“Ditch The Dollar” Meme Gains Steam?
By Justin Gardner | Related entries in Money, The World
What would happen if the dollar wasn’t the world’s reserve currency?
Well, we may just find out if an U.N. panel has its way.
Currency specialist Avinash Persaud, a member of the panel of experts, told a Reuters Funds Summit in Luxembourg that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket.Persaud, chairman of consultants Intelligence Capital and a former currency chief at JPMorgan, said the recommendation would be one of a number delivered to the United Nations on March 25 by the U.N. Commission of Experts on International Financial Reform.
“It is a good moment to move to a shared reserve currency,” he said.
Central banks hold their reserves in a variety of currencies and gold, but the dollar has dominated as the most convincing store of value — though its rate has wavered in recent years as the United States ran up huge twin budget and external deficits.
What drove this thinking?
Well…
“Speculation that major central banks would begin rebalancing their FX reserves has risen since the intensification of the dollar’s slide between 2002 and mid-2008,” CMC Markets said in a note.
So Bush’s monetary policies drove this loss of confidence, but will Obama’s be any better?
This logic is most likely wrong, but if the dollar isn’t the reserve currency, doesn’t that mean that dollars would flood into the market, devalue the dollar even more and lead to inflation? And what would be our recourse? Gobble them up and deplete our currency reserves to provide a counterbalance?
Here’s the biggest issue…since no currency has been commoditized (backed by something of real value) this whole market has been faith based since 1971. So that’s what worries me. Because once people don’t have faith in the dollar, there are bound to be consequences? So what are those?
I welcome your thoughts, but please don’t come to the table spreading gloom and doom about the “complete collapse” of our currency. That’s not going to happen, but there could be some pain and I’d like to hear what that might be.
This entry was posted on Thursday, March 19th, 2009 and is filed under Money, The World. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
March 19th, 2009 at 11:49 am
…doesn’t that mean that dollars would flood into the market, devalue the dollar even more and lead to inflation?
Indeed it does, Justin. Oh well.
Sunshine, puppydogs & chocolate!
*Hugs!*
March 19th, 2009 at 12:55 pm
Of course our currency could collapse. Currencies collapse. It’s happened before, and it could happen again. And when it has happened, it’s been because governments printed more bills without a concurrent increase in the perception of the value they represented. Only a fool would pretend that this is not so.
That doesn’t mean that any of the proposed European “solutions” actually offers a solution.
The basic premise of a currency is just an iffy proposition that we all got so used to that few ever questioned it. But make no mistake, a sudden appearance of way more additional dollars, whether paper or electronic, makes more folks wonder. And that’s not a great thing for the value of the dollar.
If the current buy up in short-term US bonds on the part of investors seeking safe havens turns out to be another bubble, we’ll have a serious problem with the value of the dollar, and thus with inflation.
March 19th, 2009 at 4:52 pm
I believe that Justin has on numerous occassions referred to inflationary dangers as “nonsense”. So for me and my 500 mg. of Prosaic,we are WITH Justin on this one.
SD3, I’ll trade you a bushel of daisies, unicorns and lollipops for some chocolate and puppies.
(Regardless of topic) Repeat after me: This is what happens if the market goes unregulated.
By the way, that TOTAL IDIOT, Peter Schiff, who has NEVER gotten a single damn thing right, has several STUPID books out with completely DUMB ideas on how to “safeguard” (ha, ha) your wealth from the imaginary inflation boogey-man. He is such a moron.
March 19th, 2009 at 11:59 pm
You got more of that prozac, J. Harden? Did you hear what the Fed did yesterday? The just announced they are going to print over 1 trillion dollars to buy bad assets, including 300 billion in treasury bonds. There is likely more to come. This presents an opportunity for bond holders to sell to the fed while they still can.
When China says they are “concerned” about the value of the bonds they have already bought, imagine what they are saying in private. The whole reason you used to buy treasuries in the first place was because you didn’t want to be concerned where you put your money.
March 20th, 2009 at 12:30 am
No one’s going to dump the dollar anytime soon. It’s not in Europe’s interest or China’s or the Saudis. Whatever they might be trying to avoid would be infinitely worse if they followed this path.
People need to calm down. I know some of you out there are hoping for a chance to use those survivalist supplies you have in the basement, but I think the odds are about 99% that we’ll all still be here a year from now.
I’ve survived quite a number of imminent catastrophes so far in my life — nuclear war, global pandemic, OPEC taking over the world, the Japanese taking over the world, killer comets, terrorists blowing us all up with suitcase nukes. It’s always something. And yet, somehow, I still have cable.
March 20th, 2009 at 3:46 am
Maybe cable is the real problem. The Fed is going to print in excess of $1 Trillion in new bills, this is very inflationary in this point in time. China, India, OPEC countries all trade outside their countries in dollars – a constantly devaluing asset. It is doom and gloom but not for the US as much as it is for all those countries holding dollar denominated assets and securities. It is going to get bad, and it will continue for quite awhile. Gold is one of the only protections against devaluing currencies- everyone should have some. On the other hand, if everyone starts spending again this problem will go away in no time. You can get a 30 year mortgage for under 5%, cars and rebates have never been cheaper, American companies have never been cheaper on Wall St, this is still the largest most vibrant economy in the world. The employment rate is north of 90% – yes it’s bad, but it’s not that bad and it’s still a hell of a lot better than it could be.
