Tweet
The Chinese Proposal for a New Global Super Currency
As I discussed a few weeks ago in a New York Times op-ed the Chinese are flexing their muscles on the question of the global reserve currency system dominated by the dollar.
With the revision of the SDR basket (so far including only dollar, euro, yen and pound) coming to the table next year it is clear that the Chinese will push for including the renminbi in the new SDR basket. And senior Brazilian policy sources suggest in private that, if the RMB is included in the SDR, so should the Brazilian Real as there is already a much deeper bond market for Real debt and as - unlike China - Brazil has a more liberalized capital account. And the Russians are now openly pushing for commodity currencies - the Canadian and Australian dollar but also the Ruble - to be included in the SDR basked. And the BRICs are on record pushing for the IMF to issue SDR denominated debt.
So the process that will lead - in the medium-long term - to a challenge of the US dollar as the major global reserve currency has started. The US creditors - the BRICs, the Gulf states and others - are becoming increasingly alarmed that the US will deal with its unsustainable fiscal path via inflation and debasement of the value of the dollar via depreciation. So they will not sit idly waiting for this to happen: they are already diversifying into gold, into resources (as China purchases mines and energy, mineral and commodity resources all over the world) and into shorter term maturity US Treasuries that have less market risk than longer term Treasuries. With two-thirds of US Treasuries, being held by non-residents and the average maturity of such government debt down to 4.5 years, the risk of a refinancing crisis and disorderly fall in the dollar will increase over time unless the US presents a credible plan for medium term fiscal consolidation.
Increasingly it is clear that unless such reduction in fiscal deficits occurs the incentive to continue monetizing them will increase. In the short run such massive monetization has not been inflationary as money velocity has collapsed and as the slack in goods and labor markets is still rapidly rising. But over time - late 2010 and 2011 - deflationary pressures will lead to an increase in expected inflation and then in actual inflation if monetization of persistently large fiscal deficits continues. Indeed some in the US argue that wiping out the real value of public debt and dealing with the private sector debt deflation through a bout of double digit inflation may be the most desirable way to reduce the overhang of public and private debt. While such arguments have many flaws as inflation will have serious collateral damage one cannot rule out that the US will use inflation and depreciation as a way out of its public and private debts. Greenspan's concerns about the long term inflationary effects of large US budget deficits - expressed today in a FT op-ed - go along the same lines. Thus, our creditors' nervousness about the eventual debasement of the US dollar has some increasing validity.
And here again is the full text of my recent NYT op-ed in case you missed it the first time:
With the revision of the SDR basket (so far including only dollar, euro, yen and pound) coming to the table next year it is clear that the Chinese will push for including the renminbi in the new SDR basket. And senior Brazilian policy sources suggest in private that, if the RMB is included in the SDR, so should the Brazilian Real as there is already a much deeper bond market for Real debt and as - unlike China - Brazil has a more liberalized capital account. And the Russians are now openly pushing for commodity currencies - the Canadian and Australian dollar but also the Ruble - to be included in the SDR basked. And the BRICs are on record pushing for the IMF to issue SDR denominated debt.
So the process that will lead - in the medium-long term - to a challenge of the US dollar as the major global reserve currency has started. The US creditors - the BRICs, the Gulf states and others - are becoming increasingly alarmed that the US will deal with its unsustainable fiscal path via inflation and debasement of the value of the dollar via depreciation. So they will not sit idly waiting for this to happen: they are already diversifying into gold, into resources (as China purchases mines and energy, mineral and commodity resources all over the world) and into shorter term maturity US Treasuries that have less market risk than longer term Treasuries. With two-thirds of US Treasuries, being held by non-residents and the average maturity of such government debt down to 4.5 years, the risk of a refinancing crisis and disorderly fall in the dollar will increase over time unless the US presents a credible plan for medium term fiscal consolidation.
Increasingly it is clear that unless such reduction in fiscal deficits occurs the incentive to continue monetizing them will increase. In the short run such massive monetization has not been inflationary as money velocity has collapsed and as the slack in goods and labor markets is still rapidly rising. But over time - late 2010 and 2011 - deflationary pressures will lead to an increase in expected inflation and then in actual inflation if monetization of persistently large fiscal deficits continues. Indeed some in the US argue that wiping out the real value of public debt and dealing with the private sector debt deflation through a bout of double digit inflation may be the most desirable way to reduce the overhang of public and private debt. While such arguments have many flaws as inflation will have serious collateral damage one cannot rule out that the US will use inflation and depreciation as a way out of its public and private debts. Greenspan's concerns about the long term inflationary effects of large US budget deficits - expressed today in a FT op-ed - go along the same lines. Thus, our creditors' nervousness about the eventual debasement of the US dollar has some increasing validity.
And here again is the full text of my recent NYT op-ed in case you missed it the first time:
Comment