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Is the Dollar REALLY Losing Its Reserve Currency Status … If So, What Will REPLACE It?
Yes, The Dollar Is Losing Its Status as Reserve Currency
The average life expectancy for a fiat currency is less than 40 years.
But what about “reserve currencies”, like the U.S. dollar?
JP Morgan noted last year that “reserve currencies” have a limited shelf-life:
As the table shows, U.S. reserve status has already lasted as long as Portugal and the Netherland’s reigns. It won’t happen tomorrow, or next week … but the end of the dollar’s rein is coming nonetheless, and China and many other countries are calling for a new reserve currency.
Remember, China is entering into more and more major deals with other countries to settle trades in Yuans, instead of dollars. This includes the European Union (the world’s largest economy).
And China is quietly becoming a gold superpower, and China has long been rumored to be converting the Yuan to a gold-backed currency.
Why China Doesn’t Want the Yuan to Become the Reserve Currency
But a switch to a totally-different system – say, a gold-backed yuan – would cause enormous disruption and chaos. China – which has been a long-term planner for thousands of years – doesn’t want such a sudden change.
Moreover, housing the world’s reserve currency is a huge burden, as well as a privilege. Venture Magazine notes:
The inherent burden of housing the world’s reserve currency is that the U.S. must continue to run a balance of payment deficit to meet the growing demand. However, it was this outstanding external debt that caused investors to lose confidence in the value of the reserve assets.
Michael Pettis – the well-known American economist teaching at Peking University in Beijing – explains:
A world without the dollar would mean faster growth and less debt for the United States, though at the expense of slower growth for parts of the rest of the world, especially Asia.
***
When foreigners actively buy dollar assets they force down the value of their currency against the dollar. U.S. manufacturers are thus penalized by the overvalued dollar and so must reduce production and fire American workers. The only way to prevent unemployment from rising then is for the United States to increase domestic demand — and with it domestic employment — by running up public or private debt. But, of course, an increase in debt is the same as a reduction in savings. If a rise in foreign savings is passed on to the United States by foreign accumulation of dollar assets, in other words, U.S. savings must decline. There is no other possibility.
***
By definition, any increase in net foreign purchases of U.S. dollar assets must be accompanied by an equivalent increase in the U.S. current account deficit. This is a well-known accounting identity found in every macroeconomics textbook. So if foreign central banks increase their currency intervention by buying more dollars, their trade surpluses necessarily rise along with the U.S. trade deficit. But if foreign purchases of dollar assets really result in lower U.S. interest rates, then it should hold that the higher a country’s current account deficit, the lower its interest rate should be.
Why? Because of the balancing effect: The net amount of foreign purchases of U.S. government bonds and other U.S. dollar assets is exactly equal to the current account deficit. More net foreign purchases is exactly the same as a wider trade deficit (or, more technically, a wider current account deficit).
So do bigger trade deficits really mean lower interest rates? Clearly not. The opposite is in fact far more likely to be true. Countries with balanced trade or trade surpluses tend to enjoy lower interest rates on average than countries with large current account deficits — which are handicapped by slower growth and higher debt.
The United States, it turns out, does not need foreign purchases of government bonds to keep interest rates low any more than it needs a large trade deficit to keep interest rates low. Unless the United States were starved for capital, savings and investment would balance just as easily without a trade deficit as with one.
***
Only the U.S. economy and financial system are large enough, open enough, and flexible enough to accommodate large trade deficits. But that badge of honor comes at a real cost to the long-term growth of the domestic economy and its ability to manage debt levels.
For the reasons outlined by Pettis, China – which has the world’s 2nd biggest economy (or 1st … depending on the measure used) – doesn’t want the burden of housing the world’s reserve currency.
As such, China is pushing for a basket of currencies to replace the dollar as reserve currency.
Indeed, China – as well as Russia, the U.N. and many other countries and agencies – have called for the “SDR” to become the new reserve currency. SDR stands for “Special Drawing Rights”, and it is a basket of 4 currencies – the US dollar, Euro, British pound, and Japanese yen – administered by the International Monetary Fund.
Jim Rickards – one of the leading authorities on currency, having briefed the CIA, Pentagon and Congress on currency issues – says:
China is not buying gold to create a new gold standard; rather it is aiming to make the Yuan more attractive, with the end result of being included in a basket of currencies, referred to as the Special Drawing Rate (SDR). He added that there is a move to make the SDR the new global reserve currency.
“Everybody knows that the U.S. dollar’s days are numbered but there is no really currency to take its place except for the SDR,” he said.
“What the world is trying to do is move to the SDR and China is fine with that.”
Rickards added that China’s goal of being in an SDR basket is the best of both worlds; the country can still have total control over its monetary policy and capital accounts but still influence global economics by being part of a basket of currencies.
