This page has been archived and commenting is disabled.
Guest Post: Making The Last Use Of Reserve Currency Status
Submitted by Bo Peng
Making The Last Use Of Reserve Currency Status
I suspect many in the mainstream academia haven't realized what QE2 is.
It is the last use of the dollar's reserve currency status, intended or
otherwise.
In a fiat currency system, inflation should be the
only risk, because fighting deflation should be trivial -- just print
money. This is a fundamental advantage of a fiat system over the old
gold standard. Unfortunately for the US, the dollar's reserve status
means the geopolitical border is not the dam holding the water as in
other countries. As Fed pours in more water, it leaks right out to
lowlands (good investment destinations) all over the world. Given the
current economic prospects in the world, the result is that QE2 cannot
stoke inflation in the US, but causes very unwelcome interference in
exactly the other places in the world where inflation is a big concern.
It's small wonder all the growth EM economies are engaging in the low-grade currency war of capital control.
To them, this is a defensive war for survival against the invading army
of dollars. If the low-grade war proves insufficient, they would
escalate the defensive posture. They have to.
Another
consequence, intended or not, of QE2 + reserve status is that all growth
economies are under tremendous pressure of currency appreciation. Some
may be able to resist it and muddle through until an easier day; others
will have to cave in, therefore caught in the catch 22 of either raging
inflation or shrinking economy, or both. And, of all the growth
economies, China arguably has the most capacity and strongest political
will to resist appreciation. In such a scenario, if the intended target
of Fed's fury is China, as hinted not so subtly by Bernanke, "collateral damage" would once again be the main theme, as has been in all recent offensives launched by the US.
In
summary, Fed's dogged efforts in stoking inflation have caused and will
continue increasing the risk of bringing all growth EM economies to a
halt, significantly increasing policy risks in the rest of the world as
each country tries desperately to deal with the capital tsunami, and all
the while with huge doubt in whether it could reach its domestic goal
of stimulating employment and housing. In other words, Fed is screwing
the world for a slim chance of helping the US economy.
This is
emphatically NOT a moral criticism. But it does represent a significant
abandonment of the responsibilities on Fed's part as the issuer of world
reserve currency.
Let's go back a little in history. Right on
the heels of WWII victory, in 1944 US dictated Bretton Woods that
established the dollar as a proxy for gold in the free world. The
"proxy" part was only convenience, of course, as to be expected and
proven by Nixon in 1971. The arrangement made sense: the US would
provide security blanket, and the rest of free world would pay for it by
accepting and holding the green paper printed by the US. It's the same
idea as gangs collecting protection fee in NY, no cynicism intended.
Fast
forward to Berlin Wall collapse. Now the fundamental premises of the
dollar's reserve status were gone. Europeans quickly realized this
change and created the Euro; why should they continue paying for
protection when there's nothing to protect against? The US has made
numerous fantastic efforts in creating threats (by "creating" I don't
necessarily mean create; often times you just have to doze off for a
second and the enemy will help you out): perpetual terrorism, WMD in
Iraq, perpetual war in Iraq and Afghanistan/Pakistan, Iran, North Korea,
China, even Somali pirates (now it gets really pathetic). But none of
them could ever live up to the high expectations set by USSR.
After
10+ years of trying, it's become clear that this is futile. Nothing
works; none of those idiots could do it. But with the reserve currency
status comes its responsibilities. Win-win is BS-BS; there's no free lunch after all. The time has come to end Bretton Woods II.
Now Zoelick's surprise proposal of a new gold standard makes perfect sense.
With
QE2 the Fed is saying: Ah fuck it, you don't like USD as the reserve
currency? Well guess what? We don't like it, either. So let's drop it
and from now on it's every man on his own. Good luck.
Good luck everybody. We all need it.
»
- 6692 reads
- Printer-friendly version
- Send to friend
- advertisements -
Theres no need for a 4th pet store in a 1/2 mi radius. Using the printed $ for another pet store is a waste, but maybe China could use its 1st.
Pretty simple
Actually, the Chinese eat cats and dogs so there's a big market over there for "pet stores" :)
Just ask the Chinese restaurant guys.
