and silver can be used as a kind of super-currency whose value is recognized and easily exchanged for local currency in all economies.

In an economic sense, “currency reserves” refer to the sum of all foreign currency (including cash-equivalent liquid assets denominated in foreign currency) and specie (such as gold and silver) available within a country’s financial system. It represents the resources immediately available for any actor, public or private, in that economy to buy goods and services abroad or to pay interest and principal on debt borrowed in foreign currency. If a country’s banking system doesn’t have enough currency reserves to meet such needs, it can buy the foreign currency it requires in exchange for its own domestic currency. It can also, of course, trade one foreign currency it holds for another. Either action, however, affects the overall supply and demand for the currencies traded, and thus their relative prices, the exchange rate. Economists pay attention to a country’s “currency reserves” because they indicate to what extent a country’s economy can meet its trade and debt obligations relying on its own ability to earn foreign currency, without being forced to bid down the value of its own currency in world markets.

Some or all of a country’s “currency reserves” may be held directly by its government or central bank as “official reserves.” These two terms refer to distinct concepts, but are often used interchangeably, especially in countries, like China, where the government restricts private holdings of foreign currencies and/or actively buys and sells foreign currency in order to maintain a fixed exchange rate for its own currency. In principle, a country’s government doesn’t have to hold any “official reserves” at all – it could simply let the banking system meet the economy’s foreign currency needs on its own. In practice, governments often hold their own foreign currency reserves for fiscal, monetary, and structural reasons:

1. Fiscal. Some governments accumulate reserves in order to sponsor or facilitate high-priority projects such as roads, dams, or ports. This is particularly true for developing countries that must hire outside technology and expertise, and whose own currency is not widely accepted abroad. Official reserves can also be used to subsidize politically-sensitive imports, such as food and gasoline, and to ration people’s ability to engage in private transactions (such as importing luxuries) that might deviate from state-sanctioned priorities.
2. Monetary. The most common reason countries hold official reserves is to maintain a fixed or semi-fixed exchange rate in the face of economic fluctuations. When there’s an influx of foreign currency from a trade surplus or foreign investment, rather than allow the excess supply to lower the price of foreign currency (and raise the price of the domestic currency), the central bank will buy the excess at the official (above-market) rate and hold it in reserve. Then when economic conditions change, and the country runs a trade deficit or foreign investment withdraws, causing a shortage of foreign currency, the central bank will reverse the process, selling back its reserves at the official (below-market) rate. Of course, this can only work as long as conditions correct themselves before the reserves are depleted. If the problem is more serious or persistent, the country will have no choice but to accept a more lasting change in the relative value of its own currency. Nevertheless, the ability to ride out temporary swings can minimize the disruptive effect of unpredictable exchange rates on trade and investment.
3. Structural. A persistent outflow of foreign currency at a fixed exchange rate will ultimately deplete a country’s official reserves. But a persistent inflow can, in principle, go on forever, as long as the government is willing to keep buying excess foreign currency and stockpiling it as reserves. This is the situation in which Japan found itself in the 1980s, and China finds itself in today. In these cases, the accumulation of official reserves has no intentional purpose – or has at least outstripped its original purpose — and is merely the byproduct of pursuing other goals, such as export-driven growth and employment.

Not all foreign currencies fulfill the purposes described above equally well. A pound is not the same as a peso. Even in the last case, where a country accumulates reserves despite itself, the type of currency it accumulates reflects important economic realities. In fact, only a handful of currencies meet the requirements to be desirable and practical as widely-held “reserve currencies,” and of these, only one tends to play a dominant role at a given time. From 1816 to 1914, that role belonged to the British Pound (backed by the gold standard). From 1914 to the present day, it has resided in the U.S. dollar (sometimes backed by gold, but as often not).

There are four main factors that set the Pound and the Dollar apart as viable and attractive reserve currencies. Each was necessary. They were liquid. They were available. And they were perceived as safe. I’m going to run through each of these conditions in turn. I will consider how they applied to the Pound and the Dollar, and to what extent they are satisfied by China’s Renminbi.

(1) Necessity. The fundamental purpose of a reserve currency is to settle external obligations. The greater quantity and variety of obligations a particular currency can settle, the more useful it is as a reserve currency. The currency of a country that produces little of note and lacks funds to lend or invest is not nearly as useful as one whose home economy produces many goods and services desired around the world, serves as an important source of capital, and has many commercial partners who also find its currency relevant to meeting their own obligations. This idea — that the dominant reserve currency derives its status from its connection with the dominant national economy in an interconnected world – is what underlies Roubini’s reasoning that the Renminbi may be next in line to replace the Dollar.

