The yuan is displacing the dollar as a key currency

[WS-10 Engine]

The US dollar rose to dominance because of its industrial might, global trade (exports and imports), size of economy and largest holdings of gold.

During Bretton Woods, the dollar was accepted as main reserve currency and it was backed by gold.
But gold was being drained from the US as the US needed alot of money to pay for the Cold War activities (war, space race, etc) and also other countries (Europe, Japan) started to get stronger economically and export goods to the US in return for gold.

These events led to the US gold reserves to significantly decrease and would have been a default if foreigners wanted gold and US didn't have any gold in its vaults.
Nixon then in 1971 took America off the gold standard.

Once the dollar was off the gold standard, US inflation started to rise due to money printing to run big deficits and dollars were not as much absorbed by the US and the world.
To increase the global demand for dollars, the US did a deal with the Saudis to peg the oil to dollars as oil is needed by everyone and thus to buy a barrel of oil, you need dollars thus creating MASSIVE demand for dollars.

This abled the US to run big deficits to bankrupt the soviets by overspending as dollar had massive global demand but soviet ruble had little demand globally. So soviets had to live within their means but America could live beyond its means. Soviets eventually fell even its debt reached melting point and printed the ruble into oblivion.

This made the US just print dollars to pay for global goods as everything was priced in dollars. The US could run big current account deficits without the dollar falling apart. Those dollars foreigners held (like Saudi Arabia) were invested in US government bonds to support the US budget deficits.

The trade of commodities in dollars is the main source of its power.

You start to price commodities in different currencies, then countries have less demand for dollars and all those printed dollars won't be absorbed by the world to keep US domestic inflation low, instead those dollars will stay in the US to create massive inflation in the US.

This is why when the US does QE programs, the world gets all the inflation and the US has minimal domestic inflation. The world is absorbing those dollars due to global trade (energy, raw materials, agriculture, merchandise and services) being invoiced and traded in dollars.

 

[Chinese-Dragon]

This is why when the US does QE programs, the world feels the inflation and the US has minimal domestic inflation. The world is absorbing those dollars due to global trade (energy, raw materials, agriculture, merchandise and services) being invoiced and traded in dollars.

QE1, QE2 and QE3 were also a massive "stealth tax" on anyone who holds US dollars or US bonds.

Which includes us. America prints loads of money, devaluing their currency, and reducing the value of the US bonds that we hold.

 

[WS-10 Engine]

QE1, QE2 and QE3 were also a massive "stealth tax" on anyone who holds US dollars or US bonds.

Which includes us. America prints loads of money, devaluing their currency, and reducing the value of the US bonds that we hold.

Yes imo the QE3 is to devalue its debts.
They need debt relief.
If interest rates rise to normal levels like 5%, that will take a significant portion of their fiscal revenues.

Then they won't have much room to spend on military and welfare, most of the spending will have to go to interest payments.
And if they borrow more money to pay for interest, the budget deficits gets even bigger and financing those deficits at 5+% coupon rates on the bonds will be extremely hard.
It's like a debt spiral.

The US is in big big trouble economically and financially, they are doing their best to hide the truth.
That's why it has become very protectionist lately, they know they have to rebuild their economy quickly to make up for the current account deficits and budget deficits.
Or else they will be living a much lower standard of living.

End game is near for the US.

The more they print dollars, the less confidence people around the world will be to hold dollars indefinitely as they see their wealth evaporate.
They look for alternatives like other currencies or gold.

When the dollar loses its reserve currency status, the US will be a much much weaker country than it is right now. It won't have the luxury of living beyond their means while the rest of the world props it up.

 

[kalu_miah]

Good discussion.

