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Another Day, Another Dollar
March 23, 2009 6:01 PM   Subscribe

China proposes replacing the dollar as the world's standard currency.

Less than two weeks after Premier Wen Jiabao raised concerns about its massive U.S. debt holdings, China's central banker, Zhou Xiaochuan, has called for a new central currency. Although China's top foreign-exchange official also reassured today that it would continue to buy U.S. treasuries, and although this is not the first time China has used its unique position as holder of US debt for political ends, this new case of China's buyer's remorse comes just before the upcoming G-20 summit--and China has already potentially got Russia on board as well.
posted by ornate insect (63 comments total) 6 users marked this as a favorite

 
The dollar would still reign though, as oil is contractually tied to the dollar.
posted by ZaneJ. at 6:07 PM on March 23, 2009


ZaneJ., that's true of course, but there have long been talks of petrodollars being replaced (for example the Iranian bourse, eurodollars, etc.).
posted by Houstonian at 6:14 PM on March 23, 2009


I think China might be posturing against Obama's moves towards breaking the Chinese currency peg. China wants some stable international currency that won't fight back because pegging keeping their labor costs minimal and preventing imports. Western nations want free market floating currencies because this minimizes long term trade imbalance (especially during recession).
posted by jeffburdges at 6:16 PM on March 23, 2009 [1 favorite]


China has a GDP of 3 trillion, Japan is 4 trillion, the US is 13 trillion and the Euro is 17 trillion. China is not even the top 3 currency. Ok, take away the Euro, Germany still exceeds China in GDP.
posted by stbalbach at 6:18 PM on March 23, 2009 [6 favorites]


Can't we just switch to Federation Credits and get it over with?
posted by blue_beetle at 6:23 PM on March 23, 2009


Can we call the new currency "gold pieces?"
posted by swift at 6:26 PM on March 23, 2009 [7 favorites]


Is it possible that the news that the national debt will nearly double in the next 10 years might have them a wee bit spooked?
posted by Joe Beese at 6:31 PM on March 23, 2009


Can we call the new currency "gold pieces?"

Silence, fool! We are finally at the tipping point where science-fiction fans everywhere can come together to endorse... the credit.
posted by Pope Guilty at 6:33 PM on March 23, 2009 [6 favorites]


China has a GDP...

Important to note, but naturally neither China nor Russia are proposing that the yuan replace the dollar. Instead, although China is keen to have the yuan gain as a currency of foreign exchange, what they are proposing here appears to be a hybrid or basket approach for international reserves:

from the WSJ link in the FPP: Mr. Zhou's idea is to expand the IMF use of "special drawing rights," or SDRs -- a kind of synthetic currency created by the IMF in the 1960s. Its value is determined by a basket of major currencies. Originally, the SDR was intended to serve as a shared currency for international reserves, though that aspect never really got off the ground.

*

oil is contractually tied to the dollar...

Yes but China's demand for oil is growing--and they are buying reserves.

*
on a related note: Did the Fed bail out China by buying Treasuries?

posted by ornate insect at 6:35 PM on March 23, 2009 [1 favorite]


Those Chinese, always with the currency disputes and lead-poisoning and beating on Buddhists. But where else can you get a $3 shirt that's guaranteed to have been sanctified by the tears of child laborers? Drape yourself in enough stuff produced via misery and the whole world just looks brighter somehow!
posted by jamstigator at 6:36 PM on March 23, 2009


The dollar would still reign though, as oil is contractually tied to the dollar.

There's no reason those contracts can't just be changed to other currencies. Iran had switched to the euro, and Iraq had been considering it before we invaded.
posted by delmoi at 6:38 PM on March 23, 2009


I'll give you this debit for that credit.
posted by fantabulous timewaster at 6:42 PM on March 23, 2009


We are finally at the tipping point where science-fiction fans everywhere can come together to endorse...
...the formation of a greater trading power blog, the Combine Honnete Ober Advancer Mercantiles. Petrodollars, sure, but keep the spice flowing.
posted by Fiasco da Gama at 6:46 PM on March 23, 2009 [2 favorites]


Well, SDRs are based on a basket of currencies, yet that basket can be rebalanced over time. So holders of dollars wouldn't lose everything by switching to SDRs as they exist now, but could potentially use it as a stepping stone to a new reserve currency which is already part of the SDRs.
posted by Sova at 6:49 PM on March 23, 2009


Zhou Xiaochuan, governor of the People’s Bank of China, argued that what he called a super-sovereign reserve currency would not only eliminate the risks inherent in currencies such as the dollar, which are backed only by the credit of the issuing country and not by gold or silver, but would also make it possible to manage global liquidity.

