Saturday, June 27, 2009
What China's Push for An Alternative World Reserve Currency Means
Yesterday, after China called for a super-sovereign currency, the dollar slid as investors started seeing the writing on the wall. Specifically, the People’s Bank of China said the International Monetary Fund should manage part of members’ foreign-exchange reserves. See this.
“To prevent the deficiencies in the main reserve currency, there’s a need to create a new currency that’s delinked from the economies of the issuers,” the People’s Bank of China (PBOC) said in a review of the economy in 2008 released today. In March, the PBOC had urged the IMF to expand operations of its Special Drawing Rights currency (SDRs) and move toward a “super-sovereign reserve currency.”
The PBOC argues that the frequency and intensity of financial crises following the collapse of the Bretton Woods system suggests costs of the dollar-based system may have exceeded its benefits and that that the SDR could take on a key global role.
The PBOC statement comes a day after a top Communist Party research chief said that China should buy gold and U.S. real estate rather than Treasurys.
American officials and talking heads have attempted to downplay the irreversible trend of the dollar fading as the world's reserve currency. They have argued that China is in a dollar trap. With trillions in dollars, they argue, China cannot let the dollar tank.
But as Marc Faber has pointed out, 2 trillion dollars in reserves isn't really that much for a country with as many people as China has. And China long ago signaled that it was gradually moving out of dollars. The signals came in the form of (1) China moving out of long treasuries and into treasuries with a duration of 3 years or less, and (2) China using its reserves to buy commodities, instead of more dollars.Nouriel Roubini argues:
The process that will lead - in the medium-long term - to a challenge of the US dollar as the major global reserve currency has started. The US creditors - the BRICs, the Gulf states and others - are becoming increasingly alarmed that the US will deal with its unsustainable fiscal path via inflation and debasement of the value of the dollar via depreciation. So they will not sit idly waiting for this to happen: they are already diversifying into gold, into resources (as China purchases mines and energy, mineral and commodity resources all over the world).
And the senior economist at the Federal Reserve Bank of Cleveland argued last month:
While SDRs may be declared an official international reserve asset today, they are not likely to become the world’s key international currency anytime soon.
In other words, as explained by Nouriel Roubini, the Fed economist believes that the SDR may be declared the world reserve currency, but the current usefulness of the dollar as a highly liquid, international medium of exchange means that it won't be replaced in the near future as the key unit of international trade.
Would the SDR be a Better Reserve Currency than the Dollar?
Given the IMF's history of imposing draconian, destructive and anti-democratic measures on third world countries, I'm not sure that appointing the IMF as the issuer of the world reserve currency is a great idea.
But to understand the big picture on SDRs, dollars and other potential reserve currencies and mediums of exchange, we have to take a step back and look at what money really is.
It should be remembered that money does not itself have to be a valuable commodity. Obviously, gold is a valuable commodity and can serve as money. And, in many ways, having a gold-backed currency is better than having a fiat currency.
But in its most essential form, currency is solely a way to keep track of the exchange of goods and services. In other words, money is simply a way of keeping tally, a scoreboard, a record keeping system.
As such, money could be pegged to just about anything objective, such as the consumer price index (as long as it included food and energy) or - as China has proposed - a basket of 30 or so commodities.
In fact, there is no need for the U.S. or any other country to cede its sovereignty to a group of international bankers. On the other hand, there is no need for the rest of the world to be beholden to the dictatorial one-sidedness inherent in using the dollar as the world's reserve currency.
Instead, money can be returned to its most minimalist function of being a neutral yardstick to measure goods and services exchanged. In other words, instead of being an instrument of financial warfare and oppression, money can return to its function simply as an objective tally of who owes who what for the good and services they have provided.
As Ellen Brown explains in her book Web of Debt (as summarized by Stephen Lendman):
A global currency is another proposal - one that creates more problems than it solves. The world "is not one nation or one region," and who's to be boss and in charge. Further, if all governments issued the same currency, "the global money supply (would be) vulnerable to irresponsible governments (issuing) too much." Strong ones would end up dominating the weak, and national sovereignty would be weakened, perhaps ended. A "fully dollarized" world is a prescription for trouble enough to make scarcity "the order of the day."
Rather than one currency, "a single global yardstick" is needed "against which governments can value their currencies - some independent measure (by) which merchants can negotiate their contracts and be sure of getting what they bargained for"...
National currencies "would become what (they) should have been all along - (contracts) or promise(s) to return value in goods and services of a certain worth, as measured against a universally recognized yardstick for determining value."