World-systems theory - Wikipedia, the free encyclopedia

Core nations

- The most economically diversified, wealthy, and powerful (economically and militarily)[2][5]
- Have strong central governments, controlling extensive bureaucracies and powerful militaries[2][5]
- Have more complex and stronger state institutions that help manage economic affairs internally and externally
- Have a sufficient tax base so these state institutions can provide infrastructure for a strong economy
- Highly industrialized; produce manufactured goods rather than raw materials for export[2]
- Increasingly tend to specialize in information, finance and service industries
- More often in the forefront of new technologies and new industries. Examples today include high-technology electronic and biotechnology industries. Another example would be assembly-line auto production in the early 20th century.
- Has strong bourgeois and working classes[2]
- Have significant means of influence over noncore nations[2]
- Relatively independent of outside control

Throughout the history of the modern world-system there has been a group of core nations competing with one another for access to the world's resources, economic dominance, and hegemony over periphery nations. Occasionally, there has been one core nation with clear dominance over others.[3] According to Immanuel Wallerstein, a core nation is dominant over all the others when it has a lead in three forms of economic dominance over a period of time:

1. Productivity dominance allows a country to produce products of greater quality at a cheaper price compared to other countries.
2. Productivity dominance may lead to trade dominance. Now, there is a favorable balance of trade for the dominant nation since more countries are buying the products of the dominant country than it is buying from them.
3. Trade dominance may lead to financial dominance. Now, more money is coming into the country than going out. Bankers of the dominant nation tend to receive more control of the world's financial resources.[19]

Military dominance is also likely after a nation reaches these three rankings. However, it has been posited that throughout the modern world-system, no nation[citation needed] has been able to use its military to gain economic dominance. Each of the past dominant nations became dominant with fairly small levels of military spending, and began to lose economic dominance with military expansion later on.[20]

Historically, cores were found in the north-west Europe (England, France, Holland), although later in other parts of the world (ex. the United States).[3][5]

Periphery nations

- Least economically diversified
- Have relatively weak governments[2][5]
- Have relatively weak institutions with little tax base to support infrastructure development
- Tend to depend on one type of economic activity, often on extracting and exporting raw materials to core nations[2][5]
- Tend to be least industrialized[5]
- Are often targets for investments from multinational (or transnational) corporations from core nations that come into the country to exploit cheap unskilled labor for export back to core nations
- Has small bourgeois and large peasant classes[2]
- Tend to have a high percentage of their people that are poor and uneducated.
- Inequality tends to be very high because of a small upper class that owns most of the land and has profitable ties to multinational corporations
- Tend to be extensively influenced by core nations and their multinational corporations. Many times they are forced to follow economic policies that favor core nations and harm the long-term economic prospects of periphery nations.[2]
- Historically, peripheries were found outside Europe, for example in Latin America and today in Sub-Saharan Africa.[5]

Semiperiphery nations

Semiperiphery nations are those that are midway between the core and periphery.[5] They tend to be countries moving towards industrialization and a more diversified economy. Those regions often have relatively developed and diversified economy, but are not dominant in international trade.[5] According to some scholars, such as Chirot, they are not as subject to outside manipulation as peripheral societies; but according to others (Barfield) they have "periperial-like" relations to the core.[2][21] While in the sphere of influence of some cores semiperipheries also tend to exert their own control over some peripheries.[5] Further, semi-peripheries act as buffers between cores and peripheries,[5] thus "partially deflect the political pressures which groups primarily located in peripheral areas might otherwise direct against core-states" and stabilize the world-system.[2][3]
Semi-peripheries can come into existence both from developing peripheries, and from declining cores.[5]
Historically, an example of a semi-periphery would be Spain and Portugal, who fell from their early core position, but still manage to retain influence in Latin America.[5] Those countries imported silver and gold from its American colonies, but then had to use it to pay for manufactured goods from core countries such as England and France.[5] In the 20th, nations like the "settler colonies" of Australia, Canada and New Zealand had a semi-peripheral status. In the 21st century, nations like China, India, Brazil and South Africa are usually considered semi-periphery.

China in particular and East Asia in general is on its way to become the second core region.

So US dollar will not loose relevance, Euro may become as powerful as dollar and Yuan will come up and become the third reserve currency, which will continue to become more and more dominant with growth of Chinese economy and influence in the world. But it will be a gradual process, unless there is some world war.