I think it's safe to say that for all of China's internet filters, it's still possible to Google Ron Paul.
posted by Marisa Stole the Precious Thing at 6:50 PM on March 23, 2009 [5 favorites]


It's linked to in the WaPo article, but here's the essay by China's central banker, Zhou Xiaochuan, entitled Reform the International Monetary System.
posted by ornate insect at 6:50 PM on March 23, 2009


Can't we just switch to Federation Credits and get it over with?

I vote for gold-pressed latinum. As recent events have shown, the world's financial elite are basically all Ferengi anyway.

This is the nerdiest post I have ever written. I do not apologize for this.
posted by DecemberBoy at 6:52 PM on March 23, 2009 [13 favorites]


At one level, the latest rounds of quantitative easing by the Fed (aka, firing up the printing presses) does sort of seem like a "beggar thy neighbor" devaluation of the dollar that leaves the central bank of China holding the bag as a creditor. More importantly, it would seem to decrease the future potential for Chinese industry to prosper by exporting to the US. They are not amused. I'm keeping an eye on the exchange rate trends between the RMB and the dollar, seems like it might tell you a lot about what to expect in the next decade.
posted by dacoit at 6:53 PM on March 23, 2009


Seriously though, to be honest, I like the idea. Bring on the international money. We could call them "geos". Or would, if that didn't bring to mind an obsolete little compact that was prone to break down a lot.
posted by Marisa Stole the Precious Thing at 6:59 PM on March 23, 2009


Really poor discussion so far, tinged with xenophobia. I'm not defending China's human rights record, by why does it have bearing on reserve currencies? Similar to saying the US dollar is a poor reserve currency because of Guantanamo Bay.
There is no reason to assume the USD should be a default reserve currency since Bretton Woods ended. It is convenient to use for trade like oil where the US is the largest consumer, but I suspect Venezuela would be happy to sell its oil to the Chinese in Euro or Francs.
Just about the only beneficiary of the USD as global reserve is the USA, if you can accept that euro or a basket of currencies can offer similar stability (noting the recent high volatility of USD).
The downside of this proposal would be that US governments would face higher interest rates to sell bonds to finance deficits, but bear in mind that is an upside for the rest of the world buying those bonds.
posted by bystander at 6:59 PM on March 23, 2009 [5 favorites]


None of it makes any difference, except to the egos of the powermongers.
posted by Xoebe at 7:08 PM on March 23, 2009


Didn't Hillary Clinton go over there, out of the box, as Sec. of State? Uh....What the hell did she say to them? *tongue in cheek*

Been contemplating war with China for years. Man, that'd suck.
..y'know, too.
I don't think we'd lose in the sense we've lost any other recent war (yeah, remember when the Vietnamese took over the White House?) but I think we'd lose in the sense that we've lost other recent wars.
I know it sounds premature to beat the wardrum, but we're going to have to change the direction of a lot of policies. We've been doing a lot of pushing in the place of leading for a while, not surprising there's some pushback. But I don't know that we'll make the policy changes we need to make. Whether from resistance or disinformation...I think I give the Obama administration a lot of credit on making the right policy changes....hope I'm right on that. Pretty sure I am, sharp group of people, but it's not a certainty. And there's an awful lot of inertia there.
Reminds me of Three Days of the Condor. People won't want to know about it, they'll just want the people in charge to get it for them. Me, I hate big cars. But I am keen on human rights. Dicey stuff.
posted by Smedleyman at 7:14 PM on March 23, 2009


Can we make it Chuck E. Cheese tokens? I have a LOT of those!
posted by briank at 7:15 PM on March 23, 2009 [4 favorites]


We already have a world currency. It's also the oldest.
posted by CynicalKnight at 7:34 PM on March 23, 2009 [1 favorite]


We already have a world currency. It's also the oldest.