“What the Chinese want is to have the Yuan in the SDR basket but not open up their capital account,” he said. “That is a backdoor way for the Yuan to be a de facto reserve currency without having to give up control.”
What’s Missing?
It is silly to exclude the Yuan from the basket of currencies.
Indeed, given that there are privileges and burdens of having the reserve currency, I would argue that – if we are going to move away from the dollar as sole reserve currency – all of the currencies of the world could be in the basket … in proportion to the size of their economies. It is simple to look up the GDP of the world’s nations.
That way, each country would all share in the benefits and costs, in proportion to its size and strength.
(Obviously, some countries have such small or unstable economies that no one would want to settle in their currency. To be realistic, they’d probably be dropped out of the basket. But the ideal of including everyone is worth maintaining.)
Keynes and Other Economists Say We Should Use a Basket of Commodities
While having a basket of different things acting as the world’s reserve currency may sound like a new idea, John Maynard Keynes – creator of our modern “liberal” economics in the 1930s – promoted a basket of 30 commodities called the “Bancor” to replace the dollar as the world’s reserve currency.
The arguments for currency fixed on a basket of commodities – as opposed to currencies – was that it would stabilize the average prices of commodities, and with them the international medium of exchange and a store of value.
As China’s head central banker said in 2009, the goal would be to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies”. Likewise, China suggested pegging SDRs to commodities.
Economics Professor Leanne Ussher of Queens College in New York concludes that a reserve currency made up of a basket of 30 or so commodities would:
Reduce the disorderly swings in individual commodity prices … reduce supply constraints, stabilize costs of production, promote global effective demand from the periphery and balance growth between periphery and core countries.
Monetary expert Bernard Liataer – formerly with Belgium’s Central Bank – writes:
The idea of a commodity-based currency may seem to some a step backwards to a more primitive form of exchange. But in fact, from a practical point of view, commodity-secured money (for example, gold- and silver-based money) is the only type of money that can be said to have passed the test of history in market economics. The kind of unsecured currency (bank notes and treasury notes) presently used by practically all countries has been acceptable only for about half a century, and the judgment of history regarding its soundness still remains to be written.
With a commodity-based currency, a central bank could issue a New Currency backed by a basket of from three to a dozen different commodities for which there are existing international commodity markets. For instance, 100 New Currency could be worth 0.05 ounces of gold, plus 3 ounces of silver, plus 15 pounds of copper, plus 1 barrel of oil, plus 5 pounds of wool.
This New Currency would be convertible because each of its component commodities is immediately convertible. It also offers several kinds of flexibility. The central bank would agree to deliver commodities from this basket whose value in foreign currency equals the value of that particular basket. The bank would be free to substitute certain commodities of the basket for others as long as they were also part of the basket. The bank could keep and trade its commodity inventories wherever the international market was most convenient for its own purposes–Zurich for gold, London for copper, New York for silver, and so on. Because of arbitrage between all these places, it doesn’t really matter where the trades would be executed, as the final hard currency proceeds would be practically equivalent. Finally, since the commodities also have futures markets, it would be perfectly possible for the bank to settle any forward amounts in New Currency, while offsetting the risks in the futures market if it so desired.
This flexibility results in a currency with very desirable characteristics. First of all, the reserves that the country could rely on–actual reserves plus production capacity–are much larger than its current stock of hard currencies and gold. The New Currency would be automatically convertible without the need for new international agreements. Since the necessary international commodity exchanges already exist, the system could be started unilaterally, without any negotiations. Because of the diversification offered by the basket of several commodities, the currency would be much more stable than any of its components–more stable, really, than any other convertible currency in today’s market.
3 Choices for a More Stable Money System
The 2 choices for reserve currency discussed above are using a (1) basket of currencies or (2) basket of commodities.
A third choice – which may be the best – is to use a mixture.
For example, we could have 50% currencies and 50% commodities.
That would give us some of the desirable characteristics (like stability) of a commodity basket, but not immediately move away from the fiat money systems which are now status quo for the current system.
Any of these 3 choices would give us far more stability and prosperity than we have today … without the chaos and misery – especially for Americans and perhaps Chinese – that switching to a Yuan-only reserve currency would bring.
Notes: You might assume that public banking advocates would be for a currency-only basket. But Bernard Lietaer was one of leading public banking advocate Ellen Brown’s main teachers, and he is pushing for a basket made up solely of commodities. (But public banking advocates might argue for adding currencies to the basket currencies to allow for some elasticity in the money supply.)
Gold standard advocates would obviously prefer commodities to currencies. A basket of commodities might not have the simplicity of a gold standard, but it would accomplish a lot of the same goals.
As an American who wants stability and prosperity for my country, I think a basket would be the best option for a healthy future for the U.S. And as someone who wants good things for the rest of the world, I believe that a basket would help to share political influence more widely.
