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Posts Tagged ‘international reserve currency’

Dollar Devaluation Is a Dangerous Game

Posted by Larry Doyle on October 8th, 2009 9:24 AM |

Can we ‘devalue’ our way back to our days of economic ‘wine and roses?’

Many debt-laden countries throughout economic history have chosen to implicitly or explicitly pursue a devaluation of their currency as a means of improving their economies. Are the ‘wizards in Washington’ taking this approach? Aside from a few perfunctory comments in defense of the greenback, Washington has been largely silent on the topic of the declining value of the dollar. Many believe Washington very much favors a weaker currency as a means of supporting our economy. I believe this of Washington, as well. Let’s navigate.

Going back to the G20 in London last Spring, the Obama administration has attempted to curry political favor with emerging economies, especially the BRIC nations, by ceding dollar sovereigncy as the preeminent international reserve currency in return for support of global economic stimulus programs. Why does Washington believe a weak currency serves our economic interests? A weak currency generates and supports the following:

1. Promotes inflation as imports decline. Washington would like some inflation, given the massive deflationary pressures presented by falling wages and declines in the value of commercial and residential real estate.

2. Promotes exports for corporations with a multi-national presence.

3. Supports labor by making it more attractive for companies to keep jobs here as opposed to opening factories or sending work overseas.

So, in light of our current economic crisis, why wouldn’t we want a substantially cheaper dollar to maximize these benefits?

Recall that economists always need to keep certain variables static in order to study the impact of a change in another variable or multiple variables. This approach, known as ‘ceteris paribus,’ is not quite as easy as some may think. Why? Variables are NEVER static, or ‘ceteris is NEVER paribus.’ (more…)

Tags: balance of trade, BRIC nations, capital, capital flight, capital flows, ceteris paribus, commercial real estate, commodities, David Malpass, debt, Deficit, deflation, dollar, dollar decline, dollar devaluation, dollar vs Euro, Economy, exports, G20, Geithner, gold, greenback, imports, Inflation, international reserve currency, international trade, labor, Obama Administration, oil, residential real estate, stimulus, The Weak-Dollar Threat to Prosperity, wages, Washington, Washington's approach to value of dollar, weak dollar
Posted in Deficit, deflation, Economy, emerging market economies, Federal Reserve, General, U.S. dollar | 9 Comments »

Increasing Chinese Protectionism: A Real ‘Prisoner’s Dilemma’

Posted by Larry Doyle on June 23rd, 2009 2:25 PM |

Can we all just get along?

As the global economy continues to struggle, tensions within the international trade arena increase. To wit, today the United States and European Union fired a salvo back at a BRIC nation–none other than our largest creditor, the People’s Republic of China. Bloomberg highlights, E.U, U.S. Complain at WTO Over Chinese Export Curbs:

The European Union and the U.S. complained at the World Trade Organization about Chinese export restrictions on raw materials such as magnesium, their third joint complaint against the Asian nation.

The EU and the U.S. said they filed a request for consultations at the WTO in Geneva today, setting off a period of discussions with China aimed at resolving the dispute. If talks fail, WTO judges can be asked to rule on the issue.

“We are most troubled that it appears this is a conscious policy to subsidize Chinese industry,” U.S. Trade Representative Ron Kirk told journalists in Washington. “China is a leading global producer and exporter of the raw materials in question, and access to these materials is critical for U.S. industrial manufacturers.”

If this complaint were filed in the midst of a strong, robust global economy, one could dismiss it as a ‘one off situation.’ I believe it represents a far more important issue. I view this complaint as another shot in the ongoing ‘serve and volley’ being played out between China and the United States.

To this point, most of the shots have been directed from the BRIC nations toward the United States. While Obama has put forth a few statements to ‘buy American,’ the BRIC nations have aggressively promoted a move away from the U.S. dollar as the international reserve currency.

The crux of the Chinese-U.S. relations continually revolves around a very simple yet complex issue: trust!! (more…)

Tags: buy American, Chinese Export Curbs, Chinese export restrictions on raw materials, Chinese protectionism, Chinese trade disputes, Chinese trade fines, Chinese trade rulings, do Chinese trust U.S., does U.S. trust China, E.U. U.S. Complain Over Chinese Export Curbs, international reserve currency, international trade dispute China U.S. E.U., People's Republic of China trade protectionism, Prisoner's Dilemma, Ron Kirk U.S. trade representative, Shi Yinhong, Shi Yinhong international security professor, tension between BRIC and U.S., tension between China and United States, trust between U.S. and China, World Trade Organization, WTO, WTO to hear U.S. -China trade dispute
Posted in China, General | No Comments »

China Ups the Ante

Posted by Larry Doyle on March 23rd, 2009 11:12 PM |

In ten days, the leaders of the G-20 will meet for the most highly anticipated financial conference since Bretton Woods in 1944. In a bold and aggressive move prior to this conference, China’s central bank called today for the replacement of the U.S. dollar as the international reserve currency.

I have written about the tension in U.S.-Chinese relations over the last few months. The essence of this tension is captured in the Prisoner’s Dilemma and A Question of Honor.

Make no mistake: the timing, tone, and substance of this message so close to the start of the G-20 is another major shot across our bow. The ramifications for a change in this international reserve currency are enormous, both politically and economically. Check out current, worthwhile discussions on this topic collected from a variety of sources at Memeorandum.com. In addition, I recommend reading the following article from the Financial Times:

China calls for new reserve currency
By Jamil Anderlini in Beijing
Published: March 23 2009 12:16 | Last updated: March 24 2009 00:06

China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund. (more…)

Tags: Bretton Woods, China, China's Central Bank, China's fear of inflation in U.S., China's foreign reserves, G20, IMF, Inflation, international reserve currency, Prisoner's Dilemma, Question of Honor, U.S. -Chinese relations
Posted in China, Economy, Foreign Affairs, Foreign Policy, General | 3 Comments »