A special reserve currency for the world
The USD dominates the world's official foreign exchange reserves at about 60% compared to ca. 20% for the Euro.
Putting aside issues of nationality etc, would you like to see another currency take over this role? In which ways would that be good or bad? Would you pick an already-existing currency or would you prefer to use something more esoteric?
"One day, we shall die. All the other days, we shall live."
No.
The USD as reserve currency works, the USD is one of the oldest currencies in the world and (besides technically for hours decades ago) there's never been a US default. There's very few other currencies in the world that can say both those - GBP (another former reserve currency) is one but I don't see any reason for it to switch that way.
If change happens (and it may and probably will eventually), best its happen organically. Nothing esoteric.
Originally Posted by Ominous Gamer
"One day, we shall die. All the other days, we shall live."
Reading some of the letters from that UN working group just makes me think it's an incredibly boring place to work.
Can someone explain the Triffin dilemma to me a bit more? It's the first I've heard of it and it doesn't totally make sense to me.
As much as it seems less-than-ideal to have a single country's currency be a "reserve" currency, the reality is is that currently is a multi-polar world. That's the beauty of the whole thing -- every currency is backed-up by the perceived reality of that currency in relation to other currencies. Even a "new" currency like the Euro is backed-up by its real economic use in the Eurozone.
An international "reserve" currency would be backed-up by nothing. It would be even more of a psychological ploy than our current currency market, which I imagine would make it even more susceptible to manipulation and crashes than our current system.
Start by backing it with the IMF's special drawing rights and then adjust the composition of that basket to also include valuable international assets such as Eurobonus travel points, stock transaction fee coupons, clean water, etc.
"One day, we shall die. All the other days, we shall live."
Yeah, because one of the key traits to a reserve currency is a lack of transparency
Last night as I lay in bed, looking up at the stars, I thought, “Where the hell is my ceiling?"
WTF?
What do you think the purpose of a reserve currency is?
It was just a starter, surely there must be alternatives. Or, if the IMF is serious about being the backers of a global supranational reserve currency, perhaps we can force them to become more transparent.Yeah, because one of the key traits to a reserve currency is a lack of transparency
"One day, we shall die. All the other days, we shall live."
Lets start by saying what the purpose of the reserve currency is. Once we're settled on that, we can figure out what does its job best.
Well one purpose may be to facilitate stable and reliable international economic relations.
"One day, we shall die. All the other days, we shall live."
Relations is quite a vague word there what do you mean by it?
I wasn't talking about transparency of process. That was a reference to transparency of value.
Last night as I lay in bed, looking up at the stars, I thought, “Where the hell is my ceiling?"
I've been meaning - for a very long time - to write an article addressing some aspects of this debate. This is not the time or place for said article, but some brief comments on the immediate issue at hand:
It is clear that an explicit currency peg is a great way to screw up international trade and finance. We saw this with the Bretton Woods system, and we saw it with the European Exchange Rate Mechanism. In that context, then, it is obvious that having a single national currency doubling as the official international reserve currency has some definite drawbacks (I want to emphasize that the Triffin dilemma mentioned applies much more to fixed exchange regimes like Bretton Woods than to the floating regime we've had for the last four decades). However, the US dollar is not any longer an official reserve currency - exchange rates generally float freely (except for countries like China which monkey with the exchange rate on purpose), and the dollar is less an official reserve currency as a commonly accepted store of value. The depth and liquidity of dollar and dollar-denominated markets makes them very valuable for most transactions, including forex transactions. As a result, most transactions between currencies are actually mediated through dollars, meaning most international trade also runs through dollar markets. It's a bit of a chicken and egg problem - because dollar markets are so large and liquid, people use them as a common medium of exchange, which makes them even larger and more liquid.
Anyways, since international trade and forex transactions largely use dollars anyways - without any intervention by national governments - it makes sense for countries (especially smaller, export oriented economies) to stockpile the common medium of exchange - dollars, or dollar-like securities like US Treasuries - in order to fend off shocks to the trade/current account balance. This makes the dollar the de facto reserve currency, even in the absence of a formal system like Bretton Woods.
Now, it's possible you could replace the dollar with another national currency. The big criteria would need to be faith in the liquidity and stability of the new currency, as well as the currency being of sufficient size in terms of market and trade weighting to become a common medium of exchange. Currently there are no national currencies that will fit those criteria. The two obvious candidates are the Euro and the Yuan. The Euro is hampered by a great deal of uncertainty as to its status, regulation, stability, and future. The Yuan is still a tightly controlled currency with disastrously awful capital controls. In the absence of significant changes to either currency, there simply aren't alternatives to the dollar.