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We will manage the decline much better than china. That may or may not be saying much.
IMO I don't think regardless of the U.S.'s debt levels that replacing it as the reserve currency will work efficiently at least for now. This has to be a very gradual process. I say this because we are still the world's greatest producer and exporter of food.
In effect the dollar's inherent strength is supported by other countries need to eat. While the petro-dollar is oft discussed as the reason for much of global economic and political machinations, the food-dollar is even more powerful but rarely discussed in the same vein. Granted without petroleum, food production in the U.S. would suffer but what nations out there wish to destroy their main source of food in exchange for suddenly destroying the dollar? Let there be no doubt that weakening the food-dollar too much with global population still climbing is counterproductive and dangerous to foreign governments. U.S. farmers and food conglomerates too have to have an incentive to produce and that incentive has always been making a profit. Take that incentive away and watch the world get a whole lot hungrier. China knows this and the rest of the world hence knows this.
Whatever's said about disparaging the U.S.'s current approaches to how it handles its financial affairs the fact remains that until someone else replaces the food-dollar any SDR basket is destined IMO to still heavily weigh towards the U.S.'s favor even over gold and like stores of value. At the end of the day one cannot eat gold nor oil and live. And neither can stable governments.
Perhaps the destiny here is an SDR Super-Dollar so to speak. In effect expanding the dollar itself to be stronger and more stable through a melding of other currencies into it. Some will say that is the same as a NWO currency. I say it's more of a morphing, a further evolution of what already is defacto the NWO currency. Or should I say what is an even more globally accepted NWO U.S. food-petro currency with additional SDR-like pillars built under it with gold and silver being some of those pillars but certainly not all of them, as some would like to envision them as a simple solution that once worked in earlier simpler times. Unfortunately we're not in those simpler times.
I've been thinking along the same lines for years, the deep soil profile in the US is a huge advantage, an asset most countries do not have. As long as north america can produce surplus crops it's never going to be or stay broke. This is not true of most countries, and those countries that can't feed themselves, fully (a real trade deficit), will turn out to be the truly impoverished and broke, and for the long-term. All countries have assets (and militaries are not it, that's a major liability, and this is where the US will lose-out big as resources are squandered on it), and the assets must be traded to live.
So the real assets have to be the backing of the currency, otherwise ponzi currency will always be the result.
The soil in much of the food producing areas of the US is on a twisted sort of life support. It lacks biodiversity and many micronutrients. It is flooded with artificial nitrogen fertilizer, pesticides and herbacides, but lacks what comes from biodiversity and cycles involved in the decay of previous growth. Crops are also genetically similar to the point that they will produce well with the nitrogen, pesticides and herbicides in general, but if a new super bug, weed, or fungus comes a long that one plant is susceptable to, all will be susceptable to it. We have been setting ourselves up for massive crop failure after all of the years of booming production, and that doesn't get into the oil and natural gas dependencies in the current system, nor does it get into water issues. But this is what we get for allowing people to think that food comesgrows wrapped in plastic and steak grows in styrofoam trays wrapped in plastic.
no offence but i as an individual try not to put anything in my mouth that comes from usa. though i'm not sure all countries/big consumers share my concerns regarding gmo-s.
The Silence of the Lambs - It rubs the Lotion on its skin [HD]
http://www.youtube.com/watch?v=WCSZfmbFJyQ (1:41)
I don't get it. Why is so important reserve currency when everybody is in debt. It is like, "you know, I have $1000000 debt, but I still have $10 somewhere under the pillow"
GW, im surprised my Corporate Finance professor would be quoted here. which reminds me how horrible the economics/finance professors are in queens college
I think there will emerge 2 reserve currencies.. 1 will be an anglo-american-european currency used by many other countries in the world, which will also be used like the USD to price commodities & oil in. The second will probably be the Yuan as a de-facto currency and that will widely be used in asia, some places in africa and south america
A reserve currency is one you hold on to. The chinese dont want to use the yuan as a reserve currency. It functions more like trade credits. Mercantilists as they are they insist you buy something from china with it and send it back.
You're forgetting that China is like the rest of the world- They hate us for our freedom!
You live in Bhutan?
They don't hate us for debt-based currency though. It's a great gig if you make your neighouring countries buy and sell goods in yuan, and collect all the interest on that. Also, with all of those countries holding onto even more yuan than they can do with it, they can do what the U.S. has been pushing china and other countries with their USDs, and make them buy chinese bonds with the Yuan, buying China deficit-spending time. Also they just need to continue producing and selling goods to the fat-domestic-spending countries like the U.S, Canada, and most of Western Europe to keep this game going.
and our Levis
All the bankrupt countries will have one currency and all the solvent countries will have another?
