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The "exorbitant privilege" of the US

Stephanie Flanders | 11:27 UK time, Thursday, 27 January 2011

Davos: What's going to happen first - sensible US fiscal policy, or a global revolt against the dollar? In all my discussions about the global economy so far here in Davos, that's the question we keep coming back to.

In my earlier post I spoke about the "new economic reality". The first thing you notice about this new landscape is that the successful developing countries are doing much better than the old, developed ones. The second thing you notice is the extraordinary fiscal position of the US.

America's exceptional approach to the public finances comes out starkly in today's new budget forecasts from the Congressional Budget Office. These show the federal deficit rising to nearly $1.5 trillion in 2011, the highest on record. At 9.8% of GDP, it will be only very slightly higher than it was in the depths of the financial crisis, in 2009.

In every other major advanced economy, public borrowing is going to fall in 2011. America is the only country in which both the headline deficit and the structural deficit are going up.

That increase is entirely due to the package of tax cuts agreed last month. There is a coherent case for fiscal stimulus in the US in 2011. But, as the IMF commented on Monday, when it comes to stimulating the economy, the tax cut deal agreed with Congress does not provide much bang for the buck. And it involved a lot of bucks. The CBO says the package will add $858bn to federal borrowing over time.

In theory, US politicians are committed to getting the deficit under control. But as I noted the other day, they have a funny way of showing it. In his State of the Union address this week, President Obama repeated his commitment to eliminating the deficit, outside interest payments. But the concrete spending cuts he suggested to help reach that target will reduce borrowing by a measly $40bn a year.

No-one here at Davos was expecting to hear anything very different - from the President or Congress. The rule is that America gets a free pass to run larger deficits, for longer, than anybody else. Who knows, with the likes of China growing so fast, Asian and other emerging market demand for treasury bonds might even grow faster than Washington's ability to print them.

But you have to wonder - and everyone I speak to in Davos is wondering - how long America's "exorbitant privilege" is going to last.

The only other country to have had this status - and lost it - is the UK. It took several decades, and two punishingly expensive wars, for the world to tire of holding sterling. But when they did, it changed British economic policy making forever. Indeed, we are still seeing the consequences today. Rightly or wrongly, the British government believes it cannot risk borrowing a lot more from international markets. The Americans know they have a lot more leeway.

They will have it for some time yet. But the lesson of sterling's rise and fall is that if you run current account deficits long enough, and depreciate your currency far enough, the world will eventually stop giving you the benefit of the doubt. The biggest difference between Britain in 1945 and America now is that back then, there was a ready replacement for sterling, in the form of the dollar.

The renmimbi can't replace the dollar any time soon - neither China's government nor its financial system are ready for what that would entail. Heaven knows, the euro is in no fit state to replace it either.

But looking at the way the global economy is shifting in China's favour, many I've spoken to here think the emergence of the renmimbi as a serious alternative to the greenback is only matter of time. If the past few years are any guide, this supposedly long-term change might well happen faster than we think.

To return to where I began - the question is whether the US can stop borrowing dollars before the world stops wanting to buy them.

Comments

  • Comment number 1.

    Whilst the US would appear to be loseing its dominant position, I agree that this will be a far slower process than many commentators expect. If fo no other reason that there is no clear 'heir-apparent'.

    We are now talking about the possible economic cracks appearing in the economic positions of the BRICS. Even the drawing rights argument appears to be fraught with danger.

    Perhaps we are starting to see the end of the old global financial order even before we can identify a new one.

  • Comment number 2.


    It looks like the only person who knew how to run a decent Ponzi scheme is in jail.

    A campaign to release Madoff might just save the world.



  • Comment number 3.

    Given the current level of US debt and the unfunded liabilities it has to deal with, I cannot see the printing presses being mothballed just yet.

    5 Years or so ago, the problem may have been manageable. But given the changes that have taken place in global trading patterns, the structure of the US economy and the rise of Asia, it is difficult to imagine a viable short-term solution. Even the AAA dollar rating is beginning to be questioned - something that was inconceivable not so long ago.

    Maybe the day of the 'redback' will arrive sooner than we think.

  • Comment number 4.

    When the USA spends dollars it has to borrow, the rest of the world suffers. Their can be only one end to

    this financial roundabout . The last one left holding the can...is out of the game ( and it won"t be the USA

    or China,) so that just leaves the rest of us,and l would not bet on us...

  • Comment number 5.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 6.

    America's exceptional approach to the public finances comes out starkly in today's new budget forecasts from the Congressional Budget Office. These show the federal deficit rising to nearly $1.5 trillion in 2011, the highest on record. At 9.8% of GDP, it will be only very slightly higher than it was in the depths of the financial crisis, in 2009.

    =========================================================================

    And the cumulative deficit as % of GDP? How hard is it for economists to include both figures for proper context. And a comparison to other economies as well?

  • Comment number 7.

    This will be gradually process over next 20 years and will introduce more uncertainty into the markets. The UK must not be trying to manage a big debt and deficit as this happens. The UK must also rebalance the economy to make sure our businesses are exporting widely around the world, instead of today's focus on US and Europe, spread and diversity will be the key.

  • Comment number 8.

    2. At 12:00pm on 27 Jan 2011, onebadmouse wrote:

    It looks like the only person who knew how to run a decent Ponzi scheme is in jail.

    A campaign to release Madoff might just save the world.

    ======================================================================
    What a shame he can't be joined, not yet in any case, by the theives who allowed it to happen.

    Still there is always an alternative - no sense or irony here

    http://www.bbc.co.uk/news/world-us-canada-12294466

  • Comment number 9.

    The US and China and ... Russia and ... Brazil ... and Venezuela and India and about 150 more are all playing the game ... of 'protectionism' in very covert ways of operation.

    When our UK political elite/UK establishment learn how to and the need for the UK playing this game as a 'winner' instead of as a 'loser' ... maybe the economic decline of the UK can be halted ... and may be one day ... even reversed?

    Any British industrialist(s) walking around there and proudly proclaiming that the UK is the 6th largest manufacturer in the world?

    Nah ... they're not that stupid to think that is true or even dare say it?

    What is the view on the US financial protectionism as the is the reality of the US actions?

  • Comment number 10.

    I take that all these clever and well connected people in Davos are not going to do anything about e.g. gang up and publicly criticise the Republicans for forcing the tax cuts for the rich on the US government.

  • Comment number 11.

    They simply cannot plain and simple.I was once told by a top financier on my travels that"The U.S finances can survive on its own but the worlds finances cannot survive without the U.S"no matter how big China and India are getting without the states we are all heading for financial Armaggedon.

  • Comment number 12.

    The numbers concerning the US defecit/debt are truly staggering - almost incomprehensible. The fact that the USD is doomed is surely in no doubt. Although I agree with others that it will take longer than you might think for it's demise to play out.

    Going forward what is needed is a universal unit of currency/exchange/debt - call it what you will! I have a suggestion:

    Global
    Ordinary
    Liquidity
    Device

    or GOLD for short.......

  • Comment number 13.