Now, there are any number of synthetic options that have been floated. SDRs are a red herring and are unlikely to ever get much traction - they're just a basket of currencies, so it's subject to all the problems of each individual currency without giving you much in return. A truly synthetic currency like Keynes' bancor sounds like a nice idea on paper, but would probably be a nightmare to effectively administer... and if it wasn't used for actual transactions, it would lose its theoretical utility. Precious metals, while having much in the way of stability, have lots of other issues that make them wholly unsuited to global monetary policy.
What this boils down to is that the current system is certainly flawed, but there are precious few viable alternatives. I do think that a more expansive view needs to be taken of appropriate national monetary policy to help smooth out potential shocks to debt, equity, or forex markets due to sharply shifting exchange rates. Lots of small export oriented economies have experimented with various macroprudential and unconventional measures in monetary policy in order to protect their economies from wildly appreciating exchange rates and capital influx in response to havoc in dollar, euro, pound, and yen markets. I think that these interventions are potentially quite dangerous and counterproductive (I certainly don't favor exchange rate tinkering on the scale used by China), but that there may be a place for their limited implementation to shelter smaller economies during times of economic upheaval. In this context, it suggests that some of the downsides of having the de facto global currency be managed by a national central bank can be mitigated by carefully modulated short-term policy action by other central banks. This hardly means we should engage in a race to the bottom, shunting excess capital away from all of our markets in order to protect exports, but it does suggest that volatility can be damped down to make currency shifts more gradual and closer to their real long-run value.
I want to emphasize again that this is dangerous - exporters can't indefinitely sop up excess liquidity by increasing the size of their reserves - it's wasteful and means that the changes that need to happen get delayed. Yet there is scope for some reevaluation of the role of reserves and management of the short term exchange rate. The dollar's central role in the global economy is not mere happenstance or imperialism - it makes a lot of sense, and will continue to do so for at least the near future.
These are interesting responses. The inspiration for this thread came from the implicit claim in the "Fiscal Cliff" thread that another currency could replace the USD as the dominant global reserve currency more easily than I believed!
I brought up the SDR because it continues to be brought up as a possible alternative by eg. expert panels and by people who presumably accurately represent their nations' willingness to use an SDR-based system. Of course, for such a system to become a viable alternative to the USD the IMF and its handling of the SDR system would have to change dramatically in several ways. For example, at the end of the road you'd probably need to have an international central bank that can act as a lender of last resort, you'd have to change eg. the rules that prevent the IMF from allocating SDRs on short notice to maintain liquidity, and you'd have to make it easier for private institutions/actors to use SDRs. And that's provided you get the US to cooperate with this project
But, in the short-to-medium term, there are other things you can do to bolster the SDR's usefulness, right? Allocate more SDRs, change the composition of the basket--which may already be a little more stable than the constituent currencies--to include real goods, convince the major oil-producing countries to quote oil prices in SDRs rather than USDs. In emerging markets, we're already seeing a willingness to use currencies other than the USD. If China can trade with Japan and Russia can trade with Brazil using rubles, yen, yuan, beef, then surely the same countries can also go over to using SDRs provided that system is expanded and made more flexible? (given that both the Chinese and the Russians have expressed a desire to use SDR)
Btw, this thread has, so far, mostly touched on economic aspects. What're your takes on the political and strategic aspects?
"One day, we shall die. All the other days, we shall live."
You mean the issues of nationality you told us to put aside?
Last night as I lay in bed, looking up at the stars, I thought, “Where the hell is my ceiling?"
Sorry, I was unclear. I meant hidden bias caused by national loyalties. It's all right if you're open about it and agnostic re. the "goodness" of the consequences
"One day, we shall die. All the other days, we shall live."
Good question. Should a global reserve currency be "owned" by one nation, or manipulated by its Federal Reserve banks that are 'independent' of congressional legislation?
It's one thing to debate floating sovereign currencies (pound sterling, euro dollar, yen or yuang) but quite another to compare them ALL to the US dollar.
If the USD becomes too volatile or politically corrupt, its purpose as a reserve currency for global economies becomes moot.
:shrugs: China is pushing the idea because they've finally realized that the dangers of their excessive dollar holdings are a two-way street and they're looking for a way out that doesn't make the renminbi rise and thus cost their officials any official embarrassment.Sorry, I was unclear. I meant hidden bias caused by national loyalties. It's all right if you're open about it and agnostic re. the "goodness" of the consequences
Last night as I lay in bed, looking up at the stars, I thought, “Where the hell is my ceiling?"
After finally reading Wiggin's post, I just want to give ato it generally. To be honest, a good part of me wonders if the solution is simply thicker skin/more economic education so that average people understand these issues enough to remove a bit of the politics from it.
I know that's sort of a weird takeaway, but when you think about the various unhealthy/unsustainable attempts to influence monetary policy, many of them are based around the idea of protecting export industries or preventing political instability. Some more early education on these issues could help tamp-down the irrationality of these discussions (which are problematic in the US too).
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