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CHINA LOOKING FOR NEW "WORLD CURRENCY"

 
 
Reply Tue 24 Mar, 2009 03:25 pm
a not very surprising announcement by china's central bank governor :

A NEW GLOBAL RESERVE CURRENCY IS NEEDED TO REPLACE THE U.S. DOLLAR .

to me , the only surprising part is that china has waited this long .
i would think that "in the long run" this would be a good development - though there might be temporary turmoil in the currency market in trying to guess which currrency will come out ahead .

other countries would be separated from strains on the U.S. dolar , and the U.S. economy would not be constrained by the effect other currencies have on the U.S. dollar - such as extremely favourable exchange rates for the chinese currency .

i would think that it would help the economies of all countries to develop more freely .
hbg

Quote:
China suggests switch from dollar

China's central bank has called for a new global reserve currency run by the International Monetary Fund to replace the US dollar.

Central bank governor Zhou Xiaochuan did not explicitly mention the dollar, but said the crisis showed the dangers of relying on one currency.

With the world's largest currency reserves of $2tn, China is the biggest holder of dollar assets.

Its leaders have often complained about the dollar's volatility.

China has long been uneasy about relying on the dollar for trade and to store its reserves and recently expressed concerns that Washington's efforts to rescue the US economy could erode the value of the currency.

His speech was, unusually, published in both Chinese and English, signalling it was intended for an international audience.

"The outbreak of the crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system," said Mr Zhou in an essay on the People's Bank of China website.

Mr Zhou said the primacy of the US currency in the financial system had led to increasingly frequent crises since the collapse in the early 1970s of the system of fixed exchange rates.

On Tuesday, the dollar weakened against most major currencies following the announcement of a US plan to buy up toxic debt.

'Light in tunnel'

Mr Zhou said the dollar could eventually be replaced as the world's main reserve currency by the Special Drawing Right (SDR), which was created as a unit of account by the IMF in 1969.

"The role of the SDR has not been put into full play, due to limitations on its allocation and the scope of its uses," he said.

"However, it serves as the light in the tunnel for the reform of the international monetary system."

The essay comes before the G20 summit in London on 2 April, at which reform of the international financial system is top of the agenda.

"This confirms that China intends to play fully its role of global economic and political power at the next G20 summit," said Sebastien Barbe, an analyst at French financial service firm Calyon in Hong Kong.



http://news.bbc.co.uk/2/hi/business/7960620.stm
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Type: Discussion • Score: 4 • Views: 7,746 • Replies: 25
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farmerman
 
  1  
Reply Tue 24 Mar, 2009 11:57 pm
@hamburger,
Remember, the US currency is backed by good will, lots of kind words, and several thousand nuclear tipped missiles
BillRM
 
  1  
Reply Wed 25 Mar, 2009 02:51 am
@farmerman,
Hell with the nuclear tip missle we are still the largest ecomonic in the world and any real harm done to the US dollar will hurt the Chinese a great deal more then it will harm us as they are the holder of our dollars by the trillions.

I have to laugh when I hear the claim that this fact that they are such a holder have place them in some kind of a power position over us instead of the other way around.

farmerman
 
  1  
Reply Wed 25 Mar, 2009 03:55 am
@BillRM,
we are about the only ones who can boast having several thousand nuclar tipped missiles.
0 Replies
 
hamburger
 
  2  
Reply Wed 25 Mar, 2009 09:57 am
@BillRM,
bill and farmerman :

i can't see that having the U.S. dollar replaced by a "universal currency" would do any harm to the U.S. economy .
the U.S. government has been complaining about the wretched exchange rate between the U.S. dollar and the chinese currency for a long time .
freeing the U.S. dollar from such dependency should be a benefit and not a disadvantage to the U.S. dollar .
(don't confuse the U.S. dollar with "prestige" - prestige usually won't buy you much - but good currency will ) .
hbg
Robert Gentel
 
  1  
Reply Wed 25 Mar, 2009 10:41 am
@hamburger,
hamburger wrote:
(don't confuse the U.S. dollar with "prestige" - prestige usually won't buy you much - but good currency will )


Very appropriate. BillRM's earlier comments seem to see currency as being about bragging rights, with his concern for who might be able to be construed as one-upping who.

