The Dilemmas of the Dollar
by Barry Eichengreen
Legions of pundits have argued that the dollar's status as a reserve currency has been damaged by the credit crisis of 2007-9. The crisis has not exactly enhanced the attractions of
Meanwhile the federal government is emitting vast quantities of public debt. Together these trends in supply and demand are a recipe for a significantly weaker dollar. Capital losses on their outstanding dollar reserves will in due course cause central banks to consider alternatives. The dollar's status as the dominant international currency will then be history.
There is only one problem with these arguments. It is that there has been no actual diminution of the dollar's international role. The dollar in fact strengthened following the outbreak of the crisis. With the spread of illiquidity, investors sought refuge in the most liquid market, that for U.S. government debt securities. Since then the dollar exchange rate has fluctuated, but there has been no dollar crash.
The same is true of the composition of the foreign reserves of central banks.
The explanation is that the alternatives all have equally severe problems. The euro is the leading rival to the dollar, but
For the renminbi to become attractive as a reserve unit,
A final alternative is to issue non-national reserve assets like the Special Drawing Rights of the IMF. SDRs are a synthetic currency unit currently made up of the dollar, euro, yen, and pound sterling. Creative thinkers in
Making SDRs attractive would require making them liquid. This would mean developing private markets on which SDR claims can be bought and sold. It would be necessary to build a broad and liquid market on which governments and, for that matter, financial and nonfinancial firms could issue SDR bonds at competitive cost. Banks would have to find it attractive to accept SDR-denominated deposits and extend SDR-denominated loans. The pension funds and insurance companies that are the dominant sources of private demand for bonds would have to be attracted to holding bonds denominated in a basket of currencies despite the fact that their liabilities tend to be dominated in a single national currency. All this is possible, but it will not be easy. It is worth recalling that there was a previous attempt to commercialize the SDR in the 1970s that never really got off the ground. Succeeding this time would take decades rather than years.
It is as
The Dollar's Fate, in the Longer Term
There is a most interesting debate going on at present in the academic community about the longer-term fate of the U.S. dollar as the supreme reserve currency for foreign-exchange transactions and, more importantly, for the currency holdings of national governments, global companies and the producers of oil, gas and other raw materials.
Divine Debt Trumps All
Victor Davis Hanson
In modern America, debt -- whether national, state or trade -- now plays the same overarching role as the ancient Greek notion of fate. And the president, Congress and the states for all their various agendas are impotent since they must first pay back trillions that have long ago been borrowed and spent.
Joseph Stiglitz Left's Favorite U.S. Nobel Economist
by Andres Oppenheimer
U.S. Nobel laureate Joseph Stiglitz has become a sort of rock star in left-of-center Latin American countries for his vocal criticism of free-for-all capitalism. But in a wide-ranging interview, he offered some advice that many of his fans in the region may not want to hear.
U.S., China and the Emerging Economic Order
The assumption that the end of the recession will restore the familiar global economic system ignores the psychological and political upheaval that has taken place. A vast tide of liquidity coupled with America's appetite for consumer goods had sent enormous amounts of dollars to China that, in turn, China lent back to us for still more buying. Before the crisis, China sent scores of experts to the United States and invested in major American financial institutions to learn the secrets of the system that seemed to produce permanent global growth at little risk.
Economy: Past Stormy Weather and What May Follow
Paul A. Samuelson
The Fed and the majority of the consensus forecasters fear that this expected recovery might be a weak one that does little to reduce Main Street's unemployment. And it may also imply that future private consumer and investment spending will continue to be anemic. That would mean that at the global level there might not be the replay of the old-time drama in which the American locomotive comes to the rescue of depressed economies.
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