Towards a new global reserve currency…the end of the U.S. dollar?

Maybe we should start with a quick reminder about the meaning of “a reserve currency”. Well, a reserve currency could be defined as a foreign currency held by central banks and other major financial institutions as a means to pay off international debt obligations, commodities such as gold or oil, or just to influence their domestic exchange rate.

Considering this definition, there are many questions that rise automatically: do we really need a reserve currency? Why the US dollar and not another currency? Could any other currency replace the US dollar?

Do we really need a reserve currency? What is the point of having one?

What’s the point of having a reserve currency? From its meaning, it serves first of all as a standard unit for international payments and thus it protects national currencies against shock. But more importantly, manipulating reserve levels can enable a country’s central bank to intervene against currency volatility  and thus help to adjust exchange rate. If demand for the  yen drops,  for example,  Japan can use their extra US dollars to buy up the unwanted yen, thereby propping up its value.

Why the US dollar and not another currency?

The first currency to be held in foreign reserves was the British pound, during the 18^th and 19^th centuries. That changed after World War II, when the major economic powers met at Breton Woods and established the exchange-rate system and the International Monetary Fund to oversee it. Under that system, the US dollar became the “de facto reserve currency”, partly because the United States was an economic power and partly because the dollar was backed by gold (In other words, any country could trade its dollars back in exchange for gold). As a result, the US dollar was considered extremely stable. Nowadays, the dollar still makes up more than 50% of global reserves, trailed by the euro, which constitutes about 25%.

Does any privilege accrue from being the reserve currency? Certainly. Part of the privilege is that the US can borrow in its own currency and later pay back the debt in its own currency even when the dollar has decreased in value. Furthermore, commodities and international invoices are priced in the reserve currency (US dollar),  so for the US economy there is no additional cost in the event of currency fluctuations.

So, if there is a need for a reserve currency, and if the US dollar is the most stable currency at the moment, why are China and Russia calling for a new global currency?

It was reported recently that two of the world’s superpowers, Russia and China , have called for a new global currency. I believe they’re doing this because they know that the US is printing (or planning to print) huge amounts of dollars right now to pay down its own massive debts (debts that other countries, like China, have been financing for years by purchasing US Treasury Bonds).

But, what America tends to forget is that: “the more paper money you print, the less it’s worth” and right now, with the Americans’ new stimulus plan, the federal reserve is planning to print many more paper money. (Don’t forget this is the country of “yes we can”).

So, how does it work?

You see, when a country buys a bond, in fact, it is loaning money and charging interest to the issuer of that bond to be paid upon maturity.

Well, for years now, other countries have been buying US bonds so the USA could in turn buy all of their made-overseas stuff. They were essentially loaning their biggest customer the money it needed to buy from them. For instance, US owes China alone over a trillion dollars. That’s just one of many countries that the United Stated owes money to.

So now, to get America ’s bills paid, The Federal Reserve is purchasing those US Treasury bonds that other countries used to buy. To do that, a lot more dollars have to be printed to buy them.

So, the fact that china is asking for a new reserve currency is a clear sign that China , as the largest holder of US dollar financial assets (bonds), is concerned about the potential inflationary risk of the US Federal Reserve printing money. Indeed, US dollars could decrease in value very soon, because The US Federal Reserve would print many of them to loan out. Logically, “the more there is of something, including money, the less it’s worth”.

What is the Chinese argument with regards to the new reserve currency system? Well, according to China , to better insulate countries from the ills of one country or one currency, they are pressing the IMF to create a “reserve currency” based on shares in the body held by its 185 member nations, known as special drawing rights (SDRs). The thing is, at present, the currencies in the SDR basket are by weight, the US dollar (44%), the Euro (34%), the Japanese Yen (11%) and the British Pound (11%). So ultimately, this new reserve system would not make that much difference except that, in addition to the US dollar, China would have the chance to diversify the basket of their reserves, keeping the US dollar at the top (just like now). Their argument nevertheless does make sense.

Could any other currency or reserve currency system replace the US dollar?

Not so sure. Why? Because first of all there is always an advantage to an individual central bank  holding its reserves in the same currency as other central banks. By far, the US dollar remains the main portion of central banks’ reserves around the world including China (approximately, the US dollar would make up more than 50% of global reserves, trailed by the Euro). Thus central banks  find it attractive to hold US dollars because other central banks hold US dollars. With everyone doing likewise, the market in dollars is deep, liquid and likely to last for long time ahead. Secondly, oil and many commodities are priced in dollars. Business deals around the world are done in dollars. Also, the US dollar is still considered by most investors as the more stable currency  compared to others such as the Euro or the Yen. Finally, it would require acceptance from nations around the world that have long used the US dollar and hold huge stockpiles of the US currency, before shifting over to any other reserve system. Can this happen suddenly?

Let’s finish this paper by pointing out that the idea of creating a new global reserve currency isn’t new. For decades there has been talk about creating an international reserve currency and it has never really progressed. Why? Because managing such a currency would require balancing the contradictory needs of countries with high and low growth or with trade surpluses and deficits.  Probably, in the end, the most powerful currency will predominate. This would be the US dollar again considering its stability and availability around the world.

Anyway, countries aren’t required to keep their reserves in dollars, they do it because they want to (The dollar’s “primary reserve currency” status is more de facto than official.) So, if China decided to dump its reserve of dollars, it would not only jeopardize its relationship with the United States , but other countries wouldn’t necessarily do the same.