March 20th, 2009 at 7:10 am
Michael — I’m glad we’ve established a new baseline of success for the Obama Administration…Survival. Anything short of a MadMax scenerio will be treated as the glorious success of our Dear Leader. A bit of different slant to the “Change”(TM) and “Hope”(TM) — but probably more realistic.
March 20th, 2009 at 7:25 am
Maybe Michael. I think we can both happily default to our previously-agreed upon insight that everyone’s guessing. And agreed, calming down seems useful. Panic is not known to foster good judgement. Along with this, I’d like to suggest that your view, which I’ve quoted above is something that is certainly to be hoped for, no question.
And along with that hoping, I think it makes an awful lot of sense to continually test and question it. This reassuring view you’ve stated could be the very rationale that supports the continued growth of a bubble in US treasuries. If so, it would be another version of that “the old rules don’t apply” thing which helps bubbles grow.
Right now, its true that many investors outside the US are tied up deeply in dollars and that few safe havens exist outside of hard assets. And even the values of hard assets are ultimately tied to some kind of variable economic utility. So it’s not entirely unreasonable to presume that dumping the dollar is not in the interest of China and the Saudis today.
If and when inflation appears resurgent, that can and will change very quickly. China, which holds trillions of dollars in us securities, has already shifted many of its assets from long-term to shorter term treasuries. That means that they are prepared, if things turn more sour, to roll over dollars into something else.
And they ARE currently using their stockpiles of dollars to buy hard assets with less fungible values. China has lots of poeple who have read lots of books about capitalism, including I am sure book by Peter Schiff and other folks. they know what could happen and they know how to unwind themselves from the dollar should it become wise.
By the way one conundrum about panic and its utility is that the utility of not panicking decreases at the extreme margins depending on what everyone else is doing. When a panic leads to stampede one’s options dwindle to two: running wiht the heard and getting trampled. That truth sits in the back of the mind of even the most sober and reasoned person.
March 20th, 2009 at 9:59 am
Terence and KK:
I’m in the OC — southern California — supposedly one of the epicenters of this meltdown and I notice an awful lot of people in good restaurants and a lot of people in Mercedes and a complete lack of (VHA) Visible Hobo Activity. I’m buying stocks because they’re cheap. Looking to buy a house possibly if I see a deal I like. My publishers are looking a year or three ahead and signing me to contracts.
Then there’s the evident calm and lack of panic at the White House. It doesn’t seem phony to me, it seems like they really don’t sense a need to freak out.
So on the one hand I see various theoretical doomsday scenarios. On the other hand there are people buying $50 steaks at Mortons and the Dow isn’t headed straight into the cellar anymore, the dollar exchange rate is actually higher still than it was a year ago, the president’s on Leno and I am turning away extra work.
There is clearly a disconnect between scenario and scene. I don’t know whether that will continue to be the case. But as I said, this isn’t my first doomsday.
March 20th, 2009 at 1:34 pm
M, when Bush got elected did you say “I don’t know how he got elected, I don’t know anyone who voted for him.” :-) Sorry, I had to ask.
I would never dismiss actual on-the-ground testimony, but if you want to base predictions on samples, they ought to be representative, right?
I am in publishing too, and we are looking years out as well. Nature of the beast. Obviously the people who have jobs still need to do them, and that includes planning. And hoping.
I think you should beware of making generalizations about the state of things based on the as-yet-unchanged behavior of folks near the TOP of the economic pyramid. At least not without checking in on the behavior of folks lower down. You know, that vast majority that comprises the base of the pyramid? Really, ought we to be surprised that many of the folks who eat at places like Morton’s aren’t feeling much pain? at least not yet…
I don’t think folks necessarily ought to avoid stocks. But they sure ought not to be buying them if it’s with assets they might need within the next 3 to 5 years.
MY main point continues to be that we all ought not to be blithe about the possible repercussions of an extended period of gross gov’t overspending.
March 20th, 2009 at 3:08 pm
KK:
I actually think that this should be hitting the upper income levels. Those are the people watching their portfolios dwindle, those are the ones used to racking up big credit card bills, and they’re the ones who may have speculated in the real estate market.
People at the base of the pyramid have been living paycheck to paycheck and are only going to be directly affected if they lose their jobs. They weren’t running up 30k on the American Express and finding their credit limit chopped down to size. In fact, people at the bottom are getting a tax break, their gas is less expensive, clothing costs less, and if they had the sense to have a 30 year fixed they can now refi at a lower rate.
If you’re lucky enough to still have your job (big “if”) and you’re making say 40k a year, you may actually be better off than you were a year ago.
As admitted previously by both of us: we don’t know. Of course we don’t know and neither does anyone else.
But here we are in this period of absolute uncertainty and insecurity and yet life for 95% of people is effectively unchanged. Housing starts actually ticked up slightly. The market may have stopped its free fall. It just doesn’t feel like the end of the world to me. It feels like a bad recession combined with a banking crisis that’s already being addressed.
I’m betting that a year from now the market has bottomed out, the housing market has bottomed out, the dollar is weaker but still very viable, inflation is moderate and unemployment is under 8% and getting better. And I’ll risk a bottle of Scotch (our your favorite libation) on that bet.
March 21st, 2009 at 10:07 am
MR
“I’m betting that a year from now the market has bottomed out, the housing market has bottomed out, the dollar is weaker but still very viable, inflation is moderate and unemployment is under 8% and getting better. And I’ll risk a bottle of Scotch (our your favorite libation) on that bet.”
If all 5 of those predictions are on the table I’ll take that bet – a bottle of Johnnie W Blue Label.