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.

Saving grace of slow money

With all the money being pumped into the economy from the Feds, Tom Campbell says we may be looking down the wrong end of 13% inflation in about a year, as soon as the velocity of money picks up.

Paul Krugman says “don’t worry be happy”, inflation is econo-imaginary boogeyman and a bit of inflation will pint-size the debt, anyway.

The story here is why I think the answer will lie somewhere in the middle. If there is one fundamental change that we may be facing is that Americans may begin to save more. Not Asia type of savings, but more than in the recent past. If inflation creeps up, Bernanke and co will have to jack up interest rates which will also create and incentive for increased savings.

So jacked up interest rates and increase in savings may both contribute to lessening the return of high-velocity dollars, which may in turn dampen inflation so it’ll just be high, rather than very high.

Money quote:
With income growth far outpacing spending, Americans' personal savings rate zoomed to 5.7 percent, the highest since February 1995, the Commerce Department reported Monday.

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War on savers

Inflation is eating away at your money faster than a normal savings plan will grow it. Bottom line, it now costs money to save. Seriously, how did we get into this mess? (That's a rhetorical question).

If increasing savings in the US was difficult before, it is actually counterproductive now. There is actually no point to save. This is great news for fans of foreign deficits

Here's the money quote on how depressing the situation has become:

"As I pointed out last week, one of the few things you can do easily to avoid this trap (inflation) is to buy some of your family's non-perishable foods, like pasta and canned foods, ahead of time and in bulk. Their prices are rising much faster than your savings are growing in the bank."

Fed Move Is Tough News for Savers

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.

Recession to be longer than usual: UMich | U.S. | Reuters

Recession to be longer than usual: UMich | U.S. | Reuters

Here's a quote:
Paradoxically, worsening economic conditions will induce families to save money, reinforcing the drag on an economy that has become largely reliant on consumer spending.

True, but increasing US savings would also reduce the trade deficit and would also help shore up the dollar. Increased savings may also do more to boost lending than the current reduction in the interest rates. Increased savings would keep more money in the US system and mitigate the necessity for aggressive monetary policy.

I'm also guessing that consumers with more savings in their accounts would also be a lower credit risk, making them more attractive to banks.

And finally, increased (and sustained) savings in the US means there won't be a generation of pensioners in about 20-40 year without enough money to live off of.

I'm not begging to a long and deep recession, but if it hurts enough to in some ways impact the mentality of the current generation and encourage them to save more, borrow less and spend within their means, then the current period of pain will be worth it in the long term.

And oh yeah… what would a post be without my obligatory warning on inflation (which increased savings would also help mitigate.)

Inflation pressures will linger despite the retrenchment in consumer spending, complicating the task of policy-makers, the University's Richard Curtin said in a report, citing data from industry group The Conference Board.