Except that now the punchline will be "Ten yuan, same as in town."
posted by gimonca at 7:42 PM on March 23, 2009 [3 favorites]


Pogs, people. Pogs.
posted by Marisa Stole the Precious Thing at 7:45 PM on March 23, 2009 [8 favorites]


It's not just China: Reuters reports a UN panel is also talking about alternative reserve options to the US dollar, and notes that Russia appears to be really driving for a new reserve currency. Interesting times.
posted by zenon at 8:16 PM on March 23, 2009


Yuan... a dollar?

I give you a dollar.
posted by Civil_Disobedient at 8:21 PM on March 23, 2009 [2 favorites]


Mr. Bush, welcome to your legacy!
posted by orthogonality at 8:45 PM on March 23, 2009


Mr. Bush, welcome to your legacy!
posted by orthogonality at 11:45 PM on March 23


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.
posted by Pastabagel at 8:57 PM on March 23, 2009


Pastabagel: 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.

Industrial wages have been on a race to the bottom ever since globalization became a reality. If you want a decent wage in the first world country, there are pretty much only two options - do something that requires training or education a third worlder can't easily get, or do something that can't be relocated to a third world country or done by an illegal immigrant. Factory work is neither of these. With trades, some of them can be outsourced and some go to illegal immigrants (for example, construction.) But some are still doing ok.
posted by Mitrovarr at 9:12 PM on March 23, 2009


500 quatloos that this plan never gets off the ground.
posted by stargell at 9:15 PM on March 23, 2009 [1 favorite]


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.

Does that Include people who design industrial robots?
posted by delmoi at 9:19 PM on March 23, 2009


A tourist went into a noodle shop next to the forbidden city. He points to a picture of beef noodle soup, and waits in the corner. The noodles come out, and he begins to awkwardly use chopsticks to shovel them into his mouth. Unfortunately, his skill is still lacking, and the chopsticks slip out of his hand. In trying to grab them, he knocks the bowl to the floor, which shatters.

Already embarrassed, he immediately hears the waitress and cook in the back begin to shout at one another. He can't make out much, but sees the waitress turn back to him and say, "哎呀,碗打了!"

... Wan dalle? One dollar? Oh gosh, he thinks, they want me to reimburse them, and takes out his wallet. The bickering between the employees continues.

"谁打了?!?," screams the cook from the back. Trying to understand, he repeats what he heard in his head "Shee dalle." Must be three dollars! Embarrassed by the scene he's caused he immediately reaches into his wallet for more.

Before he can hand anything to the waitress, she points and him and screams "他打了!" Ta dalle. Ten dollars? That's extortion! Seeing the bickering continue between the cook and waitress however, he quickly drops a $10 bill on the table and runs out.
posted by FuManchu at 9:21 PM on March 23, 2009 [3 favorites]


I like the cut of XKCD's jib.
posted by CitrusFreak12 at 9:39 PM on March 23, 2009


China has a GDP of 3 trillion, Japan is 4 trillion, the US is 13 trillion and the Euro is 17 trillion.

Provided, of course, that one believes for a moment that there is any truth whatsoever to these evaluations. I believe they are every bit as imaginary as AIG's profits this past decade: lies built on mathematical sleight-of-hand.
posted by five fresh fish at 10:06 PM on March 23, 2009 [1 favorite]


500 quatloos that this plan never gets off the ground.

I see your 500 quatloos and raise you 1000 blorkbars, foolish hooman.
posted by Blazecock Pileon at 10:24 PM on March 23, 2009


In every China post there's always talk about how we need to have local industry.

