Coming from China, I think it is absolutely fair that they have to deal with the dollar as the reserve currency because we had to put up with the decade of bullshit from them pegging their yuan to the US dollar.
The major reason they're holding an excess of US assets is because they decided for 10+ years to ensure that it was artificially cheap for anyone in the US to import from China. We complained to hell about fair trade and threatened import taxes, but we let it slide mostly in the name of diplomacy and cheap consumption.
Well now China gets to reap the consequences of that decision and I have not a single ounce of remorse for them.
What's with all the moralising? You think China are under some sort of moral obligation to take their losses cause they 'had it coming' for keeping the yuan low? Just like the US they'll do whatever they see is in their advantage. I don't see anyone saying you should feel remorseful but if China want to move towards other currencies then that is their right.
This shouldn't be about "payback". The first post in this thread (kirse) makes a fair statement about China's fixed currency. But does take it too far. Similarly, China not accepting that it is a partner in its situation of the USD is also taking things too far. I think most of this is political response to China's leaders having to answer to its own "middle class" trying to explain what happened to their dream.
It is very true that China would not have its position in the world today if the U.S. had not made credit so cheap to not just U.S. citizens, but the entire world. This is key to understand: the problem with the USD is the world's problem not just Americans. Bankers, traders, homebuyers worldwide benefited from the loose credit policies of the U.S.
Mr. Zhou's statements on changing the system are worth looking into. But keep in mind that there were many smart economists that studied the current set of rules for decades prior to loosening U.S. banking regulations and most of them thought it would work...they were wrong. I'm sure if we jumped into Mr. Zhou's "new IMF system" that in 40 years, there would be externalities we could not have predicted.
I don't think morals have to enter into it. If a country artificially ties its currency to the dollar for purposes of inflating trade, it's going to end up with a bunch of dollars that aren't worth so much.
Seems like natural consequences to me.
I'm dubious that the system is so simple that simply changing the reserve currency is going to fix anything. But if I were an expert in international finance, I wouldn't be working on startups. And I'd probably be a lot more boring.
I agree the Chinese are in a bit of a pickle what with holding so many US dollars. The fact that they are prepared to risk their investment by saying this is suggestive. In the end I think the US would still like to hold onto the USD as the defacto world currency and the Chinese move is more a warning that that this can be lost if the value drops too much.
Either way I'm not sure how much it matters who's 'fault' it was now.
But I'm not an expert in international finance either. The startup I'm a part of does very well when the USD is strong but that is about it.
The actual statement doesn't make any sense: "China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.
In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said 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'."
"controlled by the IMF" does not imply stable. While the IMF is somewhat disconnected from individual nations, it is gamed.
I suspect that this is China's way of saying that it wants to play too. Since it's big enough to break the IMF, it may just be a public announcement of China's new role.
This is the first time I've ever heard a Chinese official this high up call for replacing the dollar. Can anyone else think of any other examples? If this is really a new development, then it's very significant news.
There has been news about it but it has not been given much coverage. Christmas eve last, it was reported by AFP and Xinhua (Chinese Govt. Media) that China was trying to create conditions for the yuan to become an international settlement currency and would use the yuan in transactions with neighbouring economies on a trial basis:
I link to a blog and not the articles because I think the blogger makes some great commentary. He also gives his incite to yesterday's news in the first link on the right. Definitely worth a read.
China has made several statements in the last few weeks about their concerns about the dollar. However the real BIG news is not their talk, its their actions. China has been moving their dollar holdings into short-term bills out of longer-term notes. They are positioning themselves so that they can get out of the dollar quickly - and they are doing it in a way that won't raise alarms because they aren't (yet) cashing-in their dollar holdings.
"In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said 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."
Monetary policy is definitely not my forte, but why not use the Euro instead of the U.S. Dollar then? The Euro is not connected to any individual nation, after all. Creating a new currency takes such a long time that I wonder whether it would be practical.
Well, from what I read in the FT article, they are actually implying a shift from US dollars to SDRs, which already exist and are well established. SDRs are effectively a currency in the ways that matter, at least at this (international finance) level. Since the SDR is defined in terms of the US dollar, the euro, and a couple of other currencies, the SDR is potentially more stable than either the dollar or the euro alone.
