China Wants a Global Currency? Here's How 14 comments
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As the dollar falls against the euro, yen and other major currencies, China and other emerging economic powers holding lots of dollars and U.S. securities are crying foul, and for an end to the dollar’s central status in global commerce.
If they are truly disgusted, they should look to themselves for answers.
Since the end of World War II, the dollar has largely replaced gold as the reserve asset central banks hold to back up national currencies. The supply of mineable gold is too limited, and efforts to back up currency with gold would result in chronic shortages of liquidity and global deflation.
When a merchant moves goods, for example, from Thailand to Mexico, the market for pesos into bahts is thin or nonexistent, and the merchant sells pesos for dollars to buy bahts. Similarly, many other cross-boarder trades, financial contracts and debts are denominated in dollars, although the euro is coming into greater use.
Over the years, governments and traders gravitated to the dollar, because the United States has the largest and most diversified economy. Virtually anything made or grown around the world is made or traded in the United States, and money invested in dollars is secure from political upheaval and state confiscation.
Until recently, the dollar has been a well managed currency. The U.S. government resisted the temptation to borrow too much and flood the world with too many dollars and Treasury securities, which provide liquidity the same as do dollars.
The current market determined system of exchange rates emerged by default in the early 1970s, when the Bretton Woods system of government-enforced fixed exchange rates failed, and the United States ended the convertibility of the dollar into gold.
This system has no rules or effective governing structure. Consequently, some governments seized opportunities to manipulate the system to gain competitive advantages in trade. For example, since 1995 China has maintained an undervalued currency by selling huge amounts of yuan for dollars to merchants and currency traders.
The undervalued yuan makes Chinese exports artificially cheap and foreign products too expensive in Chinese markets. China enjoys huge trade surpluses that create millions of jobs and double-digit growth in China. Japan and others have pursued similar strategies.
These policies impose huge trade deficits and unemployment on the United States, create enormous imbalances in the global economy, and contribute importantly to the Great Recession.
The U.S. trade deficit grew from about one percent of GDP in 2001 to more than five percent from 2005 to 2008, and this should have created a shortage of demand for U.S. goods and services and a recession.
However, China invested the dollars obtained suppressing the value of the yuan to purchase U.S. securities. U.S. consumers borrowed those dollars, against their homes and on credit cards, and kept the U.S. economy going.
Finally, the credit bubble burst and an even bigger recession resulted. Huge federal borrowing is now required to finance massive U.S. stimulus spending, bailout banks and otherwise rescue the U.S. economy.
All this borrowing floods capital markets with Treasury securities, which provide the same liquidity as dollars, and pushes down exchange rates for the dollar against every major currency except the Chinese yuan. This reduces the value of the dollars, as expressed in euro and yen, held by China, Russia, Saudi Arabia and others.
Hoisted on the consequences of their own mercantilism, China and others would like to see the dollar replaced by a basket of currencies.
A global currency poses enormous diplomatic and technical challenges, including creating an international body to control its supply and persuading governments to issue debt denominated in this global currency. Without those, private merchants and financiers would still seek a central national currency to facilitate trade and denominate private cross-border contracts and debts.
Even with a global currency, China could still buy dollars with yuan to keep its value suppressed against the dollar and boost exports into the United States. The United States would still have to run large federal deficits to avoid economic meltdown.
China would still be stuck holding dollars that chronically fall in value against other currencies.
If China and others want that problem fixed, they need to abandon currency manipulation and let their populations purchase more U.S. goods and services.
The U.S. economy would grow robustly, federal borrowing would subside and the threat of too many dollars compromising the dollar’s role in international finance would vanish.
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This article has 14 comments:
Please substantiate this with research. I've seen compelling research to the contrary. Refute this notion and support your assertion with substantive evidence. I'm neutral on this debate.
Historically, the problem with gold is that governments cannot raise/print enough money to support (1) wars and (2) significant social programs with gold underpinning the currency. That is why most countries abandoned the gold standard during times of war - they can't raise the money necessary to fund these activities. (Hence, the golden rule "He who owns the gold, makes the rules.")