More on currency:
History of money - Wikipedia, the free encyclopedia
Fiat money - Wikipedia, the free encyclopedia
Reserve currency - Wikipedia, the free encyclopedia
Triffin dilemma - Wikipedia, the free encyclopedia
Special drawing rights - Wikipedia, the free encyclopedia
World currency - Wikipedia, the free encyclopedia

Currency and commodity have been intimately tied for most of history, except for rare war time breaks. In 1971, US dollar became decoupled from the gold standard and the world since then has moved from commodity backed currency model to fiat money. This move is irreversible, my prediction is that currency will never become commodity backed again. This fiat money is now a piece of paper the value of which depends on the sum total of:

- products and services
- commodities
produced by a nation

In other words, the paper fiat currency is directly related to GDP. The reason money cannot go back to commodity base again is because all commodities are finite and increasing a nation's gdp nowadays depends more on the intellectual products based on productive labor, creativity and innovation and is not just based on how much indigenous commodity that nation has. South Korea, Japan, Western Europe are examples of nations with high intellectual value addition, but limited commodity, whereas resource rich Middle-East, Central Asia, Africa, Latin America are examples of commodity rich regions, but limited or low value addition. USA, Canada, ANZ and to an extent Russia have both high value addition and high commodity products.

World's currency and reserve scene will continue to be dominated by currencies backed by powerful nations. So according to my prediction there will not be a unified world currency, instead it will be a combination of three currencies: USD, Euro and Yuan. Currencies are essentially a small piece of a unified economy under a single unified govt. Introducing Euro was premature because of this reason and its continuing weakness is also because of this. Unless there is a unified United States of Europe, Euro will not become as powerful as USD or Yuan.

Since there will be 3 instead of 1 world reserve currency, none of them will be able to print at will like todays QE 1, 2 and 3 and impose a inflation tax on the rest of the world. Printing at will instead will result in instant devaluation of that currency, as there will be 2 other alternatives, which is not present now, under the current single reserve currency model. This will enable people to dump any currency which is being printed at will by any nation and move to the other 2. Some countries of course will do it deliberately to devalue their currency and thus make them more export competitive, if they have too much unemployment due to economic down turn or recession.

US and EU, or West in general have a very interconnected economy, so USD and Euro can be considered as two related currencies of a very highly integrated single economy of the West. So before the rise of Yuan, the USD and Euro will continue to impose inflation tax on the rest of the world when they go for QE or printing money. This I believe will gradually come to a halt about 15-20 years from now, when Yuan will become dominant enough and very common as a world reserve currency.

As soon as US and EU can no longer impose an inflation tax on the world, that will result in devaluation of USD and Euro and loss of western living standards (end of the free ride based on inflation tax), which will usher in the era of multi-polar world, or more correctly the era of twin core regions - West and East Asia. This also means the 500 year run of Western dominance is coming to an end in about 15-20 years, although the lingering effect will remain for decades more as China and other East Asian nations (Korea and Japan) struggle to surpass the West in technological and military dominance. We or our many past generations have never lived in such a world, so there might be unpredictable situations which is hard to imagine at this point.

 

[R0H1T]

You missed two part of the story, which essentially makes you argument correct yet less reasoning in the debated case of China.

It's not the largest economy that naturally stand the US dollar as the dominant currency in the world, the missed part is as the largest economy the US provide commodities(processed) to the world thus other countries need to buy them in US dollars. This applies to your second part which says it's the industrial might that make that possible.

China as of today is the largest manufacturer with greatest industrial output as well as the largest exporter. This is exactly the reason the Redback is coming to the center stage.

There are certainly other factors but these fundamentals are the essential part.

Isn't that a corollary in itself ? Since you have the biggest(in absolute terms) economy, more trade will be done in your currency ! CN hasn't fulfilled that criteria yet, there was this other point that one of the posters mentioned regarding $ denominated debt which is the second part of becoming a reserve currency. The reason it was so at the end of WW2 was because the US financed most of the allied world's costs hence it fulfilled that condition then itself. In the years since WW2 we have had bond/debt markets which benefit the US since it has a AAA rating & the main reason why the world buys that debt !