Yes. And yes.. it is bizarre, idiotic, and nonsensical. However, I don't underestimate the stupidity of these elite idiots anymore. I think they want to defy the laws of precious metals, and claim in some weird way that because a newly minted debt-based, fiat, 1:infinite fractional reserve ratio toilet paper currency actually is hard money because commodities and oil will be bought and sold in it (if you can get the doublethink). The low-iq people, and other people who don't get the history of monetarism will fall for it pretty conveniently. Someone in the future will have to write a book titled "the creature from NYC/City of London/Brussels" for the new super-central bank that will emerge.
Quatloos are the new dollars....
How many quatloos is that thrall in the window?
I favor uncut dilithium crystals myself.
Bitcoins should'a been named Quatloos instead.
#41
A basket would work...... As long as it is filled with the heads of WS titans. As they rot, you get new ones....
Since energy moves everything and oil as well as other connodities are finite, how about a basket of BTU's, kcal's, silver and gold.
Just saying
What a load of crap!
Maybe we should make that the new reserve currency.
Oops! I forgot. That's what we are using now.
So where and when does World War 3 fit int this picture. You mean The Federal Reserve is going to go out quietly?
All war is bankster war. More desperate is banker, more gruesome is war. Embrace yourself!
Here's where we say to the cops while pointing to the banksters: Militzanya, pajalsta, oviedi yeavo adsuda (the extent of my Russian)...never to be seen again.
O trust me B.A.
I'm embracing myself everyday with my right hand wrapped firmly around it just behind the neck.
4. Lifetime imprisionment for all members of the FED (and all mamber banksters), BIS, World Bank...as well as those in fedgov that voted over the last 40+ years for this Ponzi to continue.
Who set up the rules for the Ponzi? (Who paid the polititians)?
Free room and board on The Rock off of SanFran for life.
A (short) "life" in a Syberian Gulag would be advisable
too lenient
The Rock doesn't have enough room...
San Quentin would be a better choice...
China new reserve currency status...
Yuan it, you got it!
Boris is make homonym pun. Is good progress!
Must have now work in syntax.
You mean homophone.
There is no gay man in Russia!
I am pretty sure that's Iran.................
Boris very smart and homo-genious (megalophyia)
You are kind to Boris, but some are extreme hate on Boris...
LOL
The "basket of currencies" is the sort of idea that is so stupid only a highly educated person could ever believe it would work. Such a system would be arbitraged to death in an instant.
The ideal commodity to base a new reserve currency on would be plutonium or enriched uranium. These commodities are very useful and desirable to governments but useless (and even dangerous) to individuals. Better than that barbaric relic of gold.
I'm ready to accept my "Nobel" prize in economics now.
My choice for a stable currency system is NOT LETTING THE CROOKS, CUNTS AND COCKSUCKERS RUN IT!
Moving to SDRs let's China and other mercantilists spread the pain around. Instead of just hitting the U.S., they can hit the Europeans, the Swiss, the Japanese. Print your own fiat currency, but SDRs, rinse (sterilize) and repeat. It's a license to beggar and everyone will get in on the action. End result: global simultaneous hyperinflation.
Your correct, they would do that. I think it should be a basked of commmodities, in fact a basket commodities. From agricultural, Livestock, Energy, Precious metals, industrial metals and others like (rubber, palm oil, wool etc.). I would want them to put all of them in a basket to make arbitrage a very very hard thing to do without hurting another part of their market.
Bitcoin? Interesting article:
http://www.theguardian.com/technology/2013/oct/29/bitcoin-forgotten-currency-norway-oslo-home
$27 worth of bitcoin putchased as an experiment in 2009 now worth over $880,000 !!!!!!!!!!!!!!!!!!!!!!!!!!!
Arbtrage would be encouraged and help provide liquidity and provide price discovery and keep the cuurency and its sub components efficiently priced.
Arbitrage would kill it if any of the components of the currency were fixed in price. The currency has to float also.
A reserve currency based on a basket of fiat currencies would just be another fiat currency. How would anything change?
Commodities float. They are arbitraged. A Bancor currency would have to float also because the underlying component are commodities that have price fluctuations. Price fixing leads to shenanigans and arbitrage opportunities. These eventually deal a death blow to the fixed price
The current reserve currency (the dollar) is already secured by the basket of commodities and manufactured goods that the US produces. All the US needs to do is to STOP printing multi billions of new dollars out of nothing each week. All of these basket schemes would work in theory if men were honest. And THAT is the problem.
There is no shortage of commodities, currencies or baskets. There is a shortage of honest men who are willing to put the public good above their own short term interests.
And I have forgotten more about the late philosopher Carl Popper than you probably ever knew. Popper was one of the great minds of our generation.
The way things are going in Fukushima, lead might become more important than gold.
Google gold isotopes. Gold is very special in that it is far better than lead at not forming long lived isotopes.