The demise of the dollar(independent.co.uk)
independent.co.uk
The demise of the dollar
http://www.independent.co.uk/news/business/news/the-demise-of-the-dollar-1798175.html
6 comments
Fisk has a bit of a chip on his shoulder. I think he's a fantastic reporter, but I'm little skeptical of his analytical abilities. Of course, he has earned the right to be cynical, but in his editorial pieces it's sometimes hard to tell if he's watching or wishing.
The flaw in the theory here is that the US basically guarantees Europe's military security and so there's a tradeoff with our economic security. This is one reason that the US, while occasionally grumbling about the huge cost of maintaining a nuclear umbrella, makes few moves to encourage any kind of pan-European security force.
The flaw in the theory here is that the US basically guarantees Europe's military security and so there's a tradeoff with our economic security. This is one reason that the US, while occasionally grumbling about the huge cost of maintaining a nuclear umbrella, makes few moves to encourage any kind of pan-European security force.
It's an interesting threat, and one that we're going to have to keep out eye on. But I have reservations about how effective multinational cooperation on international monetary policy can be.
One of the reasons that the dollar is the global reserve currency is because there is so much of it in circulation. No other currency is as liquid. Moving oil purchases of a bloc of countries to a non-dollar basket of currencies ought to be a significant hit to global demand for the dollar. But those same countries will have to correspondingly increase the amount of their own currency in global circulation, if the basket is to be used for international trade contracts. Despite being a strong currency and having a strong central bank, the EU has not pursued a policy of making the Euro a globally viable reserve currency, precisely because they do not want to have to deal with the problems that stem from creating the massive amounts of currency in circulation necessary for global use.
However, something similar was done in the past in Europe. During the transition to the Euro, the currency was brought into existence for use in financial transactions three years before it was brought into physical circulation (http://en.wikipedia.org/wiki/Introduction_of_the_euro#Prepar...). So the euro existed really as a reified basket of national currencies fixed against each other in certain proportions. This was possible because of the end goal of bringing into being a fully unified monetary system and because of the close political integration of all the major players, who were subject to the financial constraints necessary to keep their currency locked into a fixed ratio with the others.
It's not clear to me that the Arab nations, Iran, Russia, and China can sustain the level of economic cooperation necessary to make their basket of currencies stick. Further, it's not clear that they can maintain stable financial policies at home, while allowing enough of their currency to be used abroad. Secondary foreign markets for a nation's currency can have difficult-to-predict effects (e.g. the Eurodollar market: http://en.wikipedia.org/wiki/Eurodollar). For a nation like China, who keeps very close control over their currency, won't allow it to float, and doesn't allow full convertibility (http://www.chinadaily.com.cn/hkedition/2009-09/18/content_87...), it will be quite difficult for it to seriously play a role in supplanting the dollar.
Having one actor (the Fed) is far less prone to problems than having half a dozen or more actors facing coordination and cooperation problems when faced with currency speculators operating in secondary currency markets. Just look at how Soros was able to tear the Pound Sterling out of the ERM by massively shorting it (http://en.wikipedia.org/wiki/European_Exchange_Rate_Mechanis...).
One of the reasons that the dollar is the global reserve currency is because there is so much of it in circulation. No other currency is as liquid. Moving oil purchases of a bloc of countries to a non-dollar basket of currencies ought to be a significant hit to global demand for the dollar. But those same countries will have to correspondingly increase the amount of their own currency in global circulation, if the basket is to be used for international trade contracts. Despite being a strong currency and having a strong central bank, the EU has not pursued a policy of making the Euro a globally viable reserve currency, precisely because they do not want to have to deal with the problems that stem from creating the massive amounts of currency in circulation necessary for global use.
However, something similar was done in the past in Europe. During the transition to the Euro, the currency was brought into existence for use in financial transactions three years before it was brought into physical circulation (http://en.wikipedia.org/wiki/Introduction_of_the_euro#Prepar...). So the euro existed really as a reified basket of national currencies fixed against each other in certain proportions. This was possible because of the end goal of bringing into being a fully unified monetary system and because of the close political integration of all the major players, who were subject to the financial constraints necessary to keep their currency locked into a fixed ratio with the others.
It's not clear to me that the Arab nations, Iran, Russia, and China can sustain the level of economic cooperation necessary to make their basket of currencies stick. Further, it's not clear that they can maintain stable financial policies at home, while allowing enough of their currency to be used abroad. Secondary foreign markets for a nation's currency can have difficult-to-predict effects (e.g. the Eurodollar market: http://en.wikipedia.org/wiki/Eurodollar). For a nation like China, who keeps very close control over their currency, won't allow it to float, and doesn't allow full convertibility (http://www.chinadaily.com.cn/hkedition/2009-09/18/content_87...), it will be quite difficult for it to seriously play a role in supplanting the dollar.
Having one actor (the Fed) is far less prone to problems than having half a dozen or more actors facing coordination and cooperation problems when faced with currency speculators operating in secondary currency markets. Just look at how Soros was able to tear the Pound Sterling out of the ERM by massively shorting it (http://en.wikipedia.org/wiki/European_Exchange_Rate_Mechanis...).