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You said, "But in its most essential form, currency is solely a way to keep track of the exchange of goods and services. In other words, money is simply a way of keeping tally, a scoreboard, a record keeping system."
ReplyDeleteThat is what the dollar is today. Unfortunately, such a currency must be trusted, which means the people in charge must be trustworthy, since it (the currency) is intrinsically valueless.
Anything other than gold or silver will put us back to where we are today--regardless of anyones' best intention.
If economists did understand the economy, we would not have these problems. Currencies should not be hoarded, because in this way imbalances can be sustained for long periods. If there was a hoarding fee on money, currencies will not be hoarded, which balances trade between countries.
ReplyDeleteIf is possible to end the depression in a few months, to have constant economic growth at maximum potential without crisis forever without unemployment or government intervention. You can read more about it here:
http://www.naturalmoney.org/introduction.html
Adding to the above comment--this function of money is known as the "unit of account" function. And it's okay for a currency (not to be confused with money) to have solely this function.
ReplyDeleteBut there are other properties which money--not currency--must have. It also be a store of value, and a means of payment. So the currency is used in its "minimalist function" as you call it of determining who owes what. Then the question becomes one of settling the debt. For this you need a means of payment, not just a unit of account. A currency with no objective value is not a means of payment.
Once paid, the form of payment must retain its value into the future to be used in future transactions. This is the store of value function, and is not inherent to fiat currencies. Money--real money, gold and silver--combines all three qualities.
Folks, what's so special about gold and silver? Anything that is considered valuable and doesn't spoil easily can be used for the same purpose. Oil, copper, platinum, etc. It doesn't even have to be rare - if it is more abundant than gold, it simply means that more of it has to be used in a monetary unit.
ReplyDeleteFor something to be a viable replacement of fiat money, all it needs to be is durable, easily divisible, reasonably valuable and impossible to create in large quantities with minimum effort. There are scores of things that match these requirements - not just gold and silver.
"...money is simply a way of keeping tally, a scoreboard, a record keeping system."
ReplyDeleteThis is dead wrong, currencies are used as a means to control and obtain resouces, including labor. And when a currency is created out of debt, it is also used to service and pay down that debt. The fact that curencies can be tallied like a math equation (becuase all fiat currencies really are are numbers) doesn't make currencies "solely a way to keep TRACK of the exchange of goods and services." Rather, currencies are a way to CONTROL the exchange of goods and services.
I am sure your grandma during the great depression was thinking "gee, the bank just collapsed and my resource tally just disappeared...I better save my dollars in my matress so that I can get my rebuild my tally."
More like, "those Fing banks, they just lost my ability to buy steak for Friday night's dinner...guess the kids will have to eat pet food..."
"Folks, what's so special about gold and silver? Anything that is considered valuable and doesn't spoil easily can be used for the same purpose. Oil, copper, platinum, etc. It doesn't even have to be rare"
ReplyDeleteGold and Silver evolved as money because its easily portable. You cant store 5,000 drums of oil in your front yard, but you can easily put a block of gold or platinum or silver under your arm and carry it with you. Try carrying oil with you? Try dividing oil into portable units of acct.? You dont understand basic monetary evolution because you went to a Govt. controlled school that taught you garbage. Paper evolved as money because it was a warehouse receipt for metal held at the Treasury. Similar to todays Futures contracts which are about to go bust. Please man. Wake up.
BINGO!!!
ReplyDeleteThe "portability" argument is bogus. How much gold do you have to "carry", in order to buy a newspaper? 5-6 grams? That's just as difficult to find in your wallet, as a drum of oil, although for the opposite reasons...
ReplyDeleteDo you think it was by chance that countries have used copper coins for millenia? Besides, platinum is just as easily portable (even more, in fact) than gold - why aren't you pushing for using it as money?
The truth is, you gold bugs are simply fanatics. You can't see further than your own noses - just like the proponents of fiat money. Yes, your basic premise is correct - it should not be possible to create money out of thin air and the money should preserve its value over time - but insisting that only gold and silver fit these requirements is plain stupid.
The leverage, complexity and interconnectedness of the system ensure there will be global chaos and revolution for quite some time. I don't believe we should do anything to try and fix the situation. We undoubtable got into this situation by trying to make things work and look at the result? By us all doing what we think we should, we now have one big mess.
ReplyDeleteKindly review the Global Resource Bank currency
ReplyDeleteat www.grb.net