But this conclusion misses something important. A reserve currency must not only be capable of settling obligations in connection with a heavy-weight economy. It must be required to. Because if you can settle those obligations, as sizeable and important as they may be, using your own currency — or the currency of another leading economy — there is no reason to hold that country’s currency as a reserve. That is precisely the case today with China.

During the 19th Century, Britain was virtually the world’s sole source of industrial products and capital for industrialization. Since the world came to London to buy and borrow, Britain could insist on being paid either in its own currency, or in a currency fixed, like the Pound, to gold. After World War I, the U.S. ended up with most of the world’s gold and took over Britain’s role as lead creditor. It, too, was in the position to demand payment in its own currency. And while the U.S. was never the sole supplier of industrial goods, its reliance on exports only rarely exceeded 10% of its GNP, giving it leverage over buyers. (When exports did exceed 10%, it was during the two world wars, when the U.S. enjoyed maximum economic leverage). If the world wanted to do business with America, it needed Dollars.

China, in contrast, relies on exports for 40% of its GDP. Its dependence on exports leaves it in no position to dictate payment terms. It must continue to accept dollars, Euros, and yen or cease to grow (I say this despite China’s recent efforts to stimulate domestic demand as a replacement). And because China accumulates so many dollars it has no use for, it all too happy to lend those dollars back to the U.S. (to be repaid in dollars). Nobody requires RMB to buy Chinese goods or repay Chinese loans. Dollars will easily do.

(2) Liquidity. Holding large amounts of reserves as cash carries a high opportunity cost. It is far preferable to invest those holdings temporarily and earn a return. However, such investments must highly liquid, so they can quickly and easily be redeemed when needed for use, without any significant loss in value. Part of the appeal of the Pound and the Dollar was due to the fact that their home economies hosted the world’s most developed capital markets of their day. Pound and dollar-denominated reserves did not sit idle, they could be invested in a wide variety of liquid instruments that enjoyed a ready market.

According to a 2006 McKinsey study, the United States accounts for 38% of the world’s capital markets (excluding bank deposits), including nearly half of all private debt securities. That does not even include dollar-denominated markets for trading commodities, such as petroleum.

Relative Size of Capital Markets (in trillions of USD)

	Equity	Private Debt	Government	Total
	Securities	Securities	Debt Securities	Capital Markets
United States	19.6	20.2	6.2	46.0
China	2.4	0.4	0.8	4.5
Eurozone	8.6	12.0	6.4	27.4
World	54.4	42.0	25.6	122.4

China’s capital markets are tiny by comparison, accounting for merely 4% of the world total. To offer some perspective, China’s capital markets in 2006 were barely twice as large as its total foreign currency reserves, whereas U.S. capital markets were 23 times as large (and easily able to accommodate such investment, especially when commodity markets are added to the mix). While the precise valuations of all capital markets have fluctuated since 2006, the relative magnitudes have not significantly changed. Markets for investing dollars are at least 10 times deeper than markets for investing RMB. In particular, the Chinese market for fixed income securities — the preferred instrument for storing ready reserves — is severely underdeveloped and illiquid, in sharp contrast to U.S. Treasuries.

But the relative size of the market is just the tip of the iceberg. A more immediate problem is that most of China’s capital markets are off-limits to foreign investors. Even when owning domestic debt or equity securities is permitted — through a QFII fund or a strategic joint venture investment, or by getting special permission from SAFE and MOFCOM — the process of getting money into China and back out is usually lengthy and cumbersome. Nor can these securities be freely traded to other foreign investors, which severely limits their utility as foreign exchange. For foreigners, faced with so many capital controls, the Chinese market is simply not liquid. If you own a RMB asset, what can you do with it outside of China? In most cases, the answer is “nothing.”

(3) Availability. It may seem obvious, but to hold a reserve currency you first have to be able to get your hands on it. That means its economy must export currency. 19th Century Britain was a net exporter of goods, paid with gold, but it re-exported both pounds and gold by investing its capital around the world. From World War I to the early 1970s, the United States performed essentially the same role. At that point, it switched to become a major importer of capital, but continued supplying the world with dollars by running trade deficits. In both cases, the balance of payments made it possible for other countries to obtain access to Pounds (or gold) and Dollars to use as currency reserves.