You order pork = Dogmeat
You order Chicken = Dogmeat
You order veal = Dogmeat
You order the Chinese wall special = Dogmeat
And all the items on the menu starting from number 19 to 67 are catmeat.
Been in China and elsewhere in Asia a couple of times. I ate dog once :P very good!
Dog is a "luxurious" meat you don't eat everyday. It's also more expensive. I haven't seen cat. They eat it in Korea mostly.
Sur ce, bon appetit!
Wow, someone actually found a use for house cats? Those guys are industrious!
The coyotes around my neighborhood love cats as much as rabbits. They don't eat the heads though, my dog has found a couple of cat heads that have been left behind.
And of course, you left out...
You order dog = Catmeat
Bo is right. Either way, it won't be long before USD loses its reserve currency status along with the currency global trade model. America has been sucked dry by China from without and the super rich from within.
BTW, this morning on Morning Joe, Erskine Bowles, the co-chairman of the deficit reduction committee, still cited the official GDP number saying that the Chinese economy ($4T) is only 1/3 of US ($14T).
!! Wake up America !!
Chinese economy is much bigger than the official GDP number indicates because their currency is undervalued, while US economy is smaller because a big portion of it is fake (just paper shuffling).
Just look at the number of cars produced and sold in each country. China is #1 by a big margin over the #2, US. In many way, the Chinese economy is already the largest in the world.
The problem with the system isn't 'fiat currency' alone - it's the interest due on its' creation that eventually wreaks havoc. Debt payed for its' creation reduces the amount in circulation and requires even more to be created - a vicious cycle also known as a 'Ponzi' scheme.
Federalize the Fed.
Bernanke is using a shotgun to kill mosquitos
The correct noun is "bazooka"...
The correct verb is, "harvest," and the correct object is, "morts."
LOL. Quite excellent. And speaking of excellence, this article is spot on. It's so refreshing to see others identify & point out essential truths.
you need a bazooka to scare mosquitos
From Forbes (Ben Davies gets a mention)...
"Is your gold worth the paper it's printed on?"
http://blogs.forbes.com/investor/2010/11/18/gold-iau-gld-spy-paper-certificates/
DOn't know whether to be glad that a "mainstream" financial has finally run a story, or pissed that they've known this for forever and are getting on the bandwagon.
Still, it is one more chink in the armor.
I'll post the link in other future articles today, but check my comment in Frontrunning for a near critical dose of eargasm :D
I'M FROM EUROPE! WE'RE SAVED!
right?...
Wow, glad to see you online again. I heard a flood had struck Belgium. Thought you had...;)
Only my basement was under water but we where lucky because a few streets down the road houses where flooded.
GOD LOVES ME!!!
YEAH!!
"So let's drop it and from now on it's every man on his own."
I have heard stories of individual commanders giving this message to their troops at the Yalu River when the Chinese overran their positions in Korea.
As is said in the green machine, there's the right way, the Army way, and then there's the Cav.
We're all the Cav now.
From the Emerald Isle...
Banks have been accused of systematically feeding false and misleading information to NAMA in order to secure the maximum price for bad loans being purchased by the newly-established agency.
Fianna Fáil TD Michael McGrath called for the gardaí (police, filth, fuzz, plod, peelers, boys in blue), the Financial Regulator and Office of the Director of Corporate Enforcement to investigate the matter.
http://www.rte.ie/news/2010/1118/banks.html
I am shocked, shocked I say.
"Let them hate the government so long as they fear it."
good analysis - thanks for posting.
If QE is that last use of the dollar's reserve currency status, it is only because all the other currencies are going away. We are at a crossroad where other nations dollarize or the global economy goes belly up.
There is a third alternative, but why engage in a flight of fantasy...
It's not really a third alternative per se, more of an inevitability after all the easy roads have been traversed. Just different points on the same timeline. Plus, practically speaking, other currencies are already more form than substance... we're just finally getting around to properly labeling them and acknowledging their real status.
I believe the 'other nations' will pick door number 2.... belly up....before they dollarize.
The third alternative will emerge from the ashes.