 

[Azazel]

Good discussion.

World-systems theory - Wikipedia, the free encyclopedia



China in particular and East Asia in general is on its way to become the second core region.

So US dollar will not loose relevance, Euro may become as powerful as dollar and Yuan will come up and become the third reserve currency, which will continue to become more and more dominant with growth of Chinese economy and influence in the world. But it will be a gradual process, unless there is some world war.

More on currency:
History of money - Wikipedia, the free encyclopedia
Fiat money - Wikipedia, the free encyclopedia
Reserve currency - Wikipedia, the free encyclopedia
Triffin dilemma - Wikipedia, the free encyclopedia
Special drawing rights - Wikipedia, the free encyclopedia
World currency - Wikipedia, the free encyclopedia

Currency and commodity have been intimately tied for most of history, except for rare war time breaks. In 1971, US dollar became decoupled from the gold standard and the world since then has moved from commodity backed currency model to fiat money. This move is irreversible, my prediction is that currency will never become commodity backed again. This fiat money is now a piece of paper the value of which depends on the sum total of:

- products and services
- commodities
produced by a nation

In other words, the paper fiat currency is directly related to GDP. The reason money cannot go back to commodity base again is because all commodities are finite and increasing a nation's gdp nowadays depends more on the intellectual products based on productive labor, creativity and innovation and is not just based on how much indigenous commodity that nation has. South Korea, Japan, Western Europe are examples of nations with high intellectual value addition, but limited commodity, whereas resource rich Middle-East, Central Asia, Africa, Latin America are examples of commodity rich regions, but limited or low value addition. USA, Canada, ANZ and to an extent Russia have both high value addition and high commodity products.

World's currency and reserve scene will continue to be dominated by currencies backed by powerful nations. So according to my prediction there will not be a unified world currency, instead it will be a combination of three currencies: USD, Euro and Yuan. Currencies are essentially a small piece of a unified economy under a single unified govt. Introducing Euro was premature because of this reason and its continuing weakness is also because of this. Unless there is a unified United States of Europe, Euro will not become as powerful as USD or Yuan.

Since there will be 3 instead of 1 world reserve currency, none of them will be able to print at will like todays QE 1, 2 and 3 and impose a inflation tax on the rest of the world. Printing at will instead will result in instant devaluation of that currency, as there will be 2 other alternatives, which is not present now, under the current single reserve currency model. This will enable people to dump any currency which is being printed at will by any nation and move to the other 2. Some countries of course will do it deliberately to devalue their currency and thus make them more export competitive, if they have too much unemployment due to economic down turn or recession.

US and EU, or West in general have a very interconnected economy, so USD and Euro can be considered as two related currencies of a very highly integrated single economy of the West. So before the rise of Yuan, the USD and Euro will continue to impose inflation tax on the rest of the world when they go for QE or printing money. This I believe will gradually come to a halt about 15-20 years from now, when Yuan will become dominant enough and very common as a world reserve currency.

As soon as US and EU can no longer impose an inflation tax on the world, that will result in devaluation of USD and Euro and loss of western living standards (end of the free ride based on inflation tax), which will usher in the era of multi-polar world, or more correctly the era of twin core regions - West and East Asia. This also means the 500 year run of Western dominance is coming to an end in about 15-20 years, although the lingering effect will remain for decades more as China and other East Asian nations (Korea and Japan) struggle to surpass the West in technological and military dominance. We or our many past generations have never lived in such a world, so there might be unpredictable situations which is hard to imagine at this point.