Another thought: Changing from one reserve currency to another is kind of a big deal - you can't just go to some currency exchange window and say "hello, I'd like to exchange this $372.4 billion in USD into Euros please". Throws the markets out of whack. So perhaps another reason for choosing the SDR is that they are less likely to need to change it in the future. Say thirty years from now if conditions change, and the euro starts hyperinflating and the USD is solid again, the SDR value will be relatively stable.
I'm at best an amateur in these matters, so I could be mistaken. Not to mention the fact that I did not read the original article (at http://www.pbc.gov.cn/english/detail.asp?col=6500&id=168 - the page will not even render readably in any browser I have). Anyone who can read Chinese care to comment?
Edit: I threw around a little jargon above... SDR stands for "Special Drawing Rights", and can be viewed as a kind of pseudo-currency used by the IMF. See http://en.wikipedia.org/wiki/Special_Drawing_Rights
It's hard to see how that kind of basket would work. If you don't have fixed pegs between the currencies, then you have not increased the stability of the system. If you have fixed pegs, then each member country must cede complete control of its monetary policy to the international bank. Otherwise the temptation to inflate would be too great.
It isn't perfectly stable but it isn't so dependant on any individual currency. Even if the USD halves in value then the total impact is less than 25% on the SDR. And presumably the other currencies would increase to offset much of the impact.
As currencies changed in value over time you would probably need to re-balance the percentages. I'm not sure how this would happen.
Do you think there are any benefits doing it against currencies rather than against a basket of resources?
Money serves two purpose: store of value, mechanism of exchange. If inflation kicks in, people with government backed currencies that are easing will be caught with their pants down.
I've been thinking about this on a small scale recently. Now there's no systematic reason you couldn't have your cash held by a bank in terms the GS commodities index (http://www2.goldmansachs.com/services/securities/products/sp...) and then convert it to local currencies at the last minute - either when you're paying your bill or getting money from an ATM. They could manage the risk of moving it into and out of currencies (so that they have liquidity to service people at ATMs) as part of their service.
I spent my first year in London operating like this against AUD - being paid into an Australian account and spending from it on Visa debit. (You're subject to foreign exchange risk, but actually that's just a perspective thing. You're subject to it when you've got pounds via opportunity cost, you just don't realise it.)
China is doing a crude version of this at the moment - converting USD into commodities countries at a rapid rate. But if they want to get a new currency, why not peg it against tangibles rather than building a new castle on already shaky foundations?
It's an interesting idea. Seems better than just gold. However I don't necessarily think it would be more stable. Changes in supply and demand of resources could have numerous unintended consequences.
I don't think you would gain any day to day stability from doing so. You would still have all the instability in the USD multiplied by the instability in your commodities index. The advantage would be a hedge vs. inflation but that's got limited value relative to stability when talking about small amounts of money.
I don't think it would be a real currency, it would just be a broadening of the current basket the IMF uses. We'd use an expanded form of special drawing rights as reserves, and the SDRs would be based on the broader basket of currencies.
This is interesting, this would certainly be a very new direction for foreign currency.
Another interesting point is this was not raised during the 2008 APEC meeting, much to the dismay of European countries.
However this time around things seem to have progressed, and Russia has put forth the proposal to the G20, it will be interesting to see how this plays out.
IIUC one downside of the European monetary integration is that if, say, the German economy is doing fine while Italy is in recession, then Italy cannot simply loosen up its currency to boost demand while Germany keeps its currency tight. Instead, the ECB has to either keep the euro tight, screwing Italy, or loosen it, screwing Germany. And since other pan-European political institutions are not as strong as the US Federal Government, setting Europe-wide economic policy for everything other than currency is difficult.
The upside of the euro may be greater than the downside, but it seems to me that a new global reserve currency would be mostly downside, for this reason. Then again as a US citizen I have a vested interest.
>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”.
If you compare it with a basket of goods it's still highly unstable. It's not a true random walk, but day to day gold fluctuations can be extreme and it's still in the middle of a bubble so expect a sudden crash some time soon.