China does not export currency. It runs a large and growing trade surplus and — if you exclude the management of its reserves — is a net importer of capital, in part because it effectively prohibits Chinese companies and individuals from investing abroad without government permission. Currency flows into China through both the current and the capital account, leaving it no way to flow out again. As long as this continues — as long as China’s government continues to bolster export-oriented growth and employment by buying up all that influx of currency, and by barring private outflows of capital – there is virtually no way for foreigners to build up net balances of RMB. Even if they wanted to hold RMB reserves, the one-way flow of funds would make it impractical.

(4) Safety. Holding sizeable amounts of any foreign currency puts the owner at the mercy of another country’s fiscal and monetary policy. If that country were to undermine the value of its currency, either by defaulting on its debts or printing too much money, whoever held that currency would suffer a real economic loss. So when deciding which currency to hold as a reserve, the credibility and responsibility of the issuer is a constant concern. The British resolved these concerns by linking their currency firmly to gold. So did the Americans until 1971. The gold standard ensured that neither Britain nor the U.S. could arbitrarily inflate their currencies and damage their value.

After 1971, the United States was no longer constrained by a fixed exchange rate with gold. Some thought that meant the end of the Dollar as a reliable reserve currency. But in the end, people decided to trust the U.S., at least for the time being. Since the days of Alexander Hamilton, even through a Civil War, it had never defaulted on its sovereign debt. And the Fed’s decision to crack down on inflation in 1981, even at the expense of a recession, inspired confidence. But such trust was never irrevocable. Today, in the face of burgeoning budget deficits, many are wondering whether the Dollar is still a “safe” currency — the Chinese foremost among them. This is precisely the reason why people are starting to talk about the Renminbi as a potential alternative.

China is an unknown quantity. It experienced hyperinflation and defaults in the early 20th Century, but under a different government. The U.S. has a long track record as a leader in global economic affairs; China has only just stepped onto the stage. Its authoritarian style of leadership and opaque decision-making processes can sometimes inspire distrust. Just as China is reconsidering whether it feels confident entrusting its assets to the U.S., the world will have to decide, over time, whether it feels confident entrusting theirs to China.

On all four counts — necessity, liquidity, availability, and safety — the evidence suggests that China’s Renminbi is a long way off from being an attractive and viable reserve currency. Of course, this situation could change. China could reduce its dependence on exports to the point where it can start insisting on its own payment terms. It could expand its capital markets and open them to foreign investment. It could buy more imports and allows its citizens to invest abroad, letting currency flow out as well as in. And it can develop a positive track record of economic leadership that involves considering other nations’ interests as well as its own. But all of these steps will involve a dramatic and sometimes painful restructuring of its economy, from an export-led growth model to a more balanced and open system. For now, China’s policies and priorities are more reflective of a country that holds currency reserves than one that supplies reserve currency to the world economy.

That’s where I’m going to stop today. In the next installment, I’ll talk about China’s recent moves to expand the use of the Renminbi, and what they really mean. These initiatives are significant, but not in the way they are often portrayed. If the Renminbi is not on track to becoming a global reserve currency, as I have argued, then what is it ready to become?

Comments

[Celcius:]

A reserve currency is just an indirect currency exchange for goods and services using a commonly accepted medium of exchange. AuGod! has a very valid point regarding the need of a reserve currency. A reserve currency only made sense when the US dollar was backed by gold. Bilateral currency swaps between trading partners is a better approach vs. reserve currencies, since you remove the risk of reserve currency price volatility. It also diversify's central bank reserve risk from a black swan event like a US default.

Aug 31 10:01 PM

[TinyTim:]

You covered all the major points in a good article.

Not mentioned was that the yuan has been pegged to the dollar which effectively supports the dollar as reserve for several reasons.

Also, the Chinese government is "communist." A totalitarian regime is a problem in the liquidity, safety and availability areas.

You hit this several times, but the main reason for the unlikelihood of the yuan as reserve currency is the tiny role it plays in world finance compared to the dollar.

On the other hand, as has been pointed out in several SA articles, if a USA creditor nation could insist to be repaid in a currency other than dollars, e.g. the dollar lost the reserve status, it would be a financial implosion of major proportion for the US.