You know a world with three (or more) reserve currencies could be dangerously unstable. With dollars, euros and (eventually) renminbi all being substitutes for one another, their exchange rates will become dangerously volatile. Substitutability will create the temptation to shift erratically between them. Even a limited loss of confidence in the policies of one of the reserve-currency countries could cause central banks to rush out of its currency, aggravating financial difficulties in the problem country. The consequences for other reserve-issuing countries, which will see their currencies appreciate sharply, will be equally undesirable. A multiple-reserve-currency system, it is argued, would be an engine of instability.

So I guess when they reach this point,I think the big economies in the world will go back to good old Bretton Wood System.This can't happen with the involvement of IMF,which also means US will cede a lot of voting shares in IMF to China and other developing countries.I also wonder whether IMF SDR's could also become another reserve currency.Many believe this will be a better alternative than all these multiple reserve currencies.

 

[gambit]

These guys can barely know how to balance a checkbook, and here they are bloviating and making predictions on global finance.

Moody's: US Corporate Cash Pile At $1.24 Trillion, Over Half Located Overseas

New York, March 14, 2012 -- US non-financial corporate cash holdings rose to $1.24 trillion at the end of 2011, reflecting the strength of companies' operations in emerging markets and the negative tax consequences of repatriating cash to the US, according to a new report from Moody's Investors Service. Apple Inc., Microsoft, Cisco, Google and Pfizer held the largest amounts of cash, says the report.

But cash in not capital. Cash is only a part of capital. It is well known that US businesses have been holding cash for a long time. Reasonable estimate to be 10-15% of the national debt. On the other hand, conservative estimate on combine capital holdings of US businesses and individuals to be approximate of the national debt and generous estimate to add 4-5 trillions over the national debt. In other words, American businesses and individuals are sitting on 15-20 trillions of capital ready to be unleashed on national and global economy. The only problem we have is that we have an economically ignorant and incompetent US President who is creating uncertainty and fear that compelled businesses to restrained themselves and also the American consumers by extension.

 

[kalu_miah]

You know a world with three (or more) reserve currencies could be dangerously unstable. With dollars, euros and (eventually) renminbi all being substitutes for one another, their exchange rates will become dangerously volatile. Substitutability will create the temptation to shift erratically between them. Even a limited loss of confidence in the policies of one of the reserve-currency countries could cause central banks to rush out of its currency, aggravating financial difficulties in the problem country. The consequences for other reserve-issuing countries, which will see their currencies appreciate sharply, will be equally undesirable. A multiple-reserve-currency system, it is argued, would be an engine of instability.

So I guess when they reach this point,I think the big economies in the world will go back to good old Bretton Wood System.This can't happen with the involvement of IMF,which also means US will cede a lot of voting shares in IMF to China and other developing countries.I also wonder whether IMF SDR's could also become another reserve currency.Many believe this will be a better alternative than all these multiple reserve currencies.

I see little logic in your statement above that three currencies will be more unstable than a singe reserve currency. As explained in my post above, it will reduce if not eliminate abuse by the monopoly situation we have now where the holder of the reserve currency can get away with abuse and unfair inflation tax on the rest of the world. Perhaps the article below will convince you as it is from a professor of economics and political science at UC Berkeley, who is essentially saying the same thing as I stated in my post:

A World of Multiple Reserve Currencies by Barry Eichengreen - Project Syndicate

Barry Eichengreen is Professor of Economics and Political Science at the University of California, Berkeley, and a former senior policy adviser at the International Monetary Fund. His most recent book is Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System.
Barry Eichengreen - Project Syndicate

Oct. 20, 2010

BERKELEY – The competition for reserve-currency status is conventionally portrayed as a winner-take-all game. There is room, in this view, for just one full-fledged international currency. The only question is which national currency will capture the role.

Market logic, it is argued, dictates this result. For importers and exporters, quoting prices in the same currency – say, the dollar – as other importers and exporters avoids confusing one’s customers. For central banks, holding reserves in the same currency as other central banks means holding the most liquid asset. With everyone else buying, selling, and holding dollars, it pays to do the same, since markets in dollar-denominated assets will be the deepest.

