Lou Thomas

Euro Shakeup: Trichet Hints at Raising Rates

This column is too obvious. We need more analysis.

Fading Glory: The Dollar as the World's Reserve Currency

Interesting premise that China could be angling to make the yuan the new world reserve currency. Certainly I agree about the weakness of the dollar, and the article's prediction that the vast foreign holdings of dollars might finally demand their due in U.S. commodities, sparking horrific inflation, is already in progress.

However, in terms of current reserves, the Euro is the obvious runner-up and therefore, I would have thought, the main contender for the reserve currency mantle. The E.U. is now the largest economy on the planet, with the U.S. second and China a close third.

In terms of stability and openness to the outside world, the E.U. is second to none. The Chinese middle class is still at a nascent stage, and this makes China highly dependent upon exports, while Europe has well-developed internal markets, providing for less instability as U.S. consumption through borrowing finally encounters the end of its tether. Note that one sign of this is the willingness of the ECB to allow the Euro to appreciate vs. the dollar (as if they were actively, rather than passively, pursuing that reserve status advantage), while China has only very reluctantly allowed its currency to float upward within a limited range vs. the dollar.

The U.S. problem, by contrast, is that its internal markets are over-developed through the extension of foreign credit, while its productive capacity has been cored out through the export of the U.S. industrial base to unregulated foreign cheap labor havens for the past several decades. Not to mention continued unmitigated borrowing for the misconduct of two endless wars.

Politically, also, we see the E.U. demanding and getting more influence on the IMF and World Bank in particular. China is not well-positioned in that regard.

As for precious metals, I always think back to the tale of King Midas. When people need food, housing or clothing, a shiny yellow metal isn't ultimately of very great value as compared to a diverse economy that produces all of those things. Seventy percent of demand for gold is for jewelry, and at present prices people are rushing to turn in their gold pendants for cash, so ask yourself the extent to which the actual use-value of gold is determining its value under those circumstances.

For the above reasons, I see the Euro as the most likely new world reserve currency. And, in my opinion, the technical problems of transitioning settlement systems to the Euro are overrated, and will be addressed in a flurry of computer reprogramming as soon as the political issues come to a head and work themselves out.

Disclosure: 90 percent of my money is invested in canned wild Alaskan Sockeye Salmon, which makes a terrible lump in my mattress. The rest is invested in German bunds.