Hell no, we don't need a manufacturing base here. I friggin' hate it when people say "we need to build shoes here." Poor countries with stable governments will always be able to undercut us with mass production. A lot more value can be created towards decision-making towards resource allocation, white collar jobs. Seeing as consumer-level CNCs may become economically-feasable within our lifetime, it's ridiculous to put effort towards a manual-labor industrial base.

Much more good can come out of fixing our economic rules, so that our white-collar resource-allocating jobs can better figure out the optimal use of our natural and human resources. Do you think China would be perfectly happy building plastic toys 20 years from now?

Back on topic, I suspect China is just making noises so that they have some leverage during the G20 meeting, to increase their odds that they have a greater say in decisions. It would be suicidal to switch now, during financial distress and they haven't been able to switch out of enough treasuries yet. This Financial Times graphic gives a good picture of what each country wants from the meeting.
posted by amuseDetachment at 10:45 PM on March 23, 2009 [2 favorites]


I friggin' hate it when people say "we need to build shoes here." Poor countries with stable governments will always be able to undercut us with mass production.

Maybe it's better for society when everyone has a chance for meaningful employment. We can't all be engineers and managers and elite.

If you don't provide employment for the kind of people who work in shoe-manufacturing jobs, ie. relatively unskilled labour, you have to provide welfare. That, or let them die of starvation and exposure.
posted by five fresh fish at 11:04 PM on March 23, 2009 [2 favorites]


five fresh fish: If you don't provide employment for the kind of people who work in shoe-manufacturing jobs, ie. relatively unskilled labour, you have to provide welfare.

Well, providing them with artificial employment that is totally unsupported by market conditions is essentially welfare anyway. You'd have to support it with massive subsidies and/or trade restrictions, and in the end that would be so inefficient it might actually cost more than just giving them money.

Personally, I think the best way to deal with this is to do our best to drive home the point that everyone in our society who can be educated needs to be. In the US we make a ton of money relative to the rest of the world, and that's only going to continue to happen if we have a lot of high-value professions - medical experts, scientists, inventors, engineers, and the like. The service industry, which can't really be outsourced, can employ some of the people who don't want to go to college or aren't suitable. The rest, well, they probably will have to be on welfare. You just cannot compete with overseas labor - you couldn't eat ramens and live in an abandoned building for what they pay some of those workers.

Eventually mechanization is going to eliminate manual factory work anyway.
posted by Mitrovarr at 11:35 PM on March 23, 2009


Well, providing them with artificial employment that is totally unsupported by market conditions is essentially welfare anyway. …in the end that would be so inefficient it might actually cost more than just giving them money.

I am telling you that there is an important psychological component to this, and that blithely destroying people's sense of self-worth by denying them the opportunity to become productive members of society may be much more costly than "just giving them money."
posted by five fresh fish at 12:07 AM on March 24, 2009 [2 favorites]


five fresh fish: I am telling you that there is an important psychological component to this, and that blithely destroying people's sense of self-worth by denying them the opportunity to become productive members of society may be much more costly than "just giving them money."

If you work in an uneconomical make-work job, you aren't a productive member of society. You're just a welfare case who has to spend the day filling out the world's most unpleasant unemployment form. To be honest, I'd rather society dispensed with that and let these people spend their time hopefully teaching themselves better skills and sending out resumes, or at least enjoying wasting their time.
posted by Mitrovarr at 12:27 AM on March 24, 2009 [1 favorite]


ZaneJ, I believe Iran is already pushing to abandon the dollar in favor of a basket of currencies. Last I heard, Venezuela was showing interest as well. Unfortunately I don't have a link for you.
posted by MaxK at 1:57 AM on March 24, 2009


Well, providing them with artificial employment that is totally unsupported by market conditions is essentially welfare anyway... in the end that would be so inefficient it might actually cost more than just giving them money.

I am telling you that there is an important psychological component to this, and that blithely destroying people's sense of self-worth by denying them the opportunity to become productive members of society may be much more costly than "just giving them money."

I love the idea of a Citizens Basic Income.