So, Dear China, would you like to take the risk?

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GOLD STANDARD: YES OR NO?

Un sommet, un Jour, et voilà l’Economie mondiale sauvée!

Tout commença au début des années 80 lorsque le president Reagan aux Etats Unis et Madame Thatcher en Grande Bretagne decidèrent de réduire le rôle de l’Etat dans la sphère financière et partant économique du Monde. Naissait donc la fameuse formule des trois D (Décloisonnement, Déréglementation et Désintermédiation). Ce vaste mouvement des trois (D) entraina ainsi d’un côté une profonde modification des activités financières traditionelles avec par exemple la création des march és à terme, des march és d’options négociables, ce qui engendra de facto de l’autre côté de nouveaux produits financiers (de moins en moins maîtrisables et de plus en plus sans valeurs réelles). Naissaient donc ce qu’il convient d’appeler aujourd’hui les “Produits Dérivés”. J’y comprends pas grand chose moi même…ce qui est pourtant certain, c’est que cette nouvelle donne encouragea et des stratégies de plus en plus opaques au sein des firmes financières (Lehman brothers ou encore le père Madoff pourront vous en dire d’avantage), et des produits financiers risqués difficilement valorisables et dont la liquidité n’est jamais assurée (demandez conseils aux dirigeants de la défunte Northern Rock en Grande Bretagne ou encore aux desormais célèbres Freddie Mac, Fannie Mae du côté de L’Oncle Sam).

Cet environnement favorable au “et pourquoi pas moi” finit donc par faire apparaître des bulles spéculatives: la hausse entraînant la hausse, l’accélération de la demande de titres générant des plus values de plus en plus attractives, et du coup, même le ménage le plus pauvre se retrouva propriétaire d’une villa (Bien sûr, c’est le pays du “Yes We Can”): Bonjour les subprimes!. Et voilà que tout le monde était heureux: des ménages insolvables avec de belles maisons ne leur appartenant pas (logique de l’emprunt immobilier oblige). Des banques et institutions financières fières de leurs exploits car ayant accordé assez de crédits et donc perspective d’un retour à l’investissement alléchant. Des spéculateurs ayant acqui des actifs (actions et titres) dans ces banques et institutions finacières qui sans doute présentaient de bons bilans avec de belles perpectives de croissance.

Mais voilà que le rêve s’avéra de bien courte durée!!! et oups, des ménages qui n’arrivent plus à rembouser les emprunts, et puisque tout le monde était devenu propriétaire, du coup personne ne demande à acheter une maison, et voilà la banque qui ne sait plus quoi faire des maisons qui ne font que perdre de leurs valeurs sur le marché immobilier (l’offre de maisons étant supérieure à la demande), et voilà que ces banques se retouvent en manque de liquidités (Northern rock, Freddie Mac etc), leurs cours qui baissent sur le marché financier, et donc des spéculateurs qui cherchent à revendre leurs actifs devenu toxiques, mais entre nous qui pouvait les racheter? Personne.

Et donc tout le monde devient malheureux!: Les ménages qui perdent leurs maisons (de l’autre côté on parle de “foreclosure”, comprenez “saisie immobilière”), des banques qui déposent le bilan, et des investisseurs qui réclament leur argent auprès des escros tels Bernard Madoff…bref rien ne va plus! Et à l’adage “lorsque les Etats Unis respire, la planète vit” on aurait pu opposer “lorsque les Etats Unis étouffe, la planète se meurt”

Alors petit “Jesus” sur Terre tient à tout arranger, suivez mon regard…G20

Un sommet, un jour, et voilà que tout est redevenu normal!

Aussi facile? Pas si sûr.

Tout d’abord les conclusions du fameux G20

- première mésure phare: Mobiliser de l’argent neuf pour éviter la syncope financière, en l’occurrence 1000 milliards de dollards à injecter dans l’économie mondiale via FMI, BM. Bien me diriez vous! Mais seulement j’arrive toujours pas à comprendre comment est ce que ces milliards seront reversés aux Etats dits en besoin, en admettant bien sûr qu’ils soient déjà disponibles ces milliards. En d’autres termes, cet argent frais sera t-il de nouveau redonné aux mêmes dictateurs (Omar Bongo, sassou nguesso, Paul biya, Hugo Chavez, Than Shwe, etc.) qui à leur tour iront renflouer les mêmes paradis fiscaux denoncés lors du sommet?

-deuxième mésure phare, et tenez vous bien: Mise à l’index des paradis fiscaux et contrôles accrus pour les fonds spéculatifs. Une seule phrase: Et si les présidents menbres du G20 (Abdullah Bin Abdul Aziz pour ne citer que celui là) commencaient par arrêter de placer leur argent dans ces pays sous couvert soit d’anonymat (dans le cas des pays avec secret bancaire) ou sous couvert d’ organisations carritatives ou à but non lucratif… j’ai rien dit!

- troisième mésure phare: Renforcement des pouvoirs des institutions internationales. C’est à dire? Je comprends pas bien là. Donc, depuis, ces institutions dont les fonctionnaires touchent de si gros salaires, en fait, elles ne servaient jusqu’à lors pratiquement à rien! Amen.

De toute facon, la crise sera bientôt finie. Merci le G20!