Some more crazy economics. This time from Nouriel Roubini. His comments in gray. My comments follow his.
Op-Ed Contributor: China’s Heart of Gold (May 14, 2009) Print Version of Op-Art (May 14, 2009)
Traditionally, empires that hold the global reserve currency are also net foreign creditors and net lenders. The British Empire declined — and the pound lost its status as the main global reserve currency — when Britain became a net debtor and a net borrower in World War II. Today, the United States is in a similar position. It is running huge budget and trade deficits, and is relying on the kindness of restless foreign creditors who are starting to feel uneasy about accumulating even more dollar assets. The resulting downfall of the dollar may be only a matter of time. |
Geopolitical muscle is also a requirement for a reserve currency. At the end of WWII the U.S. had it in spades. Britain lost it. This was a major factor in the pound ceding reserve currency status to the dollar.
Budget and trade deficits are a REQUIREMENT for a country's currency to be a reserve currency. A nation whose currency is a reserve currency, by definition, must supply exactly the amount of currency that foreigners want to hold or risk harming the integrity of the global financial system. Running trade and budget surpluses would be disruptive and eventually drive people to other currencies.
He is so confused here it is unreal. There are no "foreign creditors." What there is, are people who desire to hold dollars and the only way they can do that is by running trade surpluses with the the U.S. The dollars that they get in return are then held on account in the form of a Treasury, which is a financial asset. This does not constitute lending.
Foreigners' desire to hold dollars is a voluntary choice, but it is a choice that foreigners want so badly that they are willing to accept a lower standard of living to do. Exporting to the U.S. necessitates comparative advantage, which is usually achieved through suppression of wages and/or currency manipulation. Both reduce living standards.
But what could replace it? The British pound, the Japanese yen and the Swiss franc remain minor reserve currencies, as those countries are not major powers. Gold is still a barbaric relic whose value rises only when inflation is high. The euro is hobbled by concerns about the long-term viability of the European Monetary Union. That leaves the renminbi. |
Britain, Japan and Switzerland have not shown any interest in running budget and trade deficits sufficiently large enough to sustain their currencies as reserve currencies. Indeed, Japan and Switzerland run trade surpluses. Not gonna work.
China is a creditor country with large current account surpluses, a small budget deficit, much lower public debt as a share of G.D.P. than the United States, and solid growth. And it is already taking steps toward challenging the supremacy of the dollar. Beijing has called for a new international reserve currency in the form of the International Monetary Fund’s special drawing rights (a basket of dollars, euros, pounds and yen). China will soon want to see its own currency included in the basket, as well as the renminbi used as a means of payment in bilateral trade. |
Right. China runs trade surpluses, so no way can the renmimbi can be the reserve currency. That's like saying the reserve currency will be moon rocks. But who can get their hands on moon rocks? No one. Roubini doesn't understand this simple concept.
At the moment, though, the renminbi is far from ready to achieve reserve currency status. China would first have to ease restrictions on money entering and leaving the country, make its currency fully convertible for such transactions, continue its domestic financial reforms and make its bond markets more liquid. It would take a long time for the renminbi to become a reserve currency, but it could happen. China has already flexed its muscle by setting up currency swaps with several countries (including Argentina, Belarus and Indonesia) and by letting institutions in Hong Kong issue bonds denominated in renminbi, a first step toward creating a deep domestic and international market for its currency. |
And run huge and sustained trade deficits! Hello!!!
If China and other countries were to diversify their reserve holdings away from the dollar — and they eventually will — the United States would suffer. We have reaped significant financial benefits from having the dollar as the reserve currency. In particular, the strong market for the dollar allows Americans to borrow at better rates. We have thus been able to finance larger deficits for longer and at lower interest rates, as foreign demand has kept Treasury yields low. We have been able to issue debt in our own currency rather than a foreign one, thus shifting the losses of a fall in the value of the dollar to our creditors. Having commodities priced in dollars has also meant that a fall in the dollar’s value doesn’t lead to a rise in the price of imports. |
Most of the major industrial countries have interest rates at or near zero now. They ALL "borrow" cheaply, but their currencies are not reserve currencies. He doesn't see that?? And we have low interest rates because the Fed put them there, just as other central banks did. Interest rates are a parameter set by the central bank.
If China and other countries were to diversify their reserve holdings away from the dollar — and they eventually will — the United States would suffer. We have reaped significant financial benefits from having the dollar as the reserve currency. In particular, the strong market for the dollar allows Americans to borrow at better rates. We have thus been able to finance larger deficits for longer and at lower interest rates, as foreign demand has kept Treasury yields low. We have been able to issue debt in our own currency rather than a foreign one, thus shifting the losses of a fall in the value of the dollar to our creditors. Having commodities priced in dollars has also meant that a fall in the dollar’s value doesn’t lead to a rise in the price of imports. |
The Chinese gov't spends the way the U.S. gov't does: by crediting bank accounts. Their hoard of dollars is not in any way a consequence of "financing" the U.S. I've been all through that. It is their desire to net save in dollars. They could net save in baby seals if they wanted to, but they'd have to export to the Eskimos at the North Pole to get the seals. The Eskimos would have a trade deficit with the Chinese (they'd get cars, clothes, computers, toys and all sorts of stuff and the Chinese would get baby seals because that is what they wanted as their desired unit of saving).
This decline of the dollar might take more than a decade, but it could happen even sooner if we do not get our financial house in order. The United States must rein in spending and borrowing, and pursue growth that is not based on asset and credit bubbles. For the last two decades America has been spending more than its income, increasing its foreign liabilities and amassing debts that have become unsustainable. A system where the dollar was the major global currency allowed us to prolong reckless borrowing.
Now that the dollar’s position is no longer so secure, we need to shift our priorities. This will entail investing in our crumbling infrastructure, alternative and renewable resources and productive human capital — rather than in unnecessary housing and toxic financial innovation. This will be the only way to slow down the decline of the dollar, and sustain our influence in global affairs. |
If the dollar's position is not secure it is because U.S. policymakers think like we have to become an export powerhouse like China to solve our "problems." This can only be done by gaining comparative advantage, which means suppressing wages and weakening our currency. We are doing it to ourselves