Give every citizen: employed, unemployed or retired, a fixed sum per week from the government (say $150 or so). Then have a single, flat-rate income tax with no thresholds.
  1. The lump sum means it works out as a progressive tax system as we have at the moment
  2. No benefit traps: everyone has an incentive to work, even part-time for a few hours per week
  3. No tax thresholds: has the economic efficiency of a flat tax
  4. No stigma to receiving the income, since even the richest people get it

posted by TheophileEscargot at 2:45 AM on March 24, 2009 [1 favorite]


TheophileEscargot: I love the idea of a Citizens Basic Income.

No opinion on the idea, but could we at least call it the Basic Living Stipend and humor a bunch of people?

People's Republic of Haven on line 2...
posted by fireoyster at 3:15 AM on March 24, 2009


Woolongs!
posted by metaplectic at 4:18 AM on March 24, 2009


A global economy should be governed by a single, global currency.
posted by Thorzdad at 4:30 AM on March 24, 2009


A global economy should be governed by a single, global currency.

And a single, global ruler to tell us all what to do and allocate our energies and resources efficiently. Then we can all subsist on our Basic Living Stipend, as long as we don't get out of line and object to the wise dispositions of the Great Helmsman, in which case we will be efficiently disposed of. The shining future looms, comrade!
posted by languagehat at 5:28 AM on March 24, 2009


Well, OK - as long as my disposal is painless, as well as efficient.
posted by Kirth Gerson at 5:34 AM on March 24, 2009


TheophileEscargot, I also like the basic income idea, but I don't think it should be financed with a flat-percentage income tax, since that shifts the tax burden way, way down the income scale from where it is now. In other words, middle-income earners would end up subsidizing the rich compared to the progressive income tax arrangement that's in place at present. I'd favour tweaking the progressive income tax scales to fund the basic income, so that the largest possible number of people end up paying the same net amount of tax as they do right now.

Seems to me the main benefit of replacing means-tested welfare payments and mandated minimum wage rates with a universal minimum income is that doing so gets rid of the stupidly high effective marginal tax rate incurred by welfare recipients at present. I know of several people who have chosen not to take up part-time jobs because doing so would leave them even poorer than they are on welfare payments, once travel and childcare costs are properly taken into account.

Also seems to me that a universal minimum income would go some way towards helping us all kick our present addiction to economic growth. If the availability of anything close to full employment depends on ongoing positive economic growth, it seems to me that the entire economy is effectively operating as a gigantic Ponzi scheme and should therefore be illegal.
posted by flabdablet's sock puppet at 5:40 AM on March 24, 2009


A ‘paper-gold’ reserve system?
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.
also see
Global imbalances and the Triffin dilemma
TerraTRC1 née Bancor3 née buffer stocks2
posted by kliuless at 5:43 AM on March 24, 2009


Also: e-gold.
posted by flabdablet's sock puppet at 5:50 AM on March 24, 2009


...and e-dinar :P

btw, basic or guaranteed income has been championed by libertarians, cf. transfers!
posted by kliuless at 7:07 AM on March 24, 2009


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.
Maybe I'm missing some subtle point here, but FYI I worked for about 15 years in various factories in the US -- owned by Agilent/HP, a medical device manufacturer, and a few other smaller gigs. I recall working up to 12 hours a day 6 days a week in subpar conditions for minimum wage while doing so. It was rather unpleasant, although I was very very grateful for having a job at the time (alternative was living on the streets).

I now work in a DREADED cubicle doing something I love (programming in Python) and get paid a six figure salary including benefits and more perks than I can count. There is no trade or factory job that offers even half of what I get now unless you own the business. It's not even a contest. Working in manufacturing is shit work and you get a shit life doing it. I don't believe it should be that way, but romanticising blue collar labor is not going to fool anyone that does it, except perhaps someone deluding themselves that people who make more money while working less don't really have it better. Protip: They really do.
posted by cj_ at 7:19 AM on March 24, 2009


I've worked shit jobs, too, and the one thing I know is that even though the jobs sucked, I felt better about myself than I did when I was sucking the government teat.

For a counterexample, see the Chawners.
posted by five fresh fish at 7:41 AM on March 24, 2009


Hell no, we don't need a manufacturing base here.