Currency is not a penis, for a measuring contest. This kind of thinking is simple-minded and I'm tired of people viewing currency so simplistically. Almost invariably, they assume that a stronger (as in exchange rate) currency is desirable and ignore that too strong a currency can destroy your exports and economy just as well as too weak a currency can.

Stability is more attractive than upward trending on the exchange rate, and if a universal currency can achieve that (I have my doubts) I'm all for it. Simple-minded boasting (edit: not talking about your nuke jokes farmer) in the China/US relationship is just not what matters at all.
BillRM
 
  1  
Reply Wed 25 Mar, 2009 11:03 am
@Robert Gentel,
Bragging rights no however the simple fact if you are a large holder of another nation currency you do not wish any harm to come to the value of that currency simple ECO 101.

China is a very very large holder of our dollars and therefore need to support the value of our currency for it own self interest.
Robert Gentel
 
  1  
Reply Wed 25 Mar, 2009 11:17 am
@BillRM,
They didn't say anything about the value of the dollar at all. You read that all into it due to the loss of prestige the dollar would suffer at the creation of a universal currency.

Reminds me of the folk who reacted to the creation of the Euro in the same simplistic vein.
BillRM
 
  1  
Reply Wed 25 Mar, 2009 12:02 pm
@Robert Gentel,
Hmm it nice you are able to read my mind over the internet.

How amazing you are
hamburger
 
  1  
Reply Wed 25 Mar, 2009 12:26 pm
@BillRM,
bill :

shouldn't trade with foreign countries be easier for the U.S. when the U.S. dollar is NOT the world's reserve curency ?
now one hears only too often complaints by the FED and other agencies - as well as U.S. business - about the "unfair" exchange rate of the U.S. dollar against foreign currencies .
and relying too heavily on trade with and borrowing from china can certainly not be good for the U.S. economy - which many economists have often enough pointed out .

btw canada is in a similar siuation in its trade with the U.S .
the vast bulk of canada's exports is going to the U.S. - particularly in automobiles and auto parts . now that the U.S. has hit a rough patch , canada is buffetted heavily by the storm blowing in from the U.S.
canada's export industries had simply become lazy over the decades . they assumed that the U.S. would always be ready to take just about anything produced in canada . they saw no need to explore other foreign markets much . well , canada is paying a heavy price for that short-sighteness .
hbg

farmerman
 
  1  
Reply Wed 25 Mar, 2009 12:40 pm
@hamburger,
The euro is in no position to assume the debts of its member nations , let alone be a world currency. I dont believe that, for several reasons, this appeal by China has any "legs". Jqapan is still reeling from its lost decade and everything else is shaky. (maybe the grozny)
hamburger
 
  1  
Reply Wed 25 Mar, 2009 02:48 pm
@farmerman,
the world had quite a stable "world curency" that was established under the BRETTON WOODS AGREEMENT in 1944 - under the leadership of the united states .

http://en.wikipedia.org/wiki/Bretton_Woods_system

this world currency was based upon the value of GOLD .

so what happened ?

Quote:
The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value"plus or minus one percent"in terms of gold and the ability of the IMF to bridge temporary imbalances of payments. In the face of increasing financial strain, the system collapsed in 1971, after the United States unilaterally terminated convertibility of the dollars to gold. This action caused considerable financial stress in the world economy and created the unique situation whereby the United States dollar became the "reserve currency" for the states which had signed the agreement.


see also :

http://www.ibiblio.org/pha/policy/1944/440722a.html

Quote:
The Conference has therefore agreed that broad international action is necessary to maintain an international monetary system which will promote foreign trade. The nations should consult and agree on international monetary changes which affect each other. They should outlaw practices which are agreed to be harmful to world prosperity, and they should assist each other to overcome short-term exchange difficulties.


