China's Super-Sovereign Reserve Currency Idea: Could the SDR Be a Reserve Currency?

China's Super-Sovereign Reserve Currency Idea: Could the SDR Be a Reserve Currency?

This I think is one of the more interesting thoughts on China's push to SDR's as reserve currency:

"Foley: In the short term the costs to the US of losing its role as the reserve currency would be significant as it would lose seignorage benefits and ability to borrow in its own currency. In the longer term, the U.S. would benefit as it would regain some control over its currency. A central currency would make it harder for one country to get into so much debt to another. If the currency was increased along with global GDP it could provide a steady store of value."

Although bitter medicine, the US dollar losing its place as the global reserve currency could actually benefit the US economy in the long-term because it would force the US to lessen its reliance on debt and increase its savings.

Yes, that would cut consumption and lower growth rates, but the growth that does occur will be more stable and sustainable.

Hoping for higher rates

So here's my call.. I'd love to see interest rates begin to creep up, it would add some stability to the US markets. Higher rates would send a signal to the market that the fed is serious about shoring up the dollar and tackling any hint of inflation (well, it is more than a hint now).

So higher rates would mean strong dollar, curb in oil prices and a reduction in inflation expectations. All those things would be a huge help.

Don't think it would impact consumer lending right now because how much of it is now going on? Would hurt an already wounded housing market, though.

Has Danger to U.S. Economy 'Diminished'? : NPR

Dollar vs. Euro

Following my post: "Why is the Euro doing so well...", a reader asks:

What about the other currencies, it's not just the dollar. Banks have started switch more and more of there reserve currency from the dollar over to the euro.

Good question, so instead of answering in the comments section, I thought I'd do a post. So here's my reading on the situation:

First off, it is not that the USD is just doing poorly against the Euro, it is also faring badly against other currencies as well. I hail from Canada so US$/C$ exchange rates are always of interest. I can tell you that going back up to Toronto to visit friends and family isn't as cheap as it used to be. Friends and family now view us as the poor American relations coming North to mooch off of them.

US$/C$ parity was such a momentous occasion, I actually remember where I was when I first learned of it back in September.

In regards to the question of banks switching over reserve currencies to the Euro, I think the reader is referring to a number of countries, namely China, using a basket of currencies (rather than just the USD) either as a reserve or as a peg.

The reason here is diversification. The dollar is tanking so if you're holding a large amount of dollars (as China is), then your holdings are rapidly declining. If you want to stabilize your holdings and diversify away some of your risk, then you’d want to start holding other currencies.

Essentially all of your value/risk is tied up with one currency and in the current environment, if that currency is the USD then you’re not feeling as rich as you once did.

If you’re pegged to the USD (meaning your local currency has a fixed exchange rate to the USD), then the value of your currency is also declining. For countries that import a lot, a declining currency is putting yet more very unwanted upward pressure on prices. This is particularly worrisome in the Gulf countries where the influx of oil money and their declining dollar-pegged currencies are contributing to huge increases in inflation.

The next question usually is, will the world move off the USD as a reserve entirely? Not likely, IMHO. Too many things are still priced in dollars and the dollar-as-global-reserve is too ingrained in the current system. It would take a huge calamity, greater than the credit crunch we are currently facing, to move the world off the dollar-reserve.

"Why is the Euro doing so well..."

...a European friend recently asked me.

"It isn't," I replied with a sigh. "It is just the US dollar is doing particulalry poorly.

China and inflation

Paul Krugman again weighs in on China and inflation.

Basically, he says that an increase in the price of Chinese goods is not sufficient to cause US inflation. The actual China cost is just a small percentage of a US price; transportation, overhead and so on form a greater percentage of the total cost of a good.

True. I think China's impact on US inflation is more indirect.

1) China has a huge demand for commodities. It's additional demand is causing the price of the supply to rise.

2) Commodities are priced in US dollars. With the dollar tanking, the price of dollar denominated goods will rise.

This combination will continue to be a nasty one-two punch on the US economy until either demand dries up (not likely) or the dollar strengthens, but it is hard to see how that will happen with interest rates so low and probably going lower.

Thoughts on deficit drop

Some quick thoughts on whythe drop in the US trade deficit.

Low dollar means foreign goods are more expensive here, so demand drops. Low dollar also means the US goods are cheaper elsewhere so demand abroad increases. This may be fine while it lasts, but a low currency is not what I would call a sustainable competitive advantage for the US.

The positive side to this, however, is that exports could help lessen the impact of a recession. Recovery could very well be export-lead.

Low confidence could mean that consumers are spending less, that would worsen the impact of any recession. On the plus side, however, if consumers are spending less, that could mean that they are (hopefully) saving more.

If that becomes sustained, that would be a huge plus because it would keep permanent downward pressure on the trade deficit, could boost liquidity without excessive interest rate cuts, and in the long run will make the individual financial situation of US consumers more stable, especially in their retirement.

Buffett: Bank woes are poetic justice | U.S. | Reuters

'nuff said.

Buffett: Bank woes are poetic justice | U.S. | Reuters

Foreign Demand Aids Durable Goods - WSJ.com

This is one of the more interesting articles I've come across and I think gives some hints as to what is going on in the economy:

1) This is a consumer lead downturn

2) From a US business perspective, it is financial institutions that are in trouble. Sure, financial institutions are important but when we talk about an economic slow-down, is it really impacting US businesses across the board or is it focused on one (admittedly large) segment of US enterprise?

3) US manufacturers like the low dollar. That is good in the short term but what happens when/if the dollar goes back up?

4) I still equate low-dollar with the inevitability of higher inflation... it is out there, somewhere.

Foreign Demand Aids Durable Goods - WSJ.com