Aug 31 10:59 PM

[Grateful:]

Just a quick thanks for taking the time to lay that out clearly, piece by piece, for those of us still working out some of the basic building blocks.

Sep 01 08:37 AM

[george archers:]

BALONY-(the Chinese government is "communist." )
I guess to many Americans it does not bother them that America regime is worse than communist but Fascist. At least in China ,they don't kill their own to start wars.
www.fascistamerica.net/
All oil trade is bought in American dollar reserves.Countries have to have $ billions in American dollars. When Arab countries want nothing to do with dollars---America is toast. Very soon, Americans are in for a rude awakening :^/

Sep 01 09:07 AM

[king Lee:]

You hit under the belt when you said that what interest China is to hold reserve not exporting it.And in the foreseeable future,china would not be in a position to allow it's currency to be exported in an open market system like the USD , the reason is clear the Chinese are a pragmatic people .What would most probably develop along the line would be scenario of basket of a regional reserve currencies .That explain why RMB entered in to SWAP agreements with its major trading partners and allow RMB to be the alternative common currency of border trade.All these are done in the name of pragmatism and necessity ,and with the authoritarian govt behind China , it is already a major advancement of China 's currency policy. The issue at hand now is rather with the expected departure of USD as the dominant global currency of of which the world relies on or addicted to so much and so long probably within a decade of sooner ,the world without a dominant world currency with or without RMB as a supplant currency to USD doesn't change the picture at all,as the eventual rising of RMB is not due to the exploiting on the weakness of USD,but rather the world is now moving one step closer of a new order of multi-polar ism and the dominant Anglo-Saxon paradigm has to change as well to fit into a new reality where the Renaissance of Sino-Asian is about to debut,not only in economic but other sectors as well, perhaps as co-driver of new world order followed by the other three members of BRICs.

The theme is sharing and together reshaping the new would system and its common destiny

Sep 01 09:23 AM

[LKofEnglish:]

how about the hong kong dollar? sick and tired of "huge-ism." bottom line--too big to fail has become too big to succeed. singapore dollar looks good to me as well. basically the fact that the Fed and this administration have a policy of destroying the dollar is simply encouraging everyone else to do the same based on "size" as in "our country is too big to fail." can't stand the game.

Sep 01 09:43 AM

[sunnsea:]

Like the Soviet Union and even today's Russia, America has nothing to sell that the rest of world wants. Manufacturing is the key to wealth creation as the Chinese well know. So a major applicance company closes its Evansville, Indiana plant today and 1100 more good paying manufacturing jobs are lost and of course the community wide impacts are greater than that number. Mexico is where refrigerators will now be made. And who cares in America that this has happened? No one. That is the problem. Like the Roman Empire in the end, no one really cared enough to even lift a finger.

Sep 01 10:16 AM

[futuresmkt:]

Things do change. After precious metals and other commodities formed the basis for a stable unit of monetary value (ie. reserve currency), in recent history, a number of european countries (principally because of their gold reserves) and ultimately the United States took on that power/responsibility. For the most part, as we moved to paper currencies (again, backed by hard assets, for the most part), it was generally the military/economic power which determined who would be the lead dog.
In the 21st century, we have an increasing range and number of economic powers (raw material producers, intellectual product producers, semi/finished goods producers, and special entities), quasi transparent financial intermediation and HUGE multinationals who seamlessly transact business in a range of currencies. This increasing sophistication and integration will LESSEN the role of a "reserve currency" as multiple economic units, with clearly defined values, will be interchangeable as a stable measure of value. Of course, there have been baskets of currencies held by governments for hundreds of years so, it is not a new concept. The role of military power, however, continues to recede as a value propositon in determining economic might and thus, currency transactions will be determined more as a function of basic economic value, with military power a reduced component of calculation. For example why, in 50 years, would you want a single reserve currency? Will the world be so destablized and nations so incompetent that there is only one or three nations to which you can turn for a store of value? Lets look forward a little and imagine a more developed world.

Sep 01 10:20 AM

[hungry4food:]

where is all the money going to be going , is it because there is a plan at the 1.28 hour position in this video that talks about a African strategy thats going to take allot of cash ??? www.youtube.com/watch?...

Sep 01 11:14 AM

[hungry4food:]

The interest on ONLY our current $11 Trillion debt runs about $26 billion per month or $300 billion per year.