While it is always possible that there could come a tipping point at which everyone migrates from one currency to another, the network-based nature of the international monetary system, it is said, leaves room for only one true international unit.

But this premise is wrong, for three reasons. First, the notion that importers, exporters, and bond underwriters will want to use the same unit as other importers, exporters, and bond underwriters holds less weight in a world where everyone has a mobile phone that can compare currency values in real time. Once upon a time, comparing prices in dollars and euros might have been beyond the capacity of all but the most sophisticated traders and investors. Nowadays, “Currency Converter” is one of the Apple app store’s top ten downloads.

Second, the sheer size of today’s global economy means that there is now room for deep and liquid markets in more than one currency.

Finally, the view that there can be just one international and reserve currency at any point in time is inconsistent with history. Before 1914, there were three international currencies: the British pound, the French franc, and the German mark. The dollar and the pound then shared international primacy in the 1920’s and 1930’s. Today, currencies other than the dollar account for 40% of identified international reserves.

The implication is that the dollar, the euro, and the renminbi will share the roles of invoicing currency, settlement currency, and reserve currency in coming years.

To be sure, all three currencies have their critics. Willingness to hold the dollar may be undercut by concern with America’s twin fiscal and external deficits. Uncertainty about whether the European Union will hold together could limit the use of the euro. And, although China is aggressively promoting international use of the renminbi in trade settlements, it has a long way to go before its currency is attractive as a vehicle for foreign investment and holding reserves.

But the very fact that there are questions about all three currencies means that none of them will obviously dominate. There will be an international market for all three.

Some worry about the stability of this world of multiple international currencies. They shouldn’t: a more decentralized international monetary system is precisely what is needed to prevent a replay of the financial crisis.

Countries seeking additional reserves will not be forced to accumulate only – or even mainly – dollars. No one country will be able to run current-account deficits and use foreign finance to indulge in financial excesses as freely as the United States did in recent years. This will make the world a safer place financially.

Will exchange rates between the major currencies be dangerously unstable? Will those responsible for managing central-bank reserves, seeking to maximize returns, shift erratically between those currencies?

The fear underlying such questions rests on a misunderstanding of the behavior of central-banks reserve managers. Reserve managers do not have the high-powered financial incentives of hedge fund managers to seek to maximize returns. They do not have to exceed their previous high-water mark in order to draw a paycheck. They have social responsibilities, and they know it.

This means that they have less incentive to herd – to buy or sell a currency just because everyone else is buying or selling it. They can adopt a longer time horizon, because, unlike private fund managers, they do not have to satisfy impatient investors.

Compared to private investors, then, central-bank reserve managers are more likely to act as stabilizing speculators. The result will be to make the exchange rates between the three international currencies more stable, not less.

The world economy of the twenty-first century is becoming more multipolar. There is no reason why the same should not be true of its international monetary system. In the end, that will be a good thing.

 

[WS-10 Engine]

These guys can barely know how to balance a checkbook, and here they are bloviating and making predictions on global finance.

Moody's: US Corporate Cash Pile At $1.24 Trillion, Over Half Located Overseas

But cash in not capital. Cash is only a part of capital. It is well known that US businesses have been holding cash for a long time. Reasonable estimate to be 10-15% of the national debt. On the other hand, conservative estimate on combine capital holdings of US businesses and individuals to be approximate of the national debt and generous estimate to add 4-5 trillions over the national debt. In other words, American businesses and individuals are sitting on 15-20 trillions of capital ready to be unleashed on national and global economy. The only problem we have is that we have an economically ignorant and incompetent US President who is creating uncertainty and fear that compelled businesses to restrained themselves and also the American consumers by extension.

It's not being invested in the US because the US economy is in unofficial recession.
The consumer is highly leveraged and banks are lending to the government instead of business.
The future is bleak in the US, most of the spending done by US consumers are by drawing down their limited savings, not by income growth.
Even consumer spending is now being driven on gas and food, not much on consumer goods.

That cash will not be reinvested in the US regardless of tax changes. Companies invest where they get the growth, growth comes from china and emerging markets.