To convert the world economy to a gold standard would necessarily impede the ability of governments to issue currency (quantatitive easing, here in the US) reducing liquidity in the markets in the short-term putting strain on the economies of the world. Would the long-term affect of such a move be positive or negative? I think that needs to be analyzed in depth to understand the impact, but on first blush, it would seem that restricting currency float, while maybe reducing the potential for currency manipulation, would put restrictive pressure on overall economic growth.
Theoretically, moving to a gold standard introduces political discipline, however, looking back at 1933/34, the US confiscated gold at $20.47/oz (or something close to that) and immediately pegged the conversion price at $35/oz effectively devaluing the dollar and enabling the Fed to pump more liquidity into the market. Point being that being on a gold standard doesn't necessarily preclude monetary manipulation by central banks.
Anyway, if all mined gold were confiscated and held as support for currency, at a 10% reserve ratio that could support a global float of around $50 trillion.
On Oct 08 09:26 AM Albert Meyer wrote:
> "The supply of mineable gold is too limited, and efforts to back
> up currency with gold would result in chronic shortages of liquidity
> and global deflation."
>
> Please substantiate this with research. I've seen compelling research
> to the contrary. Refute this notion and support your assertion with
> substantive evidence. I'm neutral on this debate.
To a degree, China's surpluses and are current account deficits are mirrow images but to suggest that it was strictly China's imbalances that brought us to today's crisis is disingenuous and ignores our low interest rates, unsustainable growth in private credit, failure to develop alternative economic growth models and a belief all was well.
It was glaringly obvious what was taking place and prattle about China's imbalances and currency manipulation should have preceded the crisis; it did not both parties were happy with the arrangement until the bubble popped.
1. It is not clear that the mature, post-industrial economies, with the exception of those endowed with lots of natural resources (e.g. Canada and Australia), have sufficient goods and services to offer emerging market economies to really address the fundamental imbalances in current account
2. Many service based businesses in the US are inherently localized and do not provide an exportable offering.
3. It is not clear that emerging market consumers with discretionary income will exhibit similar appetites for binges to those indoctrinated with the notions of "lifestyle entitlement" ("Spoil yourself - you deserve it") which is endemic in the US, and elsewhere such as the UK and parts of the EU.
4. Prices of US produced goods (and the wages for those who produce them) would have to come down a lot in order to be affordable even for the aspiring consumers in the BRIC world.
5. More pertinently prices would also have to erode further to be affordable to the domestic consumers in the US and EU if, in the spirit of unregulated exchange rates and freer trade, there were no longer the protections supplied by these governments to "manage" trade and macro-economic policy.
There were many reasons behind the bubble of the early part of this decade as alluded to in the post from Cautious Investor, and the suspicion is that the new efforts to inflate the bubble again are a recognition that a laissez-faire approach with freely floating exchange rates, free trade and other mythology from neo-classical economics does not provide a solution as proposed.
In other words, you can all propose any solutions you want, but I seriously doubt that our leaders will do what needs to be done; at least, not until they are forced to do it. And their followers don't want any pain either, so we are just going to keep digging this hole deeper and deeper until it all blows up in our faces and can't go on anymore.
Then all the wealthy will move to a more tax-friendly nation and leave us to default on all that debt.
On Oct 08 10:50 AM CautiousInvestor wrote:
> To a degree, China's surpluses and are current account deficits are
> mirrow images but to suggest that it was strictly China's imbalances
> that brought us to today's crisis is disingenuous and ignores our
> low interest rates, unsustainable growth in private credit, failure
> to develop alternative economic growth models and a belief all was
> well.
>
> It was glaringly obvious what was taking place and prattle about
> China's imbalances and currency manipulation should have preceded
> the crisis; it did not both parties were happy with the arrangement
> until the bubble popped.
Historically nations that followed the Asian Economic Development Model have not ever transitioned to a balanced model. Japan never became a good customer of the US. Even today, it will shut down US plants while keeping much higher priced Japanese ones operating.
The world needs a system that balances trade with something more than a hope and a prayer.
www.uschamber.com/ip
"These policies impose huge trade deficits and unemployment on the United States, create enormous imbalances in the global economy, and contribute importantly to the Great Recession." Extremely well said.
Whether Euroes, dollars, Yen, or a world currency, letting a trading partner accumulate $2 or more trillion in reserves and letting them continue to run a trade surplus indefinitely will doom the issuing country which must suffer from the debt.
read article :
georgesorosblog.blogsp...