...but in 1971 it fell apart !

i'm sure that it was not a perfect sysytem - no system ever is , but imo much of today's stresses and strains on the economies and peoples of the world could have been avoided if a more universal monetary system would have been maintained .
hbg
0 Replies
 
ehBeth
 
  1  
Reply Wed 25 Mar, 2009 04:07 pm
@hamburger,
Several interesting discussions on the CBC about this today as I drove there and here. Interesting in part as there really was no discussion of the U.S. dollar or the U.S. - the discussions went straight to the Euro, and the history of gold as the global currency.
hamburger
 
  1  
Reply Wed 25 Mar, 2009 05:32 pm
@ehBeth,
is UK prime minister gordon brown suggesting a "new" bretton woods agreement ?
but what are we going to use instead of GOLD ?

Quote:
UK Prime Minister Gordon Brown has urged world leaders at next week's G20 summit to "take action" to reform the global banking system.

The London summit must ensure "strong growth and recovery, and particularly jobs in the world economy", he said.

He added that there must be help for the poorest countries, saying that the global downturn had pushed 100 million people into poverty.

Mr Brown was in the US, as part of a three-continent tour ahead of the G20.

Following talks with UN secretary general Ban Ki-moon in New York, Mr Brown said that at the G20 summit in London "doing nothing is no longer an option".


http://news.bbc.co.uk/2/hi/uk_news/politics/7964756.stm

btw saw a feature were housewifes now have "gold parties" - much like tupperware parties , but instead of buying anything , the women are selling their baubles to someone who'll sell them to a gold refinery . seems that gold still has a bit of value . i imagine that bauble that the first husband spent $ 1,000 on , might be going for $ 200 .
reminds me a bit of the years right after WW II in germany , when people were selling the family baubles and heirlooms - except the "currency" was usually cigarettes !

farmerman
 
  1  
Reply Thu 26 Mar, 2009 05:29 am
@hamburger,
I doubt that a new gold monetization agreement will be forthcoming.
It would destroy already fragile economies, and since OPEC already tags the priceof oil to THE VALUE OF GOLD EXPRESSED IN DOLLARS, such monetization would (with the recent uptick in gold) , be disastrous to any recovery in the next decade.
hamburger
 
  1  
Reply Thu 26 Mar, 2009 09:04 am
@farmerman,
farmerman :

i agree that gold would not represent a useful reserve currency - except perhaps for canada . our gold miners would no doubt be all for it !

what i am wondering is , why should not the currencies of a number of countries ( G 20 ?) be represented in the reserve currency ? no one country would either have the burden of carrying the load alone or be able to undue influence the market .
" IF " done the right way , currency speculation should become much less profitable for individuals and less dangerous for countries .
perhaps there is too much rivalry in the world financial markets to wish for a less volatile market - "everyone' assumes to be the winner at some time - to the disadvantage of the others (is it spelled GREED ? ) .
hbg
0 Replies
 
High Seas
 
  1  
Reply Sat 28 Mar, 2009 02:57 pm
@farmerman,
farmerman wrote:

........since OPEC already tags the priceof oil to THE VALUE OF GOLD EXPRESSED IN DOLLARS,......


That statement is meaningless; oil is priced in dollars, not ounces of gold. Think about it. As to the original question by Hamburger, what would be the loss to the US if the $ ceased to be the main reserve currency, the loss would primarily be that of the gain from seignorage, secondarily the loss of sustainability of large, multiyear, current account deficits.

I'll explain if that's not clear, but if you read anything by Prof. Mundell (a Canadian Nobel prize economics) you'll see, or for a simpler explanation, read this:
Quote:










The dollar as a reserve currency

Handle with care

Mar 26th 2009
From The Economist print edition


China suggests an end to the dollar era

Shutterstock






Get article background

IN FUTURE, changes to the international financial system are likely to be shaped by Beijing as well as Washington. That is the message of an article by Zhou Xiaochuan, the governor of the People’s Bank of China. Mr Zhou calls for a radical reform of the international monetary system in which the dollar would be replaced as the main reserve currency by a global currency. It is a delicate issue, however. When Tim Geithner, America’s treasury secretary, discussed the proposal in New York on March 25th, his remarks sent the dollar tumbling before he made clear that, naturally, he thought the greenback should remain the dominant reserve currency.