I predict that in the not too distant future there will be only two types of employed Americans: food service workers and personal injury attorneys. Labor arbitrage will kill virtually every other occupation in the U.S..
posted by MikeMc at 8:12 AM on March 24, 2009


The shining future looms, comrade!

That was so witty I just peed myself a little bit.
posted by jester69 at 11:47 AM on March 24, 2009


Give every citizen: employed, unemployed or retired, a fixed sum per week from the government (say $150 or so).

Then watch as subsistence food costs and rent rise by... $150 a week.
posted by marble at 6:12 PM on March 24, 2009


fwiw, abu dhabi wants a manufacturing base
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...
maybe we could learn something here, even as we borrow from them...
posted by kliuless at 10:52 AM on March 25, 2009


I'm sure Abu Dhabi wants a manufacturing base. I also want a big fighter jet. Neither are happening. They've got capital and absolutely nothing else. Not even water. The chances of any of those companies doing anything of any long-term value in those countries is nil.

As for the SPR thing - totally bogus.

Russia is just sabre rattling as Putin tries to keep the house of cards from collapsing (have you seen what has happened to their foreign reserves in the last six months?)

And China invests in dollar denominated assets to keep their currency from appreciating against the dollar. They do this to make sure they can continue to export to the US. If you switch to an SPR regime they'd lose a lot of this ability - which in turn makes them less competitive - et voila employment issues in Shanghai.

Not to mention the logistics of setting it up would literally take years.

The Chinese are just pissed that their screwing of American manufacturers for the last 20 years has come back to kick them in ass as the Fed debases the dollar.
posted by JPD at 2:56 PM on March 25, 2009


actually i agree that it's going to be tough for abu dhabi to build a manufacturing base (ask singapore!) but i don't think they would disagree either... and, i think, understanding the difficulty makes their desire all the more commendable -- 'not because it is easy' and all :P

i also agree that SDR expansion is unlikely to occur anytime soon -- obama just said: "I don't believe that there's a need for a global currency." :P

afterall: "In reality, currencies live and breathe more than just short-term economic air. The two other life forces for a reserve currency are sovereign credibility and power. China, Russia and India simply do not have long enough economic track records to justify backing a reserve currency."

but, from the same article, there is a certain (inexorable!) logic to it all:
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.
iow, the US cannot rest on its laurels and be complacent, for example: "In 2002, for example, data from the Bank for International Settlements show that the U.S. dollar represented 70% of the world's reserve assets, while the euro represented 20% of reserve assets. Since that time, there has been a 7-point shift, to 63% for the dollar and 27% for the euro."

again, i'll repeat: "[SDRs] could help restore faith in the dollar itself... They would avoid depressing the dollar excessively, minimising the loss on their remaining dollar holdings as well as avoiding systemic disruption..." if it comes to that, which of course you don't and neither (yet) do i, but (again!) i wouldn't completely dismiss it either :P
posted by kliuless at 5:01 PM on March 25, 2009


You could argue about both issues for hours and hours and hours.

IMO - Abu Dhabi (and other petrostates) just throw lots of money at prestige assets and are unwilling or unable to but in the hard toil to make their societies fertile grounds for industrial development. Add on top of that a total dearth of natural endowments and the odds look long, much longer then Singapore for example.

The SDR thing is a non-starter for exactly the same reasons its also a good idea. It makes it impossible for current account surplus countries (like China) to keep their own currencies from appreciating against the buyers of their goods. Thats why the Chinese ended up with so much of their reserves in USD.

Also - can you imagine the discussions surrounding setting the exchage rates of currencies into SDRs?

I also don't particularly think the USD losing some of its dominance as a reserve currency is necessarily a bad idea.

But as with all things - lets wait and see where things end up at the end of the downturn. Right now the US is about a year ahead of the rest of the world in going into this thing. It seems as though we are bottoming now - not sure that's the case for everyone else.
posted by JPD at 5:13 AM on March 26, 2009


Krugman: China’s Dollar Trap

Krugman is Wrong, the Chinese are not Fools
posted by homunculus at 1:00 AM on April 5, 2009


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