    A few thoughts;
    How long can the fed keep the QE going, given that its fueling the price of commodities and inflation?
    How much can they dilute the dollar before other countries panic and ditch it?
    How long will the US middle classes take enforced poverty as a result of wages declining in real terms and increased unemployment?
    These are fundamental issues, and any of them could bring the US economy down. I see the dollar as hanging by a thread of creditability.

  • Comment number 14.

    And the rest, the US uses smoke and mirrors with respect to its national debt so the debt is far higher than it looks...

  • Comment number 15.

    The American ability to do what it likes will last right up until the point that China tires of it and decides to expand its own military to better the American one. Europe, Africa, Russia, in fact the rest of the world, all gave up that uneven battle years ago. China is the only country now strong enough and with enough people and finance to manage it. The Americans in 2009 spent 46.5% of ALL military spending in the entire world, there is no reason to think its spending has shrunk (while for example ours has shrunk massively). Thus the Americans are clearly not defending themselves against attack by any one or two nations, but are geared to impose their will on the entire rest of the planet.
    They can run whatever deficit they like because it is backed by a massive army, navy and airforce. Basically if they want middle east oil they take it, if the want cash they can take it....

  • Comment number 16.

    @13 How much can they dilute the dollar before other countries panic and ditch it?

    As long as they like. The last time a country decided to move away from selling oil in dollars it ended up having regime change imposed.
    This is what you get when the weak fools we have as politicians in Europe allow one country to spend half the worlds total military spending on itself. If ALL the rest of the world - that is every other country bar America - were to manage to agree that America was bad then our combined military would just about match that of the Americans. Given that most of those countries (us included) need American spares, American permission to use their nuclear missles etc etc etc even if we all got together we would fail significantly. And the last bunch of Labour idiots told us that further dependance on America for tanks (as well as planes, missiles and nuclear - all of which we used to make) was a good idea.

  • Comment number 17.

    8. At 12:39pm on 27 Jan 2011, M_T_Wallet wrote:
    2. At 12:00pm on 27 Jan 2011, onebadmouse wrote:

    It looks like the only person who knew how to run a decent Ponzi scheme is in jail.

    A campaign to release Madoff might just save the world.

    ======================================================================
    What a shame he can't be joined, not yet in any case, by the theives who allowed it to happen.

    Still there is always an alternative - no sense or irony here

    http://www.bbc.co.uk/news/world-us-canada-12294466

    ****************************************************

    Well in my opinion the thieves who allowed it to happen will also be declared unfit to stand trial. Lets face it, they have proved they are unfit to run their economies.

  • Comment number 18.

    In my younger years many of my generation had fondness for motorcycles, Newcastle Brown Ale and rock music. But times change and the current younger generation have a fondness for different things.

    The point being;
    Maybe the reason why the current generation of fund managers continue to buy U.S. debt, is because that’s what their generation does.

    As the next generation of fund managers emerges, perhaps they will have a taste for something different.

  • Comment number 19.

    SF "The first thing you notice about this new landscape is that the successful developing countries are doing much better than the old, developed ones."

    The developing countries have a positive PRODUCTIVE rate of profit; in otherwords, they produce surplus value.
    Most of the developed countries do not produce surplus value, they live off the value created by the developing countries.
    They manage to do this through finance, which essentially comes down to the developing countries willingly accepting US fiat currency in exchange for commodities.

    This can only continue for as long as these developing countries expect the developed countries to be able to service their debts & not deflate their currencies by printing money.

    Clearly the US fiscal position is unsustainable & they are resorting to the printing press.

    This means developed countries will not longer be able to afford developing countries commodities & world recession will happen.

  • Comment number 20.

    The US caused the financial crisis and spread their poison around the world on the back of triple A ratings. The FED have no idea's on how to fix this and QE will eventually lead to massive inflation and seriously risks hyperinflation.

    Once the dollar loses it's status as the reserve currency and Americans suddenly face a four fold increase in fuel then protests will finally hit American shores.

  • Comment number 21.

    In addition to my last comment I do wonder if protests are even on the agenda at Davos, considering they have now spread to Yemen. They surely must realise the numbers up and the little people have had enough.

    The rich elite stand behind the name of democracy and globalisation while continuing to run the slave trade. The only difference now is the slaves have to pay for their own food and shelter and ironically they are not protesting their slavery, just the rising cost of slavery.

  • Comment number 22.

    If you question continuing US hegemony then you free yourself to critically appraise all the whole basis for international trade, the financing of that trade, and the structures as they presently exist. That, in itself can be no bad thing.

    We are already questionning the continuation of trade surpluses. Some of us are actively questioning even the existence of free markets. The definition of wealth is also up for debate. Others on this board have also asked us to consider the effects of resource usage. I strongly believe that a continuation of these debates can produce are far more positive outcome than betting upon if China or India can replace the USA as the No1 of a failed system.

  • Comment number 23.

    Does insanity reign today?

    Should the 99% of us who don't own foreign assets worry about the exchange rate of the dollar? It's only the rich with dollar holdings and govermnemnts who have a trading surplus with the US who are seeing their assets fall in value. Some of these govenments (like China) manipulate exchange rates to maintain exports and keep those dollars rolling in...

    So the US should cut their deficit to strenghten the dollar? What will that do to their economy? Go the way of austeritymeasuresUK?

  • Comment number 24.

    I suspect that the move that is now underway to expand the IMFs SDRs to include the RMB and maybe the other BRICS currencies will pick up steam, and may come to fruition much sooner than anyone expects. Once that is in place, the stage will be set for SDRs rather than dollars to become the reserve instrument of choice. I would not be at all surprised to see this before the decade is out, and maybe even before it is halfway through.

    History won't repeat, but it will rhyme.

  • Comment number 25.

    The Reserve Currency. I don't pretend to be an expert on the requirements for holding Reserve Currency status but using my powers of imagination and observation I deduce that it must involve (among other things):

    Substantial and widespread international holdings of large quantities of the Reserve Currency.

    Substantial and widespread use and acceptability of the Reserve Currency in daily pricing and transactions.

    Substantial and widespread Reserve Currency pricing of denominated assets, commodities and other currencies.

    Willingness to accept and support the above by a majority of govts, institutions, and businesses.

    The necessary requirement for the Reserve Currency nation to accept the need to provide stability to the system, regardless of the potential cost.

    General acceptance among the major part of the global community and especially for the host nation for what that will mean at the level of foreign policy and domestic policy and for the organisation of global regulatory institutions.

    I realise China is changing rapidly to meet the demands on the shift towards a managed market economy. But I find it difficult to understand that China is either willing to accept or prepared for the role of global regulator, which, it seems to me, is what all of the above inevitably requires, along with the airbases, naval bases, intelligence gathering facilities, security presence, regional security agreements etc etc. It seems like quite a lucrative but expensive and demanding position to hold.

    As I said, I’m not an expert on Reserve Currency requirements so maybe someone here can fill in the gaps and errors in my reasoning. But even I can see that it must involve much more than simply converting USD values into RMB (or anything else).

  • Comment number 26.

    9. At 12:42pm on 27 Jan 2011, nautonier wrote:
    "Any British industrialist(s) walking around there and proudly proclaiming that the UK is the 6th largest manufacturer in the world?"

    Nautonier, we may be the 6th largest economy but aren't we actually about 12th in the table of global manuafacturing?

  • Comment number 27.