US consumer will not be spending jack once interest rates rise and their payments for things like mortgages, autoloans, credit cards rise.
Neither will the US government once interest rates rise.

You think the US economy is bad now, just wait until interest rates rise, the US economy is like an adjustable-rate mortgage, when interest rates are low, the party will go on, but once they rise, the music will stop, the party will stop and the debt hangover will begin.

Corporations will be fleeing the US.

 

[Azazel]

I see little logic in your statement above that three currencies will be more unstable than a singe reserve currency. As explained in my post above, it will reduce if not eliminate abuse by the monopoly situation we have now where the holder of the reserve currency can get away with abuse and unfair inflation tax on the rest of the world. Perhaps the article below will convince you as it is from a professor of economics and political science at UC Berkeley, who is essentially saying the same thing as I stated in my post:

A World of Multiple Reserve Currencies by Barry Eichengreen - Project Syndicate

Barry Eichengreen is Professor of Economics and Political Science at the University of California, Berkeley, and a former senior policy adviser at the International Monetary Fund. His most recent book is Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System.
Barry Eichengreen - Project Syndicate

Oct. 20, 2010

BERKELEY – The competition for reserve-currency status is conventionally portrayed as a winner-take-all game. There is room, in this view, for just one full-fledged international currency. The only question is which national currency will capture the role.

Market logic, it is argued, dictates this result. For importers and exporters, quoting prices in the same currency – say, the dollar – as other importers and exporters avoids confusing one’s customers. For central banks, holding reserves in the same currency as other central banks means holding the most liquid asset. With everyone else buying, selling, and holding dollars, it pays to do the same, since markets in dollar-denominated assets will be the deepest.

While it is always possible that there could come a tipping point at which everyone migrates from one currency to another, the network-based nature of the international monetary system, it is said, leaves room for only one true international unit.

But this premise is wrong, for three reasons. First, the notion that importers, exporters, and bond underwriters will want to use the same unit as other importers, exporters, and bond underwriters holds less weight in a world where everyone has a mobile phone that can compare currency values in real time. Once upon a time, comparing prices in dollars and euros might have been beyond the capacity of all but the most sophisticated traders and investors. Nowadays, “Currency Converter” is one of the Apple app store’s top ten downloads.

Second, the sheer size of today’s global economy means that there is now room for deep and liquid markets in more than one currency.

Finally, the view that there can be just one international and reserve currency at any point in time is inconsistent with history. Before 1914, there were three international currencies: the British pound, the French franc, and the German mark. The dollar and the pound then shared international primacy in the 1920’s and 1930’s. Today, currencies other than the dollar account for 40% of identified international reserves.

The implication is that the dollar, the euro, and the renminbi will share the roles of invoicing currency, settlement currency, and reserve currency in coming years.

To be sure, all three currencies have their critics. Willingness to hold the dollar may be undercut by concern with America’s twin fiscal and external deficits. Uncertainty about whether the European Union will hold together could limit the use of the euro. And, although China is aggressively promoting international use of the renminbi in trade settlements, it has a long way to go before its currency is attractive as a vehicle for foreign investment and holding reserves.

But the very fact that there are questions about all three currencies means that none of them will obviously dominate. There will be an international market for all three.

Some worry about the stability of this world of multiple international currencies. They shouldn’t: a more decentralized international monetary system is precisely what is needed to prevent a replay of the financial crisis.

Countries seeking additional reserves will not be forced to accumulate only – or even mainly – dollars. No one country will be able to run current-account deficits and use foreign finance to indulge in financial excesses as freely as the United States did in recent years. This will make the world a safer place financially.

Will exchange rates between the major currencies be dangerously unstable? Will those responsible for managing central-bank reserves, seeking to maximize returns, shift erratically between those currencies?

The fear underlying such questions rests on a misunderstanding of the behavior of central-banks reserve managers. Reserve managers do not have the high-powered financial incentives of hedge fund managers to seek to maximize returns. They do not have to exceed their previous high-water mark in order to draw a paycheck. They have social responsibilities, and they know it.

