Greenback was the evil frog in Dangermouse, responsible for many world domination plots, foiled by a white mouse with an assistant with a PhD in knee-trembling. Now the Chinese have sights on dealing with the greenback. 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. We may all come to regret 'quantitative easing' - which sounds like something that should only be done in private in a toilet. Zhou suggests that the international financial system, based on a single currency 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. 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. The UK is at it too.
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 (now there was a prediction!). 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. 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. In Dangermouse terms, the yellow peril has been taking over as we looked the other way. The USA will resist, because losing its reserve-currency status would raise the cost of financing its budget and current-account deficits. John Maynard Keynes’s proposal in the 1940s was for an international currency, the “Bancor”, based on commodities, and 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. I suspect what we really need is substantial debate on world government and sensible living. War has been the standard and economics war by other means for too long. Anyone want to sponsor my green custard throwing in London during the G20 next week? --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups ""Minds Eye"" group. To post to this group, send email to [email protected] To unsubscribe from this group, send email to [email protected] For more options, visit this group at http://groups.google.com/group/Minds-Eye?hl=en -~----------~----~----~----~------~----~------~--~---