    USA - Pacific coast, Atlantic coast, large varied land mass, on land and under sea resources, Central and S. American mkts, suppliers and labour sources nearby.

    But maybe military, management & myopia are actually the variables to consider.

  • Comment number 28.

    Please don't blame the American people for the British Empire's policies. The Bank of England owns most of the Federal Reserve Corporation.

    Americans don't have legitimate elections, nor do we control the media-money monopoly or the formal "education" system.

    Rather than repeating history's catastrophes - "profitable" world wars on "The Grand Chessboard" for "The Money Masters" in "The Great Game" - let's evolve toward a free and fair, market-based solar economy with legitimate governance:

    Treasurynet.US

  • Comment number 29.

    just to pose a question: what would sgnificantly happen if the world had no reserve currency?

    Would we have a proper free market?

    Would one country be able to get better prices if better reciprical prices where on the table?

    Just a question?

  • Comment number 30.

    11. At 12:53pm on 27 Jan 2011, peevedoff wrote:
    "The U.S finances can survive on its own but the worlds finances cannot survive without the U.S".

    That is the biggest load of tosh I've heard in years - do you normally just accept everything you're told, or did you question his reasoning behind the statement? Current annual US turnover is around $15t of a global turnover of approximately $60t but their finances are in dog order. Your "Top financier" is suggesting that the planet cannot cope without a god-awful, debt ridden economy that is almost certainly en-route to implosion. Absolute claptrap. I hope you have no financial dealings with such a bad judge of finance.

  • Comment number 31.

    Stimulating piece

    Stephan (No 24), a bit of updated rhyming would be useful. The SDR has not been looked at in terms of make-up for most people's lifetime.

    The debt challenges these day are somewhat different from the old days as the debt issues are in developed countries and it is mostly domestic currency debt. So the IMF is needed far less as they dealt with external debt/deficit crisis.

    The FX Reserves/investing in US Treasuries is the issue as Stephanie makes clear.

  • Comment number 32.

    12. At 12:54pm on 27 Jan 2011, StartAgain wrote:
    =========================

    I read your post and I think I am correct in assuming you are advocating a return to the gold standard. If not, please disregard my comments

    The gold standard was a form of convertibility. Please do read up on the history of convertibility and the gold standard in particular. I believe you will find that it is really an unworkable system, it would solve little and just produce more chaos.

    The way forward is based around having people in power and positions of influence who actually understand how the world's and all the countries' economic systems actually work. They might then develop sensibible workable policies. At the moment all policies come out of a neo-liberal idea factory and they are all wrong. So not surprisingly we get 'unexpected effects and figures', like those yesterday. Davos will produce nothing of real value that will benefit the people in the attending countries, change is needed in the underlying ideas, then we may see progress.

    The gold standard is the wrong way to go.

  • Comment number 33.

    I am glad that Stephanie put the phrase "excorbitant privelege" in quotes. The fact is, with the exception of the Eurozone, we are all reserve currencies now - the US just happens to be the largest. Since the collapse of Bretton Woods where we all floated our currencies, the UK, US, Japan etc are all able to run a budget deficit indefinitely.

    Since the end of Bretton Woods, it is no longer necessary for a central bank to issue government debt £-for-£ to match a deficit. Even though they do this (unnecessarily) these governments can always honour their debts no matter how large they become. Rather than having the debt issued and then purchased back using QE, it is better to simply not issue the debt in the first place.

    This would inevitably mean some depreciation in the currency, but that simply improves our exports. By issuing government debt in this way, governmets are keeping their currencies artificially strong, when they should be allowing their currencies to float freely.

    Under the current voluntary arrangement of debt issuance, it is very wasteful for a government to run a deficit that is not large enough to support aggregate demand, as they will produce unnecessary levels of debt without either supporting growth and jobs, or allowing the currency to fall and improve exports.

    The governments of the US, UK, Japan, etc are not in any way financially constrained, nor are they constrained by tax revenue - they are the monopoly issuer of the currency! and they can stop issuing debt any time they choose.

    Prof William Mitchell describes the US government debt issuance thus:

    "But in saying that I recommend they abandon their stupid voluntary rule that says they have to match their deficits $-for-$ with debt issuance. That is a gold standard hangover and that convertible currency system ended in 1971 – yes – 40 years ago. For a nation that prides itself of innovation and being dynamic a 40-year lag in finding out that the monetary system has changed is very un-dynamic."

  • Comment number 34.


    Hi Stephanie

    Good post. The US has abused its position as printer of the world's reserve currency, as you suggest.

    I believe the world would be better off if no nation's currency had such status. Surely any nation accustomed to holding reserves in US dollars could simply pick ten and hold one tenth in each. There's likely some safety in diversity.

    I wonder if ways could be found to make conversions among currencies (including gold) less costly? Then people could more easily pick and choose the appropriate one for their purposes.

    I do not favour tying currencies to gold because governments will find ways to obscure and deceive. The US so-called gold standard of history is a good example. I would point out, however, that gold is now practical in ways it never was before. I often walk around with the same one or two banknotes in my pocket for weeks, even though I am spending money. That's because I am using a credit or debit card and it's just a matter of some accounting being done at my bank. That could as easily be done in gold grams/milligrams as dollars, euros, pounds or whatever.

    As to your question "whether the US can stop borrowing dollars before the world stops wanting to buy them", I suspect the two will happen at more or less the same time!

    Cheers

  • Comment number 35.

    The end of the dollar is much nearer then most people suspect. I think we will see the official disowning of the dollar either during the summer once the US states start defaulting, or next year when the next round of mortgage renewals are up in 2012. Either way it's only a matter of time.
    What's interesting is the Japan has finally lost it's AA rating. It's taken almost 20 years of deficit spending before the rating agency's have acknowledge that it won't work. I doubt any other countries will be given the same length of time.

  • Comment number 36.

    As I reported earlier this week - senators have already made noises about 'what are the consequences of a US default'

    It seems that some nations think they can get over the debt, and others are just pretending they can - so their default will not be forseen (just like the USSR's wasn't)

    The Republicans playing politics has doomed that nation - the numerous Bush tax cuts created a mere 500,000 jobs during his presidency - a lot less than the millions that Clinton's spending produced.

    The idea that tax cuts creates jobs doesn't have any evidence - and yet the republicans are determined it does - their belief in economics has become an actual 'faith' - which may be why they no longer listen to reason.
    It's a bit like the idea George Osbourne and the Tories have here - which is cutting the deficit will 'create jobs' - whereas all it will do is reduce consumption and production and actually reduce jobs.

    Before 1998 there was an unwritten rule - No nuclear super power had ever defaulted on it's debts.

    Within 20 years we could well have 2 of them - now wouldn't that be a 'surprise' for the media to get excited about.

    How many banks would collapse then? - I know most of the hedge funds would be gone as so many of them have gambled on a strong US recovery.

  • Comment number 37.

    I have said it before - it's all over for the US dollar if this goes ahead.

    http://www.middleeastforex.com/news/articles/55/UAE-committed-to-Gulf-single-currency-idea-says-C.html

    oil is the only thing which keeps the dollar afloat - if oil wasn't priced in Dollars then it would have collapsed already.
    One of the reasons the Chinese keep buying T-bills is because they want to secure oil supplies and other raw materials priced in dollars.