"By 2019, annual interest payments on the national debt will balloon to a projected $806 billion!


On Sep 01 11:14 AM hungry4food wrote:

> where is all the money going to be going , is it because there is
> a plan at the 1.28 hour position in this video that talks about a
> African strategy thats going to take allot of cash ??? www.youtube.com/watch?...;feature=fvw

Sep 01 11:14 AM

[Trane250:]

The original free trade theories were predicated on the exchange of gold to keep things in balance. When a country accumulated a big trade deficit, it had to surrender a part of its gold reserves to the nations that had the surplus. That way a country couldn't keep running massive trade deficits year after year as the USA has. The abolishment of the gold standard allowed mercantilist nations like Japan and now China to amass huge trade surpluses. This situation is like a spring that keeps getting wound tighter until there is a massive unravelling.

Sep 01 11:21 AM

[hungry4food:]

en.wikipedia.org/wiki/...

The future of global farming and food supply
this read above will explain what is wrote in this read below ;

www.timesonline.co.uk/...

Sep 01 11:33 AM

[hungry4food:]

here is some news that will make you laugh and wonder at the same time ........

www.foxnews.com/video2...


On Sep 01 09:07 AM george archers wrote:

> BALONY-(the Chinese government is "communist." )
> I guess to many Americans it does not bother them that America regime
> is worse than communist but Fascist. At least in China ,they don't
> kill their own to start wars.
> www.fascistamerica.net/
> All oil trade is bought in American dollar reserves.Countries have
> to have $ billions in American dollars. When Arab countries want
> nothing to do with dollars---America is toast. Very soon, Americans
> are in for a rude awakening :^/

Sep 01 01:26 PM

[hungry4food:]

the lower valued currency countries were suppose to float their currencies par with the value of the dollar over the period of the last 15 , so they would not create the vacuum on the US economies ability to stay competitive ; If we would have kept the dollar sound through our Regan Tariff Trade rules of the 1980s GATT trade agreements , would we have kept our Capitalists system solvent and leading the world economies to better quality of life achievements , like it has done forever , so that the rise of Social Justice would not be rising up in the debate on Equality ???? I believe the Change of Tariff Law back in 1994-95 was the beginning of this demise we see today , and the Giant Sucking Sound Ross Perot talked about in the 1992 Presidential Campaign , www.thenation.com/doc/...

The High Cost of the China-WTO Deal
Administration's own analysis suggests spiraling deficits, job losses
by Robert E. Scott www.epi.org/publicatio.../


On Sep 01 11:21 AM Trane250 wrote:

> The original free trade theories were predicated on the exchange
> of gold to keep things in balance. When a country accumulated a big
> trade deficit, it had to surrender a part of its gold reserves to
> the nations that had the surplus. That way a country couldn't keep
> running massive trade deficits year after year as the USA has. The
> abolishment of the gold standard allowed mercantilist nations like
> Japan and now China to amass huge trade surpluses. This situation
> is like a spring that keeps getting wound tighter until there is
> a massive unravelling.

Sep 01 01:31 PM

[hungry4food:]

Tax Code Conflicts of Interest , Bar Stool Style ......

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that's what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve.
"Since you are all such good customers", he said, "I'm going to reduce the cost of your daily beer by $20". Drinks for the ten now cost just $80.
The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his "fair share?"
They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:
The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.
"I only got a dollar out of the $20," declared the sixth man. He pointed to the tenth man, "but he got $10!"
"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got ten times more than I!"
"That's true!!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!"
"Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"
The nine men surrounded the tenth and beat him up.
The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

Sep 01 01:32 PM

[hungry4food:]

I believe the Change of Tariff Law back in 1994-95 was the brining of this demise we see today , and the Giant Sucking Sound Ross Perot talked about in the 1992 Presidential Campaign , www.thenation.com/doc/... , has come home to roost , and its not just the USA its every country that cannot compete with the way that Asian Countries manipulate their currencies lower than the Trade partners that are Higher , which is a direct example of " Gresham's Law of the 14 th Century , www.statemaster.com/en... , which you should argue with economic gurus that , without a counter balancing measure to deal with different valued currencies like how tariff law revalues a product par to the post of calls currency value , so the currency is not undermined of its value , and defeats its support of its working peoples ability to be competitive , " When 2 different valued currencies trade in the same markets , the Lower valued currency will drive the higher down and out of circulation " , so by what is said in that valuing currencies in terms of Commodity values , the currencies of China and the USA should be way closer in value than they have been over the past 15 years of WTO trade , because Commodities are traded in par valued international markets .