Great insights, but I think we have to do more than keep our eye on it. I think it's imperative that we transition significantly to non-oil based energy consumption (as the Obama administration is encouraging). The problem is we've allowed ourselves to become too dependent on spending, accounting for 70% of our economy. Americans have become accustomed to cheap products, and gas, while at the same time turning a nose up at menial jobs. If we truly want to keep ourselves safer, from needing to go to war in the Middle East, then maintaining reliance/placing value on oil means gas prices comfortably around $10 (or more) along with the corresponding inflation and further vanishment of any middle class. An unemployment rate of 10% would begin to look normal.
I think we need to do two major things: 1. increase the transition to high mpg/non-gas cars; 2. Begin to make things again and increase exports taking advantage of increased purchasing power abroad. (cheaper electricity would be third)
I think we need to do two major things: 1. increase the transition to high mpg/non-gas cars; 2. Begin to make things again and increase exports taking advantage of increased purchasing power abroad. (cheaper electricity would be third)
Well, I agree that we should transition to other energy sources, but that's not really topical to the article. It doesn't matter much whether we use oil or not domestically. It's whether or not major chunks of international trade will remain denominated in dollars. Oil just happens to be a major, internationally traded commodity, and oil markets are mostly denominated in dollars because the dollar is seen as the most stable/reliable currency (as opposed to the domestic currencies of oil-producing countries say).
The threat of oil-producing countries shifting their exchanges from dollar denomination to a non-dollar basket of currencies is that all of a sudden the demand for this vast amount of dollars in circulation outside of the United States will drop, and there's very little that the U.S. could do about that immediately. If the demand for dollars drops, its value relative to other currencies drops, and the United States will face massive inflation in imported manufactures, commodities, and raw materials.
Producing green technology at home may wean our dependence on oil, but doesn't do much to prevent our currency from collapsing due to a sudden drop in demand for it abroad.
The threat of oil-producing countries shifting their exchanges from dollar denomination to a non-dollar basket of currencies is that all of a sudden the demand for this vast amount of dollars in circulation outside of the United States will drop, and there's very little that the U.S. could do about that immediately. If the demand for dollars drops, its value relative to other currencies drops, and the United States will face massive inflation in imported manufactures, commodities, and raw materials.
Producing green technology at home may wean our dependence on oil, but doesn't do much to prevent our currency from collapsing due to a sudden drop in demand for it abroad.
Sorry for the late reply; I didn't see your response. The reason I say a transition away from oil is needed is precisely topical, and I disagree. It does matter whether or not we are dependent on oil domestically. Currently oil runs through our economy like woven thread. You raise oil prices and that causes immediate inflation because production and delivery of products depends on oil. With an economy that is 2/3 dependent on consumer spending you don't want steep price inflation. That's why it would be a benefit to not be as reliant on oil domestically. The value of the dollar could fall, yet domestic product prices wouldn't reflect it (as significantly) and as a consequence choke our economy.
> Americans have become accustomed to cheap product, and gas, while at the same time turning a nose up at menial jobs
I understand that cheap gas is bad for environment, but why are the other items in your list bad? Everyone who is doing a menial job wishes they could afford to turn a nose up it, and cheap products are great. Even cheap gas is good for Americans (apart from the environmental damage) because it means freedom of movement as transportation is so affordable.
I understand that cheap gas is bad for environment, but why are the other items in your list bad? Everyone who is doing a menial job wishes they could afford to turn a nose up it, and cheap products are great. Even cheap gas is good for Americans (apart from the environmental damage) because it means freedom of movement as transportation is so affordable.
In my post I was concerned with the health of the economy, not the environment. It's true that energy and the environment are linked, but that problem is not the focus here.
agreed, and furthermore, it begs the question...what will these nations do with their own immense reserves of dollars? just write them down? sell them? to who? could japan and china even do that without destroying their own economies?
Ugh. "The dollar is falling! The dollar is falling!" is one of the four memes of the redditocolypse. It's one of those things that people don't have rational discussions about, and nothing ever gets resolved.
A lot can and will happen between now and 2018. True, Britain will likely be a Euro state, but China's inevitable slowdown over the next decade will likely stall the transition away from the dollar.
"China's inevitable slowdown" - what is the basis of that prediction?
oh thats an easy call. even as we speak they are engaged in a stimulus program every bit as strange as our own and even stranger - their banks are FORCED to make loans!
the pressure to keep the growth machine going in china has been immense...but nothing grows to the sky, particularly in a global recession. the chinese will learn the hard way, as we are, not to fight economic cycles.
its not an issue of when china will have a major crash, but when and how deep
the pressure to keep the growth machine going in china has been immense...but nothing grows to the sky, particularly in a global recession. the chinese will learn the hard way, as we are, not to fight economic cycles.
its not an issue of when china will have a major crash, but when and how deep
I agree - the question always IS when and not whether:) slowdown has a non-zero probability and will happen - the nontrivial part is predicting whether in a decade or five?
these oil-valuing articles have been coming out nonstop over the last few years. i'd be amazed if anything comes of it. washington simply cannot allow the dollar to be usurped, and frankly neither can these other nations. the dollar may be a toilet-paper currency, but everyone is holding it...who can afford to have the dollar lose substantial value? no one. i have to give the Fed credit, they've made america's problems the world's problems.
http://en.wikipedia.org/wiki/Special_Drawing_Rights
This is a weighted average of several currencies, in addition to the USD. I think it's much more likely that, if oil is to be traded in any non-USD currency, it will first be traded in a pseudo-currency that includes the USD.