    If Oil is to be priced in another currency, the Chinese will invest in whatever that demonitation is and reduce their holdings in US treasuries.

  • Comment number 38.

    Stepahine - is anyone in Davos actually discussing the pitfalls of money printing without any growth?

    http://www.bbc.co.uk/news/business-12295158

    ...and the towers they fell....one by one......and when the people came to they all spoke different languages and no-one could communicate.

  • Comment number 39.

    37 WOTW,
    "oil is the only thing which keeps the dollar afloat - if oil wasn't priced in Dollars then it would have collapsed already."

    I have heard from others on this blog that you can purchase oil from any supplier in the supplier's currency (effectively in any major currency in effect) - it just happens to be 'listed' in US$. Have I got this right?

    Kind Regards

  • Comment number 40.

    Stephanie The Economist ran a similar article regarding the removal of the US Dollar as the worlds curency and replaced by China's renmimbi .
    The problems as I remember were that until China has a proper and well ordered regulatory framework and a more open marketplace this will not happen and is very unlikely to happen in the medium term.
    What China was also suggesting is that instead of a single currency used, i.e. the Dollar at present, a basket of currencies should be used as the world currency. China is already forcing smaller neighbouring countries to be paid in the renmimbi with a longer term view of ensuring the renmimbi is incorporated into the proposed currency basket and ensuring these countries are onboard China's train to push for change.
    A basket currency rate is very substantially more likely than another single soverign currency taking over from the US Dollar.
    Should this basket currency emerge then the USA will be in one enormous mess, the cost of oil in the US will double if not treble, grain, raw materials will sky rocket and of course the US will haemorrhage foreign exchange.

    It does not bode well for the US and by association the UK.

  • Comment number 41.

    I fully agree with Stephanie! The deficit reflects gap in production and consumption. It is unsustainable. The good thing is, we still have some time to deal with it, say 5-10 years at the most. We need to do two things:

    1. Cut pensions
    2. Innovate, so that we can be competitive at our current cost of labour. Also, we need to find innovative ways to innovate. Just hiring PhDs will not generate new ideas.

    Currently, we are cutting education and health to save money and not cutting pensions. We are choosing past over the future. Historically, humans always chose future over the past.

  • Comment number 42.

    26. At 2:38pm on 27 Jan 2011, Catpain_Slackbladder wrote:

    9. At 12:42pm on 27 Jan 2011, nautonier wrote:
    "Any British industrialist(s) walking around there and proudly proclaiming that the UK is the 6th largest manufacturer in the world?"

    Nautonier, we may be the 6th largest economy but aren't we actually about 12th in the table of global manuafacturing?
    ...................................

    Hi Captain

    Here is one quote (there are quite a few more):

    http://www.guardian.co.uk/business/2010/aug/09/why-uk-exports-not-recovering

    I had been periodically checking up to try and find out latest position on UK trade and I have not checked on this recently and I have found some quite confusing quotes or may be I'm reading them incorrectly... or may be the headline figures are deliberately misrepresented as 'spin'?

    Perhaps these kind of issues are not discussed as Davos as too boring for the delegates?

    I find it even more difficult to believe that the UK has the sixth largest economy in the world??? ... more stat. nonsense from UK govt that has not yet been corrected?

    '6th' or '12th' ... I don't believe it! I don't expect the UK to figure as a global leader country ... why should it in terms of size?

  • Comment number 43.

    39. At 4:12pm on 27 Jan 2011, Charles Jurcich wrote:

    "I have heard from others on this blog that you can purchase oil from any supplier in the supplier's currency (effectively in any major currency in effect) - it just happens to be 'listed' in US$. Have I got this right?"

    I understand this is true.....but you will be at the mercy of the exchange rate against the dollar.
    If the dollar is weak then the amount of Euro's (for example) that it takes to buy a barell is far less.

    ...think about it from the oil sellers point of view - it's much better you price your oil in a currency not currently being printed off by the Fed.
    This may be why OPEC have declined to increase the production recently....despite the rising price per barrell. Instead this may be a reflection on the falling value of the dollar - rather than the rising price of oil.

    Floating currencies eh? - who's idea was that? - oh wait a minute, it was the 'fix' to a previous financial crisis...or war...or some other disaster which the leaders wanted a short term fix for..

  • Comment number 44.

    Lets not forget that the US Dollar obtained it's status as reserve currency right after WWII - when the US appeared to be the most stable and reliable superpower in the world.

    Who would have thought that they would be printing money as they are 66 years later in a desperate attempt to save their Economy?

    It truly is a sad end....but the king is now dead - long live the king (whoever takes the crown next)

    On the bright side I think the obesity problem in the US might be alleviated somewhat.

  • Comment number 45.

    What is needed now - more than ever - is a state-neutral reserve currency. A basket of currencies is a half-way house.

    The freedom of challenged economies to print currency will create endless problems in the future. Currency as a concept is meaningless unless it signifies 'value'.

    Maybe not the gold standard. But some enforced exemplar to halt this race to the bottom as nations try to devalue themselves out of debt.

  • Comment number 46.

    @37. At 3:58pm on 27 Jan 2011, writingsonthewall wrote:
    38. At 4:00pm on 27 Jan 2011, writingsonthewall wrote:
    39. At 4:12pm on 27 Jan 2011, Charles Jurcich wrote:
    43. At 4:34pm on 27 Jan 2011, writingsonthewall wrote:
    44. At 4:37pm on 27 Jan 2011, writingsonthewall wrote:

    ------------------------------------------------------------

    OK. So that’s the USD and US economy down the pan (eventually)....
    ....and obesity solved (potentially)......

    There's just leaves the political vacuum I mentioned above that may/may not be quite so easy to fill. That’s what interests me.......

  • Comment number 47.

    "In every other major advanced economy, public borrowing is going to fall in 2011."

    I would not be too sure of this, particularly as far as the UK is concerned. Although governments may make cuts and increase taxes which they expect will reduce public borrowing, there is no guarantee that things will work out as they expect.

    It is difficult to believe that private sector recruiting will automatically plug the employment hole caused by government cuts, as the UK government assumes. If this assumption is wrong, public borrowing might have to go up, not down.

    Obama might well turn out to right to concentrate on creating jobs rather than cuts intended to reduce the US deficit, and those running "every other major advanced economy" wrong. In economics the "conventional wisdom" has often turned out to be wrong. After a step change such as occurred in 2008, there are likely to be non linear effects which mean that ideas based on the analysis of past data are no longer valid.

  • Comment number 48.

    Classic.

    This crisis has been going on long enough now that we can really see the fraud committed by the media.
    We all get excited about this news...
    http://www.bbc.co.uk/news/business-12301386

    ....but weren't we getting excited about it last year?

    http://news.bbc.co.uk/1/hi/world/americas/8241019.stm

    There will be many more of these stories coming out now - repeats of previous years.

    Anyone who has read JK Galbraiths book 'the great crash' will know what I'm on about......it's just like 1930 in every way...

  • Comment number 49.

    WOTW,
    Thanks for your response - I see your point.