Zoellick has let the cat out of the bag. :)
One of the prerequisites of a reserve currency is that the float is sufficiently large to handle cross border transactions of any size. So it is a bit ironic that QE2 actually helps the USD maintain its status as THE global reserve currency. One of the messages from the Bernank is that resistance is futile--we will overwhelm the world with a tsunami of dollars. Eventually, this could backfire. But for now it further cements the USD as the world's reserve currency.
I disagree with Bo Peng's claim that the US PTB do not like the dollar reserve status. "We don't like it, either."
The reserve or petrodollar status underpins the whole global empire.
Foreigners help pay for their own US military occupation, and even for the economic war against them. The petrodollar requirement for oil (and other commodity) purchases enables a global extortion racket, and partly explains the US insistence on Mideast control and dominance. For the cost of fiat dollars, the US theoretically "owns" the goods and resources of the world. The bizarro fiat economics compels other nations to push up the demand for dollars even as the US prints more of them.
No, although the US PTB may want to default on dollar-denominated debts, I do not think US leaders want to lose control of their global financial racket, any more than when they defaulted on their gold denominated debts.
Look to NATO and the IMF for the possible future.
On a concept level, I will agree with you. It could well be, however, the camel's nose is under the tent and it's end game on.
Just another argument from induction. If we've learned anything over the last two+ years, it should have been to throw out the history books and rework the models. This thesis presumes that demand for dollars exists in perpetuity, foreigners demand to be enslaved, and the ability to pay for our industrial military complex lasts long enough to make a transition to a "world" currency (even though this status is already held by the dollar and the U.S. is presently in the driver's seat, but would have to cede some degree of control to make the transition). In short, the fuel runs out before we get to escape velocity. In the end, isolationism will prevail and, as credit contracts, so does trade interaction. The camel is in the tent wrecking shit already.
++ Ironically funny, Macho.
And that is quite an interesting train of thought, military might lasting just long enough for One world currency to be introduced, then a ton of breathing space for these guys to re-group.
It would explain their willingness to leave so many soldiers in far away bases at serious risk of supply chain disruption. Maybe they'll just be cut adrift, without the codes of course. Or become self-sufficient subsidiaries of the United Nations Corporation..
ORI
http://aadivaahan.wordpress.com
I suspect they will be brought home to defend our borders and washington given you put out the fires closest to you... but I fear they may not. I vastly prefer my chances with a human than a drone plane. It doesn't hesitate to kill while watching tears stream down faces, cleaning gaunt cheeks along the way.
There is no thesis, other than to utilize the banking system as a means of controlling power. All else are simply palliatives used to soothe the global herd. Strip away the rhetoric, and what we have is naked aggression & imperial conquest. Who in the US of A wants to be viewed no differently than Nazi Germany & Imperial Japan?
Yup. The good thing, for us, is that implementation, monitoring, and management of the banking system is too dynamic for humans, despite our egos telling us with such power we inherently have the intelligence to control it. I say good thing, but obviously it could end very, very badly (strong likelihood of massive social upheaval, political unrest, even the changing of borders and allies)...
but what I mean is that eventually we (morts) grow exhausted on their treadmill, pass out, hit our heads on the ground, and wake up off the treadmill. Of course, the entirety of our recovery is spent trying to get us back on the treadmill, but luckily we naturally have a skeptical and weary period before eventually capitulating. In other words, just because we are apathetic to change is not necessarily dispositive of whether change will occur (inevitability upon contraction). Hopefully we are skeptical of the sales pitch for a very long time following our bump on the head.
Go the Irish! Gotta love this. The line up in front of the firesquad would be endless if introduced in the US>
Boyle will shortly seek leave to introduce the Bill in the Irish Senate.
http://www.guardian.co.uk/business/2010/nov/19/ireland-debt-crisis-bailo...
I think it's worth sending him an email of support and thanks:
http://www.greenparty.ie/en/people/dan_boyle
<click Save more slowly next time>
Only fundamental flaw I see in the premise of this article is that as long as there is such a thing as a petro-dollar and it's country cousin, petro-demand, the mere manipulation of Dollar Oil Price can keep the global dollar slosh going for a long time.
Try the math...
It's a big tool in their pocket and one that we were set up to believe was coming a couple of years ago ($400 dollar oil).