Mr Zhou’s proposal is China’s way of making clear that it is worried that the Fed’s response to the crisis"printing loads of money"will hurt the dollar and hence the value of China’s huge foreign reserves, of which around two-thirds are in dollars.

He suggests that the international financial system, which is based on a single currency (he does not actually cite the dollar), has two main flaws. First, the reserve-currency status of the dollar helped to create global imbalances. Surplus countries have little choice but to place most of their spare funds in the reserve currency since it is used to settle trade and has the most liquid bond market. But this allowed America’s borrowing binge and housing bubble to persist for longer than it otherwise would have. Second, the country that issues the reserve currency faces a trade-off between domestic and international stability. Massive money-printing by the Fed to support the economy makes sense from a national perspective, but it may harm the dollar’s value.

Mr Zhou suggests that the dollar’s reserve status should be transferred to the SDR (Special Drawing Rights), a synthetic currency created by the IMF, whose value is determined as a weighted average of the dollar, euro, yen and pound. The SDR was created in 1969, during the Bretton Woods fixed exchange-rate system, because of concerns that there was insufficient liquidity to support global economic activity. It was originally intended as a reserve currency, but is now mainly used in the accounts for the IMF’s transactions with member countries. SDRs are allocated to IMF members on the basis of their contribution to the fund.

Mr Zhou’s plan could win support from other emerging economies with large reserves. However, it is unlikely to get off the ground in the near future. It would take years for the SDR to be widely accepted as a means of exchange and a store of value. The total amount of SDRs outstanding is equivalent to only $32 billion, or less than 2% of China’s foreign-exchange reserves, compared with $11 trillion of American Treasury bonds.

There are also big political hurdles. America would resist, because losing its reserve-currency status would raise the cost of financing its budget and current-account deficits. Even Beijing might want to rethink the idea. Mr Zhou praised John Maynard Keynes’s proposal in the 1940s for an international currency, the “Bancor”, based on commodities. But as Mark Williams of Capital Economics says, central to Keynes’s idea was that a tax be imposed on countries running large current-account surpluses, to encourage them to boost domestic demand.





Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved.




hawkeye10
 
  1  
Reply Sat 28 Mar, 2009 03:07 pm
both China and OPEC want to remove the dollar as the global currency. As America continues to deepen its debt load and as it continues to loose its super power status it is highly likely that the dollar will be replaced. This will not happen for awhile, and its effects will be harmful more in the long term than the short term. It will mean for instance that our kids and grand kids will have an even more difficult time paying off our debts than is currently recognized.
0 Replies
 
hamburger
 
  1  
Reply Sat 28 Mar, 2009 03:41 pm
@High Seas,
from high seas quote of dr. mundell

Quote:
Massive money-printing by the Fed to support the economy makes sense from a national perspective, but it may harm the dollar’s value.


i doubt that the U.S. can continue to print money and have it accepted at 'face value" forever .
imho it would be better for the financial leaders of the world to come to an agreement to replace the U.S. dollar as a universal reserve currency "over a period of time " (unfortunately , these adjustments are only too often not done in time - and there is more harm to everyone when it eventually happens ) .

btw dr. mundell is quite well-known around here . he was a true country boy born in a village just outside of kingston (though his birthplace is listed as kingston ) .
i had the pleasure of introducing him many years ago when he gave a speech to a combined meeting of the local accounting and engineering societies - a real down-to earth-fellow .

http://en.wikipedia.org/wiki/Robert_Mundell

he is not unlike j k galbraith who never forgot that he was a canadian country boy . some years ago jkg spoke at queen's university and made a comment about hard work . "if you've ever worked on a farm you know what hard work is - and you'll make darn sure you find some easier job " , he said .
hbg


High Seas
 
  1  
Reply Sun 29 Mar, 2009 12:01 pm
@hamburger,
hamburger wrote:

from high seas quote of dr. mundell

Quote:
Massive money-printing by the Fed to support the economy makes sense from a national perspective, but it may harm the dollar’s value.


,,,,,,,,,,


with respect the article posted by me was never written by professor Mundell.

The value of the USD will be greatly harmed in any event if these proposed reforms of the domestic or international monetary system proceed.
 

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