    Currency Floatation:
    My understanding is that although currencies were floated to solve a previous financial crisis (by providing a one-off drop in the currency), governments have failed to understand that it is a long term solution privided their CBs stop issuing debt £-for-£ to match their fiscal deficits. This does not mean that there aren't any good reasons to issue debt, but it is certainly not necessary to "finance" government spending.

    What governments have been doing by issuing debt is effectively having their sovereign fiat currency emulate a convertible one - they are certainly not allowing their currencies to float freely, even though we criticise China for their currency peg.

    Under an arrangement where there is no corresponding debt issuance to match a deficit, central banks would not be able to maintain a positive target interest rate, so price-stability would have to be managed using fiscal policy instead (increases / decreases in taxation in response to demand pull price changes).

    Kind Regards

  • Comment number 50.

    Stephanie Wrote:
    The only other country to have had this status - and lost it - is the UK. It took several decades, and two punishingly expensive wars, for the world to tire of holding sterling. But when they did, it changed British economic policy making forever. Indeed, we are still seeing the consequences today.
    ~~~~~~~~~~~~~~~~~~~
    Thankyou once again Stephanie.

    Down here in Lilliput, I had begun to think that history started in 1990, 1980, or 1970.

    The "Little Fatherlanders" seem to have conveniently forgoetten that the last National economy to benefit from a sovereign default in the developed world were the instigators and agressors of those two "punishingly expensive wars". Greece didn't start it. Nor did France. Nor GB, nor Poland, nor Ireland, nor Portugal, nor Austria.

    Maybe we should spare a moment's thought on "holocaust memorial day" for the 6 million Jews, 20 Million Russians and howver many others of all creeds and colours who were sacrificed for the "greater good of the 3rd Reich".

    http://www.bbc.co.uk/radio4/womanshour/2003_04_mon_02.shtml

    And let's see if we can't find a way out of this war-induced economic coma that the population of GB has been suffering from since at least the 1950's.

    Yesterday I found and linked a news item from the 1960's showing how Britain's economy was lurching from crisis to crisis. It amused and saddened me. Because here in 2011 we are still lurching from economic crisis to economic crisis.

    Mushroom thinks that either
    a) these crises are not as profound as contemporary reports make out, OR
    b) the shackles of bankruptcy have never been lifted from our shores.

    Taking a step back...UK economics looks and sounds very much like somebody with an IVA trying to save enough to pay off their debts. Every sudden expense is a crisis. There is never any surplus.

    I would have thought that 50 years of "austerity" as punishment for refusing to bow to German Imperialism is quite enough, wouldn't you?

    And if the only thing that has kept GB afloat during that time is debt-backed dollars through Marshall Plan's, Lend-Lease, and other flavours of the same hegemony, then (to coin a phrase) "Houston, we have a problem".

    Night Night.

  • Comment number 51.

    My instincts tell me that we are at a tipping point. Questions about the role of the dollar are appearing more frequently in the media, whilst it's AAA rating is actively being monitored. Has the US indulged in hubris?

    We shall see.

  • Comment number 52.

    Nautonier;

    Thanks for that link. I must say I was surprised as I've been under the impression that since our industrial manufacturing output has been gradually declining over the last 30odd years, it would have dropped the UK quite a way down the global list.

    I think there are three internationally accepted benchmarks for national turnover...GNP and PPP are the two I can remember off the top of my head. Gross National Product is simply the total output of a nation but from what I understand, purchasing power parity is more useful as it allows economists to more easily compare different economies, particularly where there are large discrepancies between the per capita earnings. For example £30,000 in the UK with £2,000 in India.

    A colleague has just told me to look up something called "The big mac index" but I'm too hungry to go there at the moment...!




  • Comment number 53.

    43. At 4:34pm on 27 Jan 2011, writingsonthewall wrote:

    39. At 4:12pm on 27 Jan 2011, Charles Jurcich wrote:

    -------------------------------------
    Any currency system is going to have problems when idiots, driven by greed, get their teeth into it. As Charles said, there is no reserve currency now. We should use whatever currency is acceptable between buyers and sellers, but old habits die hard particularly when the financial world changed in 1971 and few have actually altered their behaviour as a result since then.

    Save us from ignorance, someone, please!

  • Comment number 54.

    45. At 4:57pm on 27 Jan 2011, TonyH wrote:
    --------------------------
    Sorry, but I must disagree with your post. Any form of convertibility of the sort you advocate would split the world apart. We would all suffer a terrible slump, and many would die as a result. Please read the history of the gold standard and study why it failed. Its not a pretty story.

  • Comment number 55.

    The USA fiscal policy will extend the deficit for as far and long as possible to ensure USA growth is stimulated (protected)whilst another region of the world suffers in order to address the poor economic performances of world markets, including the USA. Each cycle this has happened and history repeats it self. Japan was the last to shift its wealth back to the USA in this fashion, now it is the turn of Europe. Ecomonic wealth will "yoyo" in this fashion with the biggest always winning, because they can.
    Hopefully, true open markets, without local monetary contols/regulations will ensure a global market thrives rather than political ones in all our best interests. Perhaps we need a single global currency beyond the reach of local fiscal policies to "protect" a true open global market? The IMF could create this perhaps as a stronger tool to help the poorer countries?

  • Comment number 56.

    http://www.economywatch.com/economies-in-top/

    Uk economy 6th in the world in ... 2007? on PPP basis?

    Lies, damn lies and spun newspaper headlines using out of date statistics!

    This is where I think many are getting there world trade/economy figures from?

  • Comment number 57.

    52. At 5:19pm on 27 Jan 2011, Catpain_Slackbladder wrote:

    Nautonier;

    Thanks for that link. I must say I was surprised as I've been under the impression that since our industrial manufacturing output has been gradually declining over the last 30odd years, it would have dropped the UK quite a way down the global list.
    ......................
    Captain
    See previous post ... I don't think that these figures are now accurate ... and strip out the QE from GDP and .... Ouch!
    One day we might hope that our govt may find out and tell us the accurate position !

  • Comment number 58.

    54. At 5:32pm on 27 Jan 2011, SleepyDormouse wrote:
    45. At 4:57pm on 27 Jan 2011, TonyH wrote:

    ===================================================

    As I understand it, the gold standard restricted growth and was entirely dependent upon the quantity of gold available. That's why I purposely referred to a state-neutral exemplar. ie 'Bancor'

    Nixon abolished the gold standard in 1971 because of the need to finance the Vietnam war. I believe he informed the rest of the world that the dollar was their problem, not America's.

    Mind you, I could well be wrong.

  • Comment number 59.

    The amount of money we are talking about here is just staggering, truly mind boggeling. Depressing really how it got in such a horrendous state in such a short space of time.

    The three key ways to make a dent in the deficit in my humble opinion are to obviously let the tax cuts expire (which the republicans won't allow which frustrates me no end), deep cuts to the miltary budget which is just a bottomless pit (which again the republicans will probably derail - special interest puppets that they are!) and pensions. I think pensions will be key because they are an enormous expense and its the sort of thing the Republicans would go for. The fact is people are living longer and with college and further education they are entering the work force later, the system is completely untenable anyway and needs an overhaul. It will be as popular as Avian Flu but i think they should keep raising the retirement age. To be honest i think people just have to forget about retirement altogether unless they are able to fund it themselves. Im in my late 20s and im under no illusions at all that i won't be retiring at 65. That said i still find this far more palatable than taking the axe to health care and public services as raising retirement forces people to work longer it doesn't leave the most vulnerable out in the cold and working people completely at the mercy of the market economy.