Gold flucuates enormously because it is currently not the official currency of any country. If it ever became a major currency, it's price would sky rocket as it would have to absorb a huge amount of new monetary demand. Thus gold's current price fluctuations are basically a bet on the demise of Bretton Woods II. But if gold ever became an official currency, it's price would shoot up and then stabilize. After stabilizing its price would be more stable than any other form of currency. Gold has the lowest flow to stock ratio of any good, so its a perfect nash equilibrium as a currency. And empirically, the classical gold standard from 1865-1913 had much greater price stability than we have now.
This is pretty interesting. How much would the price of gold skyrocket if it were adopted as the international currency peg/medium of exchange/etc? Divide all the money in the world on the amount of gold available. That's the new price per ounce of gold. It would be a massive increase.
With a gold price that high, it might become profitable to just synthesize gold in a nuclear reactor. Which would destroy the point of imposing a gold standard in the first place. Even if it wouldn't be profitable with today's technology, it would become a very lucrative field. Which you would have to outlaw. Etc. etc. etc.
What all the gold nerds are really clamoring for is an international agreement saying that no one will ever increase the money supply. This won't happen. A system of fixed currencies is as unrealistic as every nation suddenly deciding to adopt communism.
...more mundanely, countries with lots of gold available to mine could manipulate the rest of the world's economies by strategically deciding when to grant or restrict mining concessions.
It would be an interesting mathematical exercise to define a cryptocash-like token that could be subdivided indefinitely without being duplicated--you could use this token as the basis of a permanently fixed money supply. Not sure how useful that would be in real life, though.
would it? Say you invented infinite, free, clean energy. You would wind up heating the earth as all the energy would have to dissipate somewhere. What does everyone really want? Happiness - if you generate happiness then your Wuffie account should be credited.
Energy could easily be used to cool the earth too. Also in my scheme ordinary citizens end up building power plants, whereas in yours they end up dealing drugs.
If basket of goods was priced in gold rather than dollars - then its price would also be more stable.
There have been centuries when gold was legal tender and nobody complained (apart from some emperors who found debasing gold coins by adding copper was a bit difficult; but printing press has not been invented yet).
Think about this for a second, if you value a basket of goods in terms of oil and oil's value is fluctuating rapidly then the value of those goods also seems to fluctuate rapidly.
So when you compare 2 things one of whose value is stable like USD or a basket of goods, and something else that is unstable like Gold. Then the unstable item makes the value of the other things seem to fluctuate. However, by making several comparisons you can determine that the ratio of USD to basket of goods is stable but gold vs USD or Basket is unstable so it's Gold that is unstable.
haha.... in 1971 when the US Gov. defaulted on gold, they stopped other countries from redeeming dollars for gold. Thus removing the FIXED exchange rate with a commodity that has been used for centurys as MONEY. Ever since 1971 all currencies are just floating and thus are NOT stable. Imagine being a saver and thinking "what will my cash savings be worth in the future? What about inflation?" The US Dollar is FIAT, which means its only money because the government says so. Gold has been chosen BY the people for THOUSANDS OF YEARS! The US Gov. AND the Fed have screwed this country for decades and all the crap is finally coming out in the open. I could go on and on about about these problems but would rather you just goto mises.org and learn some real economics. The standard of living here in the US will be going down HUGE so prepare yourself.
Oh, btw, why don't you check the "value" of gold against ALL currencies and see what it tells you. Hint... Gold measured in ALL currencies has passed its all time highs, the only currency that hasn't (minus the 1980's high) is the USD, but that is because the USD is the reserve currency.
This article is just another indicator of how our currency is going to crap...
Only governments and idiots keep their long term investments in USD, Gold, or anything that does not actively increase in value. Anyway, compare the cost of gold and salt over the last 20 years and we might want to go back to the roman's currency because as I said Gold is highly volatile as is anything once you start treating it as a currency.
The major reason they're holding an excess of US assets is because they decided for 10+ years to ensure that it was artificially cheap for anyone in the US to import from China. We complained to hell about fair trade and threatened import taxes, but we let it slide mostly in the name of diplomacy and cheap consumption.
Well now China gets to reap the consequences of that decision and I have not a single ounce of remorse for them.
Great article from back in '03 when this was still an issue: http://www.treas.gov/press/releases/js774.htm