This means that they have less incentive to herd – to buy or sell a currency just because everyone else is buying or selling it. They can adopt a longer time horizon, because, unlike private fund managers, they do not have to satisfy impatient investors.

Compared to private investors, then, central-bank reserve managers are more likely to act as stabilizing speculators. The result will be to make the exchange rates between the three international currencies more stable, not less.

The world economy of the twenty-first century is becoming more multipolar. There is no reason why the same should not be true of its international monetary system. In the end, that will be a good thing.

I am not against multiple reserve currencies.My agruement of multiple reserve currencies could be dangerously unstable is based on the fact that presntly all currencies are fiat money.Their value is based on the guarentee given by the central bank of the issueing country. Even a limited loss of confidence in the policies of one of the reserve-currency countries tempt currency holders to shift erratically to other reserve currencies making the exchange rates dangerously volatile.

You are right before 1914 there were multiple reserve currencies,But note that at that time they were backed by gold.Anchoring the currencies to an exchangeable commodity like gold is the only way to make multiple reserve currency system stable.Even if there is a small loss of confidence the central banks redeem it by exchanging gold.That's why I said world would go back to Bretton wood system.

 

[ahfatzia]

Fears that yuan rise will hit exports unfounded


The Chinese yuan has surged to new highs against the US dollar recently, stoking fears that China's export goods will become less competitive on the global stage at a time when the country's economic growth is already cooling.

The yuan rose against the dollar to 6.2417 Thursday afternoon, a record high since China's announcement of exchange rate reform in 2005. And that's just the latest amid a string of intra-day highs recently.

Some have pointed to the ongoing US presidential election season as a cause for the yuan's spike, as the re-evaluation of the currency is seen as an important issue. There are fears that if a new US administration favored pushing hard for yuan reform, a repeat of the sharp appreciation seen from 2005 to 2011 could take place.

However, I think such anxieties are unfounded if we make a wider analysis of recent movements in the yuan and other currencies.

The yuan's recent appreciation has nothing to do with political pressure. Rather, it is a direct result of the weakening value of the dollar owing to the launch of a third round of quantitative easing (QE3) by the US Federal Reserve in mid-September. As QE3 undermined investor confidence toward dollar-denominated assets in the market, it devalued the US currency and thus left space for the yuan to rise against the dollar.

Supporting this is the fact that other major currencies have also risen against the dollar recently, and to a greater degree than the yuan has. The exception is the yen, whose value has been eroded due to market expectations that Japan will take further monetary easing policies. From October 11 to October 17, the British pound increased 0.8 percent against the dollar, the Australian dollar went up 1.9 percent, the Swiss franc rose 1.9 percent and the euro appreciated about 2 percent. Yet, during the six trading days from October 11 to October 18, the yuan's midpoint against the US dollar rose almost 0.6 percent.

The trend will not last as the influence of QE3 gradually fades.

Also, it is natural to see the yuan's sharp yet short-term fluctuations after the Chinese government widened the yuan's fluctuation band against the US dollar in April.

In contrast to the recent upward trend, the yuan fell for seven consecutive days from May 9 to May 17.

At the same time, the short-term rise in the yuan's value will not exert a big influence on China's exports. Currently, China imports most of its raw materials. As the yuan gets stronger, the raw materials will become relatively cheaper, which will largely offset the rise in prices of exported goods in dollar terms.

Fears that yuan rise will hit exports unfounded - People's Daily Online


Actually the moderate increase in the value of Yuan in the intermediate term is good for China as she wants to direct her economy from export oriented to domestic consumption. With a strong manufacturing and industrial base that China has, any purchase of raw materials will cost less and do not affect the account balance at all. There's no need to import big ticket items since China can produce them in the country. Her exports, even shrinks in volume, make up in the difference valuation of the Yuan.

I can see win win for China if the Yuan rises at the limit of 10% for the next 5 years.