  • Comment number 60.

    The new reality: the "exorbitant privilege of the US" has already become an old reality.
    There is not one country, not even China, that is any longer willing to buy American sovereign debt. In other words there is very little market for American bonds.
    So, the United States' answer has been to moniterize the debt (i.e. buy it own debt through the Feds). Would you buy sovereign bonds from a country that is already 14 TRILLION IN DEBT AND PREPARING TO ADD ANOTHER 1.5 TRILLION? To do this, it trying to raise its debt ceiling, which I don't believe the Republicans will support.
    By my reckoning, the state of the American dollar is worth about as much as common toilet-paper. It cannot last as currency reserve. I give it less than one year.

  • Comment number 61.

    Too much debt was created in the noughties in several economies - namely the USA, UK, Ireland and to a lesser extent in Spain. The debt has to be deflated BEFORE normal economic service can re-commence.

    The USA (and the UK) were appallingly badly regulated by two guys who went to Harvard (as did Stephanie Flanders). They allowed debt that should /could have been created over thirty years to be created in just ten. There is no escape. The USA (and the UK) have to rebalance their economies to repay the debt. Why the USA (and the UK) are getting away with not doing so is a mirage! They are paying and will pay.

  • Comment number 62.

    61. At 6:29pm on 27 Jan 2011, John_from_Hendon wrote:

    '... The debt has to be deflated BEFORE normal economic service can re-commence...'

    =======================================================

    Would you, as a lender, accept that?

    I wouldn't. Try that trick and I'll charge you a higher rate of interest in the future.

    Once bitten, twice shy as they say.

  • Comment number 63.

    Many economists want to either return to a convertible system of currency, or to peg their currencies to some global currency.

    The reason for this view, I believe, is because most economists were taught neo classical theories about how the monetary system works. Given these neo classical theories were all developed either under a gold standard, or under currency pegs, they therefore only make sense under these monetary systems.

    Rather than develop NEW theories which actually ARE compatible to the current monetary system (i.e. floating sovereign fiat currency), instead they become lazy and want to move back to the previous systems so their theories make some sense.

    A "neo liberal" economist is one who applies neo classical theories to the current monetary system (which is incompatible). They also believe in perfect markets, and that at all times in the cycle, 'supply-side' initiatives drive growth in the economy, and therefore 'demand-side' initiatives have no long-run effect and should be discounted.

    We are currently seeing that during a downturn, and also during a recovery period, supply-side initiatives are inadequate, so the government must implement demand-side fiscal stimulus.

  • Comment number 64.

    8. At 12:39pm on 27 Jan 2011, M_T_Wallet wrote:
    2. At 12:00pm on 27 Jan 2011, onebadmouse wrote:
    Which reminds one of Mr Ernest Saunders who was diagnosed with Alzheimer's and made a dramatic recovery on being released from prison. That gives us all hope that miracles actually happen and we will all live happily ever after.

    Yours with his head in the sand
    Dillers

  • Comment number 65.

    From the outside it looks as if the US has been captured by big capital and short-term vested interests. I don't know what will be left of the US economy in 20 years.

    Anglo-Saxon capitalism in general thinks over-whelmingly in the short-term; maximising shareholder value and sometimes quite reckless as to the future.

    The Chinese have their own problems, but they also have 10, 20, 50 and even 100 year plans. The game's not over yet for the US, but I don't fancy their long-term chances - or ours (assuming we remain attached to them by the hip).

  • Comment number 66.

    Quantitative easing was used to give rich people time to cover their own backsides.
    We want our money back.

  • Comment number 67.

    61. At 6:29pm on 27 Jan 2011, John_from_Hendon wrote:

    '... The USA (and the UK) were appallingly badly regulated by two guys who went to Harvard (as did Stephanie Flanders)...'

    =======================================================

    Well, at least they managed to produce one very capable businessperson whose contribution would be sorely missed.

  • Comment number 68.

    The USA will just start selling bonds retail. The banks will have to compete with their own customers.

  • Comment number 69.

    44. At 4:37pm on 27 Jan 2011, writingsonthewall wrote:
    On the bright side I think the obesity problem in the US might be alleviated somewhat.

    Fair point and most people who have been to the States would agree they really do need to cut down on their portions. They must think our restaurants are taking the proverbial if they can afford to come here.

    However, I am also of the opinion that their obesity problem also lies in their factory farming methods and Monsanto's fascist grip on the farming industry. No doubt GMO frankenfoods will be the WEF's solution to rising food costs and increased population.

  • Comment number 70.

    "32. At 3:17pm on 27 Jan 2011, SleepyDormouse wrote:
    12. At 12:54pm on 27 Jan 2011, StartAgain wrote:
    =========================

    I read your post and I think I am correct in assuming you are advocating a return to the gold standard. If not, please disregard my comments"

    No not really to that extent. But gold is going to become a more accepted means of exchange alongside fiat currencies.

    Just wait until it appears in the movies - see your columbian drug dealer exchanging his coke for k-grands or bullion - then you know it will have gone mainstream then the panic to buy will take off.

    People are going to lose all faith in paper currencies.

  • Comment number 71.

    70 StartAgain,
    "People are going to lose all faith in paper currencies."

    Though gold may be used alongside conventional currency, there will always be demand for a sovereign fiat currency so long as governments stick to the basic rule that taxes can only be paid in that currency.

    I have told that even today, if you tried to pay your taxes with gold, they would not accept it.

    Tax creates a demand for the currency. If ever people started to loose faith in the currency for some reason, governments just need to enforce this basic rule, and increase taxation.

    Kind Regards

  • Comment number 72.

    71. At 7:55pm on 27 Jan 2011, Charles Jurcich:

    For me, the issue is simple:-

    Given the events of the past 3 years and the measures now being adopted:-

    Would you rather hold fiat currency - or the same value in gold?

    I think that question is about to be answered.

  • Comment number 73.

    TonyH,
    I don't dispute that widespread use gold as a currency might happen, and that if it did, it would cause some real headaches for governments - not least due to tax evasion. You might be right, but I think equally, this might be just a gold bubble, and therefore its value could suddenly fall.

    We'll see I suppose.

    Consider though, that gold has only slightly more intrinsic value than regualr currency, as it's pretty, a good conductor and helps to protect against radiation - but that's about it. I'm sure you'd agree though that silver has many more uses, and so may well be used as a currency.

  • Comment number 74.

    As long as people, namely Asian countries, want to save in dollars.

    The comparison with sterling is invalid as that was under the let's crucify everyone but the rich are different on a cross of gold standard.

    US debt is simply private wealth for those who hold the debt, it's a very safe investment just like the Yen but with slightly higher interest.

    Increased dollar demand wont increase prices significantly whilst there's 15% unemployed labour and capital output gap, it will increase output and incomes and create the money needed to support production whilst the private sector works off it's debt.

    Without the government doing it's job of spender/buyer of last resort we get a hypothermic economy with mass unemployment and broken parts of society.