ORI
http://aadivaahan.wordpress.com
There're other ways to secure the oil supply. As the Maker in Matrix said, we're prepared to accept a lower level of existence.
The trend of petro leaving USD has already started, though still tiny for now. Nothing we can do to stop it.
I hear you 42. Unfortunately, the switch away from dollar will come at great cost to humanity in the form of wars of every stripe (economic, military, bio, geo etc.) that will inevitably be fought over it.
It's the Gollum-Precious complex.
The Gollum-Precious complex is axiomatic under certain conditions.
Said conditions are almost in place.
Sad.
ORI
http://aadivaahan.wordpres.com
Greed and fear are supposed to "balance" each other when it comes to Wall Street and the Banksters. When both get away with blatant criminal activity (market manipulation and collusion) nothing will change for the better. This ship has already hit the iceberg. Now the rich (Elitists’ / Oligarchy's) are in line for the life boats. The rest of us are singing along with the band until the inevitable. Bernanke was a lousy ship captain and Obama, his 1st mate, is Gilligan. Me, I'm gonna find Mary Ann and go out with a bang!
Hoser
Good, I will find Ginger and go to the other side of the island.
Why do people on ZH think the gold standard was a such good thing? It wasn't. The Euro is a 'standard', just look how well that's working out for the Eurozone (minus Germany). Goldbugs should be careful what they wish for because if, by some insanity, we ever returned to a gold standard, you can kiss your gold goodbye as it will, by necessity, be confiscated.
So what do you propose is the mechanism to value the gold once it becomes the backing for the dollar? If it is anything less than market price, people will turn in dollars for gold and the reserves will run dry. As a result, the market price will be used. Therefore, even if confiscated, you will get dollars actually backed by the physical metal previously confiscated and, thus, are relatively in an equal position.
In other words, our present situation (being off the standard and prospectively going on the standard) is different than previous confiscation, when we were on the gold standard and the risk of hoarding threatened the currency. Constitutional issues aside.
Because most people on ZH are sitting on bullion. No other reason than talking their book.
I see alot of talking, but I don't see alot of selling;)
...wealth is being confiscated as we type mediocritas...i would rather have the right to exchange a metal for a good and or service without taxes and regu-manipu-lations attached at the hip, side, top, bottom, and ether...but, wait...i can do that now can't i?
U.S. Treasury Labor Notes.....no leakage. Also, can't have this convo without factoring in military and petrodollars.
Has anyone ever tried to transport bullion internationally? I mean carry it in their bag onto the plane? Any problems with customs or TSA?
Thanks for the replies. I am thinking about taking some to an island and depositing it into a bank security box incase I need it at a later date.
are rules/restrictions and amounts. You can find them on the gov's website.
Personally, I wouldn't feel comfortable with physical assets too far away. My theory is if the SHTF, island banks may be looted. I wouldn't even trust a foreign trustee over accounts. That's just me.
Ask George Jung about overseas banks.
A gold standard means developing economies become retarded.
How would you allocate the gold to the various economies in the world? Would you continue to warehose the gold in London? How about some small town outside Bejing, or Bagdad?
Stopping deflation is harder than you think. True, the Fed can "print" dollars, but nothing can happen with them until someone borrows them into circulation. This is the evil genius of the central bank system. It eventually gets everyone in debt to the central authority, then they fight each other over who is going to get over.
But you're also quite right that even if the Fed can't get inflation going in the US they can export it elsewhere, and it isn't just the "reserve currency" status that enables that. Under Basel I, II, etc., government promises of any kind are acceptable reserves for banks worldwide. They are considered zero risk (zero hedge?). This is why the looming spectre of sovereign default is such a threat.
"In summary, Fed's dogged efforts in stoking inflation ..."
Anyone who believe's Fed's cover story of keeping inflation up is delusional.
Fed is keeping insolvent TBTF banks' balance sheets inflated, nothing more. Well... plus keep the vampire squid in business ...and keeping the goverment going.
The Fed will transfer most of the wealth in America to these entities to keep them going till the very end.
Bernanke is the biggest thief on the planet, robbing more wealth from more people than anyone in human history.