So to consider that before we had the WTO trade agreement of 1994-5 , we had Balanced Trade deficits and a sound dollar , and a healthy Manufacturing base in the USA , the very support structure for wealth creation , that then feeds the secondary markets and infrastructures , a debate on how we can use a Bid Concept for all forms of Imported goods , like if we take the effective cost of what it would cost to manufacture a product in a given nation , and the price of raw materials is based off the international Commodities price indexes , so that the vale to produce in one country is equal to or is reflective in what kinds of trade agreements can be made to keep all trade nations currencies sound should be the way in which a price for a product should be arrived at

Sep 01 01:34 PM

[ertsfan:]

I really enjoyed your article. Thanks for posting it.

Sep 01 06:34 PM

[Griller:]

"Tax them too much, attack them for being wealthy, and they just may not show up anymore."
Good riddance: The first 5 were all hardworking underpaid employees of the 10th, who owned the beer manufacturing plant, which was a monopoly, so all the money minus the barman's 2% take went back to him. Since the first five were marginally employed or unemployed, and suffered a low quality of life, they are the ones who made the latter five enjoy capital surpluses. #6 was a full time working part-time college student with loans outstanding, #7 was a teacher, number 8 was a manager at the factory which was about to close in a takeover, and #9 was the beer distributor. The tenth was so upset he left to stay on his yacht in Cannes to sulk over the others' ingratitude....See, there is no free lunch!

Sep 03 07:17 PM

[vaultvix:]

Thank you for this great article. It lays out issues that people discuss constantly with very little knowledge. This was both a highly intelligent piece on the subject, and hopefully added to the knowledge base so future debate can be more thoughtful and iformed.

To Mr./Ms. AuGod's comment, no, the world does not need a currency monolith, but it does need money markets, and a term structure pricing proxy for interest rates is also a valuable global trade and financing lubricant. The US dollar is still far and away the best we have so far fulfilling these functions, as Mr. Chovanec points out. In fact, ironically, European corporates and sovereigns have been increasing their USD issuance which is only going to cause this issue to persist.

So we have a long way to go in terms of...let's face it, wide spread non-domestic use of the renminbi, much less reserve currency status. It isn't on the agenda for 2010. China is making many of the right moves. They could make more if they wanted. (They could force banks to hold municipal debt, they could force limited disintermediation of their banking system to create a bond market, to name two possibilities.) But they are cracking open that capital account by stealth if you watch the individual actions being taken.


On Aug 31 05:13 PM AuGod! wrote:

> "So, a truly global legal tender is a trusted currency that is well
> managed, retains its value, is fully convertible, widely traded in
> liquid currency markets and used as a currency of denomination for
> international trade." China's Renminbi fails on all criterion but
> that is no slight to them. They are a relatively new economy and
> don't really know the ropes. When they do, they will likely shun
> the idea of going global with their currency unlike the British Pound
> and American Dollar. In the nearer future, instead of a single reserve
> currency, a bunch of bilateral relationships money-wise will likely
> pop up as has been the case recently with BRIC and some ASEAN countries.
> With complexity being made tractable with computers, does the world
> really need a currency monolith? I think that is the question.

Sep 16 11:24 PM

[marcgunn:]

'Mercantilist' is a popular yet disingenuous bashing term to use these days. Strictly speaking it meant hording gold. But in reality the gold was gotten ultimately through military force. There is nothing military about the way Japan or China trades. All transactions are based on mutual agreement and free-will. It takes two (or more) to tango (buy or sell something and this includes Treasuries.) It is sad to hear us cry 'mercantilist' after we set up rules that we designed (to favor ourselves) and later find we partied too hard as if we had no choice.


On Sep 01 11:21 AM Trane250 wrote:

> The original free trade theories were predicated on the exchange
> of gold to keep things in balance. When a country accumulated a big
> trade deficit, it had to surrender a part of its gold reserves to
> the nations that had the surplus. That way a country couldn't keep
> running massive trade deficits year after year as the USA has. The
> abolishment of the gold standard allowed mercantilist nations like
> Japan and now China to amass huge trade surpluses. This situation
> is like a spring that keeps getting wound tighter until there is
> a massive unravelling.

Sep 21 02:47 AM