  • Comment number 75.

    73. At 8:19pm on 27 Jan 2011, Charles Jurcich:

    Thanks for the reply - as you say, we'll see.

  • Comment number 76.

    A change from the dollar to the renmimbi would be the sort of event that economic historians will still be discussing in 100 or even 200 years

  • Comment number 77.

    America has practically bankrupted itself funding two very expensive wars and it's once great reputation as a manufacturer and exporter is now second rate and being overtaken by the BRICS. Rising unemployment and heavy indebtedness mean the dollar's days are numbered. Perhaps this will stop our politicians to looking across the pond for inspiration.

  • Comment number 78.

    @50 -Quite so.

    "We win the wars and lose the peace." - my Dad used to say (in the 1970s) - and he was very proud of his wartime RAF days. Here's another quote - "After all that time in North Africa; I got the thanks of a grateful Nation - and a 50-bob suit."

  • Comment number 79.

    When this crisis hit the headlines in 2008, several years after it was accurately predicted in Richard Duncan's (of Blackhorse Asset Management) bestseller "The Dollar Crisis: Causes Consequences and Cures" (in 2003), many of us had already absorbed such knowledge and began to relate how the story will unfold:

    There would be a shift away from the USD, power would shift to the East, there would be ongoing crises, Keynesian spending would be necessary to prevent social unrest, and eventually, one day, a new world order would form with a multipolar (EU, USA, ASEAN, RUSSIA, etc) leadership, and key to this would a change in energy technology.

    Naturally, when everything is transported using petrochemical energy, and oil can only be bought in USD, Roubles, or Venezuelan bananas, the world first has to shift towards electric cars and improved transnational grids before it can turn off the petrodollar.

    Now, this is clear. If any one of you disagree with this - you just have to keep reading until you do, because that is the way it is and the way it is going to be. What is hard to understand is the time scale - people will be blogging day after day for years (well, some of us have already for 3), talking about a "recovery", like the Japanese, as if it had any meaning.

    There is only one future: technology, especially now in electricity sourcing and distribution.

  • Comment number 80.

    The Renminbi will be useful in the ASEAN+N economic bloc. China has already implemented international Renmimbi trading platform and is working with the ASEAN bloc to develop a system to mutually boost domestic demand. The result will be a Eurozone equivalent with the Renminbi at the heart. The USA will remain the USA and become a parallel with the Eurozone and the Renminbi. US military influence will fall like Russian military influence: the dockyards will stagnate.

  • Comment number 81.

    All of these problems in the USA, UK (and Ireland) become clear when private debt is considered. Too much was created through the incompetence of the regulators. Debt was allowed to expand far beyond the ability of the borrowers to service the debt. This debt is being/has been reduced in the USA and Ireland however it is not being reduced in the UK.

    Recent statements and action by China indicate that they consider that the Euro is a worthy successor for the US Dollar, but of course I would not have expected the BBC to permit such an observation to be repeated wedded as they are to avoiding offending the rabid right wing or the Labour and Tory parties who will happily destroy the UK if they can remain Little Englanders.

    So it is rational to expect that the UK is in the worst possible international position with government and opposition so wedded to extinguishing the country as to offer very little prospect of any type of real recovery or creation of jobs. However markets have ways of fixing this - or at least partially - fixing the problem - the pound will sink - deflating the debt in international terms and crushing the living standards of the British worker - don't expect to be able to afford to go abroad on holiday!

    (real speculation!!!!) How far will sterling fall? - well it needs to fall by 50% or so to fix the private debt problem so 1 pound may buy just about 0.60 Euro and 0.80 US$ and about 5 yuan. It is either this or raise interest rates! One or the other or both will happen. We expect regulators to be competent in managing this transition - so we will need some new ones!!!!

  • Comment number 82.

    I seem to remember the Mafia used to clear debts by killing those to whom it owed money.

    Don't know why that came to me.

  • Comment number 83.

    What a lot of limited strategic thinking has been demonstrated above! Whilst the US cannot afford to maintain both its superpower supremecy and its reserve currency status no other country (including China) is in a position to step into the gap.

    Very mixed messages are and will continue to be sent by all parties. This will cause even more confusion in the markets. It brings the likelyhood of military action that much closer.

  • Comment number 84.

    This post of S. Flanders' also qualifies as being in the best 10%.

    Except she forgets to mention that markets are already going beyond the US Dollar. Initially, it has been a rediscovery of Gold and Commodities.
    Secondly, it is the awareness that there is nothing wrong with holding other non-traditional currencies as reserves.

    For example, if you are buying oil from Saudi Arabia, why bother holding US Dollars? Hold some of your foreign reserves in Saudi currency. They have probably already figured out that they don't need to accept US Dollars to buy the goods they want from India or China.

    Eventually, economists will spend all their days calculating a fictitious Global Currency unit, based on a basket of international trading nations' currencies, and the GCU will firstly show up on Forex Markets, then become a Global Standard.

    IT's all so boring. No wonder kids hope there is a better world in their computer game.

    So suppose the GCU doesn't happen because it's too boring. Or in other words it doesn't happen because the attraction of a Global Economy does not have mass appeal and support, or even the appeal or support of the rich, or the economists. Or it doesn't happen because it goes against the vested interests of banks and global corporations who profit from international chaos?

    A conscious return to local, or at least continental economics?

  • Comment number 85.

    81. At 10:56pm on 27 Jan 2011, John_from_Hendon wrote:
    All of these problems in the USA, UK (and Ireland) become clear when private debt is considered. Too much was created through the incompetence of the regulators. Debt was allowed to expand far beyond the ability of the borrowers to service the debt. This debt is being/has been reduced in the USA and Ireland however it is not being reduced in the UK.
    =========================================================================
    Where as I totally agree with you that Private debt is as serious an issue if not more so than Public debt I must correct one point. In the USA and the UK private debt has been reduced where as it has risen in Ireland. The Irish has as I previously stated the largest personal debt globally.


  • Comment number 86.

    SF: 'In my earlier post I spoke about the "new economic reality". The first thing you notice about this new landscape is that the successful developing countries are doing much better than the old, developed ones. The second thing you notice is the extraordinary fiscal position of the US.'

    SF: 'In theory, US politicians are committed to getting the deficit under control. But as I noted the other day, they have a funny way of showing it. In his State of the Union address this week, President Obama repeated his commitment to eliminating the deficit, outside interest payments. But the concrete spending cuts he suggested to help reach that target will reduce borrowing by a measly $40bn a year.'


    84. At 09:42am on 28 Jan 2011, verano wrote:
    This post of S. Flanders' also qualifies as being in the best 10%.
    -------------------------------------------------------------------------
    The two paras I have selected might suggest that Stephanie is staying up too late, rising too early and working very hard at Davos.

    But ... also that perhaps it is not such a good Blog.

    But it does demonstrate, unintentionally perhaps, how politics, economics, tax systems, wealth and the world of finance interact, collide even.

    Stephanie appears to have forgotten that there are now individuals in the world who rank on the list of 'wealth', somewhere in the middle of small to medium-size sovereign states.

  • Comment number 87.

    re #12
    Please refer to last para of my previous post.

