We are finally at the tipping point where science-fiction fans everywhere can come together to endorse...
George Soros’ latest idea here I think is really all about boosting this SDR currency’s money supply, though still restricted to sovereigns in circulation, to enable them to maintain or raise levels of liquidity and therefore conduct more international trade. It would be of special help to emerging markets that may face liquidity pressures as a result of the credit crunch and unlike an IMF loan, would have few, if any, strings attached. [viz. "We are nearing the point where the IMF may have to print money for the world"]
The reallocation of country quotas in any significant manner could also presumably address the large surpluses built up in countries like China. At the end of the day, the solution to the global financial crisis problem is connected to restoring liquidity and confidence to the financial system. To do so, many say the solution must address the current imbalances which see vast sums of dollars stored-away on some sovereign balance sheets and not on others.
Gordon Brown said Tuesday the surplus-holding Gulf States, many of whom already peg their currencies to the dollar, were ready to extend money to an IMF bailout fund at the G20. The question is could that money be channelled through an SDR framework?
SDRs potentially address another problem facing the system too. As Fred Bergsten, director of the Peterson Institute for International Economics, wrote in the FT a year ago, they could help restore faith in the dollar itself. His argument being, surplus nations in many cases have no choice but to bankroll the US debt, as diversifying into non-dollar denominated assets would have drastic consequences on their own currencies.
Many dollar holders, including central banks and sovereign wealth funds as well as private investors, clearly want to diversify into other currencies. Since foreign dollar holdings total at least $20,000bn, even a modest realisation of these desires could produce a free fall of the US currency and huge disruptions to markets and the world economy.
He adds the problem is further heightened by the fact that none of the countries into whose currencies the diversification would take place want to receive these inflows either. Through an SDR substitution account though the following could happen:
Instead of converting dollars into other currencies through the market, depressing the former and strengthening the latter, official holders could deposit their unwanted holdings in a special account at the IMF. They would be credited with a like amount of SDR (or SDR-denominated certificates), which they could use to finance future balance-of-payment deficits and other legitimate needs, redeem at the account itself or transfer to other participants. Hence the asset would be fully liquid.
Via this system all countries would benefit, he says:
Those with dollars that they deem excessive would receive an asset denominated in a basket of currencies (44 per cent dollars, 34 per cent euros, 11 per cent each yen and sterling), achieving in a single stroke the diversification they seek along with market-based yields. They would avoid depressing the dollar excessively, minimising the loss on their remaining dollar holdings as well as avoiding systemic disruption.
Meanwhile, the US would be spared the risk of higher inflation and potentially much higher interest rates that would stem from an even sharper decline of the dollar. As the cost of protecting against US sovereign default in credit default swaps increases, it’s certainly a case worth considering, especially as a proposal for a special one-time allocation to double the number SDR in the system is already in place. To go through, the proposal needs three fifths of IMF members (111 countries) with 85 per cent of total voting to accept it. As of March 2008, 131 members with 77.68 per cent of voting power had accepted it - reflecting the level of the demand for the measure. Approval by the US would now put the amendment into effect.
This is the legacy of everyone who thought a job in a cubicle was better than an equal (or better) paying job in the trades on in a factory.
What makes Abu Dhabi unlike not just its sister and competitor emirates but pretty much everywhere in the Arab world is its devotion to manufacturing. Much of its oil wealth is being used to start industries from scratch...
As well as Daimler, it has invested in companies such as GE, Rolls-Royce, EADS and Advanced Micro Devices. This may look quixotic, yet invariably these stakes come with local training and manufacturing commitments.
Along with reform of local education, the goal is to use manufacturing to create skills and a culture of innovation – much more than to establish new branches of old industries. This at least tries to offer an alternative to the usual model in the Gulf – where the public sector employs the bulk of nationals – or the trading company model common in most other Arab countries.
Some 40 years ago, the Syrian philosopher Sadek al-Azm wrote a famous critique of the mind-set underlying serial Arab defeats. Arabs, he said, have become removed from the social and economic processes that make innovation and scientific breakthroughs possible. Abu Dhabi, it seems, wants to create, not just consume...
But is there a case for one? In theory, yes. (Although no one was banging the table for change when emerging growth rates were still being powered by deliberately undervalued domestic currencies.) The reserve currency status of the dollar helped to create nasty global imbalances – one of the main culprits of the current downturn. As China, for example, recycled export earnings back into dollar-denominated assets, the US could happily run profligate trade deficits with impunity. That helped push up the price of US assets, particularly house prices.
Now surplus countries are stuck. They cannot diversify fast enough and a rapid sell down of US assets would destroy their portfolios. Not only that, global central banks holding about two thirds of their reserves in dollars are hostage to the Obama administration. Unsurprisingly, huge budget deficits and the Federal Reserve’s leap into quantitative easing have foreigners fretting over the longer term health of the dollar... if China one day emerges as the dominant economic and military power, the status quo will change.
« Older Writing, seemingly, a book a day since his birth ... | In the summer of 2007, artist ... Newer »
This thread has been archived and is closed to new comments
Buy a Shirt