    How would you organise it? How much would it cost? What economic effect would it have? What social effect would it have? What would the likely political consequences be?

  • Comment number 88.

    One of the big questions to consider for the UK and US will be the clash of oil and electricty as far as transport is concerned.

  • Comment number 89.

    It is absurd to continue to talk about having a 'Reserve Currency' in a global economy which is linked to the policies and fortunes of one nation state: regardless of its size.
    Nations grow and decline in relative terms to one another and have done throughout history. The difference in today's world is that we really do have a global marketplace with relatively free movement of capital amongst the developed nations. As you say Stephanie, China is not yet ready to step up to the plate and take the responsibility from the USA. However, I personally believe that given the trend towards greater global integration in trade and currency movements, we should avoid arguing for a single country's currency as the global reserve currency. To my mind, this is looking for trouble and a repeat of the churlish behaviour we have seen from the US in terms of fiscal responsiblity ever since the Korean War, which like the Vietnamese war led to the US getting the rest of the world to share in the fiscal burden. The latest financial fiasco and the policies of Bernanke and Obama's administration highlight the fact that they are willing to trade on the fact that their reserve currency protects them from the kinds of crisis which has faced Greece, Portugal, Ireland and perhaps even Iceland.
    Of course by the time that the reality of the American Empire's decline comes home to roost, the current policy makers will be long gone; QED they can postpone the problem to the next generation. However, such policies are both cynical and irresponsible.
    To avoid China becoming the next cynical and irresponsible reserve currency nation, surely we need to distinguish between a large and powerful nation's currency from the role of some form of reserve backstop. The old arguments about gold or a mixed basket of currencies therefore should not be dismissed as irrelevant. Neither may be the perfect solution, but policy makers should recognise that in a global economy it is ludicrous to have one member holding all the cards: or is that 'jokers' in the pack!

  • Comment number 90.

    Many question the viability of the dollar and consider the dumping of that currency a real possibility.
    Of course, that could become a reality in time, but with nothing to replace it at the moment, America looks set to keep printing!
    The dollar, as the preferred reserve currency of most of the world is in a very strong position though! The holders of that currency have seen it's true value slip to such a level that selling it now could lead to financial losses of catastrophic proportions. At the same time, buying more of them at the current cheap price, could be used to balance out the current losses in the event that the dollar only partially regains it's pre-crisis value! Like it or not, holders of the greenback have no other option than to ride out the tempest!

  • Comment number 91.

    This is your worst blog posting I have read, where the 1976 IMF crisis in the UK is implicit throughout. I think you should give a history of how you think 1976 happened.
    1. Paul Krugman 18 Nov 2010, "It’s no mystery why China and Germany are on the warpath against the Fed. Both nations are accustomed to running huge trade surpluses. But for some countries to run trade surpluses, others must run trade deficits — and, for years, that has meant us. The Fed’s expansionary policies, however, have the side effect of somewhat weakening the dollar, making U.S. goods more competitive, and paving the way for a smaller U.S. deficit. And the Chinese and Germans don’t want to see that happen. For the Chinese government, by the way, attacking the Fed has the additional benefit of shifting attention away from its own currency manipulation, which keeps China’s currency artificially weak — precisely the sin China falsely accuses America of committing."
    2. Paul Krugman Nov 6 2010: " QE is basically expansionary monetary policy, no different in its effects (if it works) from reducing the policy interest rate. Yes, it tends to weaken the exchange rate; but it also increases domestic demand."

  • Comment number 92.

    81. At 10:56pm on 27 Jan 2011, John_from_Hendon wrote:
    Recent statements and action by China indicate that they consider that the Euro is a worthy successor for the US Dollar
    =========================================================================
    Even China appears to siding with the stable EU countries rather than the PIIGS;

    “In principle we support the euro, but we also need to ensure that our investment is safe and generates returns,” Yu Yongding, an influential economist, told Reuters. “I think it's much safer if we buy the fund as it has a triple-A rating,” he added. While great globs of Chinese cash will likely end up in German Bonds, the riskier fare will receive only small dollops.

    Even the ECB are showing caution;

    Insofar as China looks to prop up indebted European countries, a former adviser to the central bank said that it should buy jointly guaranteed eurozone debt rather than bonds issued by troubled member states such as Spain and Portugal.

    Add this with the fact that China have also moved to buy other currencies as it moves to hedge its exposure to the Dollar in its FX;

    China has bought record amounts of Japanese and South Korean debt, and has also reportedly dipped its toes into Brazilian, Canadian and Australian issues.

    Perhaps not quite the overwhelming support that you are picturing from China, in fact it only goes to show how vulnerable the Euro is and how much it is relying on the Chinese and others to prop up this ailing currency.

  • Comment number 93.

    Flanders:

    "America is the only country in which both the headline deficit and the structural deficit are going up.That increase is entirely due to the package of tax cuts agreed last month."

    Surely you jest?

  • Comment number 94.

    The renmimbi dispacing the euro as the reserve currency for the dollar..?
    Oh, dear - that's going to upset the great and good in the EU..

  • Comment number 95.

    perhaps the rest of the world should take a stand aginst the largest polluter and consumer of natural resources the USA. Start by insisting that all deals in oil, aircraft, ships, insurance and banking should be any other currency other than dollars. This would share the risk of fluctuating commodity prices with the US. Any service or products that US wish to purchase from outside America should be paid for in the currency of the seller at the prevailing exchange rate.
    Let us also withdraw from the war in Afghanistan, the only reason the USA ever goes to war is to protect its own interests. NATO after WW2 was formed to provide a buffer zone, not for Europe, but to protect the US in the event that the USSR decided to march into Europe. The calculation was that in the 3 to 4 days of conventional war in Europe would give the US sufficient time to strike at the USSR. History tells us that the US would probably wait a few years to see which side was in a possible winning position, so that they could sell, sorry lend Europe arms for which they would be paying 40 or so years after the event. America is a privileged spoilt child whose only interest is America. They would be better employed putting their own mess in order at home without interfering in elected governments who have a different political outlook to America. The United fruit Company (a pseudonym for the CIA) deliberately using undercover tactics to distabilise legally elected governments in South America. This bunch of neocons used big business funding to achieve their ends, people like Genine from ITT, the same company in the 30's and up to the outbreak of war and until the US decided to get involved, supplied arms to germany a well as to the allies. What a charming bunch! and our wonderful successive governments in the UK hammer on about the special relationship. The premise of such a relationship being jump when your told to.
    The sooner the rest of the world realise that the combined wealth in minerals, oil, and business vastly outweighs the total debt of America, the better. Lets start by decoupling our economies from the US and prepare for a better and fairer world.

  • Comment number 96.

    If the uprising in the Arab world reaches Saudi, who wants to be left holding US dollars?

  • Comment number 97.

    The topicality of this subject, is in part, driven by the reviews of Sovereign Debt being performed by the debt rating agencies. The requirement for more stringent assessment of Sovereign Debt risk was brought about by reforms of the industry in the US. One may therefore conclude that not only is this a self inflicted wound, it is has also arisen due to a change in the rules of the game.

  • Comment number 98.

    RUSSIA tried full state control it went belly up.AMERICA and the western world tried to spend what you cannot afford.They are now begining to see the error of their ways.

 

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