International finance


China’s Leader Says He Is ‘Worried’ Over U.S. Treasuries
New York Times, 2009-03-14

[Emphasis is added.]


The Chinese prime minister, Wen Jiabao,
spoke in unusually blunt terms on Friday about
the “safety” of China’s $1 trillion investment in American government debt,
the world’s largest such holding, and
urged the Obama administration to offer assurances that
the securities would maintain their value.

Speaking ahead of
a meeting of finance ministers and bankers this weekend near London
to lay the groundwork for next month’s
Group of 20 summit meeting of the nations with the 20 largest economies,
Mr. Wen said that
he was “worried” about
China’s holdings of United States Treasury bonds and other debt,
and that
China was watching economic developments in the United States closely.

As the financial crisis has unfolded,
China has become increasingly vocal about what it perceives as
Washington’s mismanagement of the global economy and financial system,
joining a chorus of foreign critics of unbridled American capitalism.
On Thursday, for example, France and Germany rebuffed American calls
to coordinate a global stimulus package at the G-20 meeting,
saying financial regulation should come first.

In January, Mr. Wen gave a speech criticizing what he called
an “unsustainable model of development characterized by
prolonged low savings and high consumption.”

There was little doubt that he was referring to the United States.

Mr. Wen sounded similar themes in his remarks on Friday,
which came in response to questions at a news conference
at the end of the Chinese Parliament’s annual session.
While refraining from direct criticism
of the Obama administration’s economic policies,
he reminded Washington of China’s status as its largest creditor.
With budget deficits mounting rapidly,
the United States needs China
if it is to finance all that new debt at low interest rates.

“President Obama and his new government
have adopted a series of measures to deal with the financial crisis.
We have expectations as to the effects of these measures,” Mr. Wen said.

“We have lent a huge amount of money to the U.S.
Of course we are concerned about the safety of our assets.
To be honest, I am definitely a little worried.”

He called on the United States
to “maintain its good credit,
to honor its promises and
to guarantee the safety of China’s assets.”
What he did not mention was that
Chinese investments in the United States helped drive
the debt-fueled boom of the last decade,
during which China grew increasingly dependent on the American market —
a point that was driven home earlier this week
when China reported a record 26 percent drop in exports in February.

He stopped short of any threat to reduce purchases of American bonds,
much less sell any of them,
underscoring the two countries’ mutual dependency.

Some specialists say that
China’s investment in American debt is now so vast that
it would be impossible for Beijing to unload its Treasury securities
without flooding the market and driving down their price.

Still, it is rare for any world leader
to raise questions about the safety of United States Treasuries.
Both the White House and Treasury Department issued reassuring statements.
Robert Gibbs, the White House press secretary, said,
“There’s no safer investment in the world than in the United States.”
Foreign investors would be reassured
if Congress adopted the president’s budget plan, he said,
because it would put “us on that path to fiscal responsibility.”

While economists dismiss the possibility of
the United States defaulting on its obligations
[Not all economists dismiss that possiblity;
indeed, some think it is a probability.]
they say China could face steep losses in the event of
a sharp rise in United States interest rates or
a plunge in the value of the dollar.

Mr. Wen praised China’s comparatively healthy economy
and said his government would take whatever steps were needed
to end the country’s slump.
He also predicted that the world economy would improve in 2010.

His remarks appeared to have little immediate effect on financial markets.
Many China experts said Mr. Wen appeared to be speaking
as much to a domestic audience as to the United States.
Other analysts interpreted Mr. Wen’s comments
simply as a sign of irritation that
the Obama administration had paid little attention to China
in the planning for the G-20 conference.
At the last such meeting in November, China’s president, Hu Jintao,
spoke about the importance of
listening to the voices of major developing economies
in reforming the international financial system.

“The Chinese are peeved, legitimately,
that the Americans have ignored them in the run-up to the G-20,”
said Adam S. Posen,
the deputy director of the Peterson Institute for International Economics.
There may also be a bit of tit-for-tat
for Treasury Secretary Timothy F. Geithner’s claim, in written Senate testimony,
that China manipulated its currency,
keeping it artificially low against the dollar.

Mr. Wen’s confident performance also underscored
the growing financial and geopolitical importance of China,
one of the few countries to retain enormous spending power
despite slowing growth.
It has the world’s largest reserves of foreign exchange,
estimated at $2 trillion,
the product of years of double-digit growth.
[And America’s failure to maintain a relatively even Sino-American trade balance.]

Economists say at least half of that money has been invested in
United States Treasury notes and other government-backed debt,
mostly bonds issued by the Treasury and government-sponsored enterprises,
Fannie Mae and Freddie Mac.

Much of the Treasury debt China purchased in recent years
carries a low interest rate and would plunge in value
if interest rates were to rise sharply in the United States.
Some financial experts have warned that

measures taken to combat the financial crisis —
running large budget deficits and expanding the money supply —
may eventually lead to higher interest rates.

“The United States government is going to have to sell a huge amount of paper,
and the market may react by demanding a higher interest rate,”
said Nicholas R. Lardy, an expert in the Chinese economy
at the Peterson Institute for International Economics.
[May? Isn’t that just what classical economic theory predicts?]
“This will force down the price of outstanding treasuries,
imposing large paper losses on the Chinese.”

The conflicting financial currents pose a dilemma for Beijing.
The smaller the United States stimulus, the less its borrowing,
which could help prevent interest rates from rising.
But less government spending in the United States could also mean
a slower recovery for the American economy and
reduced American demand for Chinese goods.

The sharp narrowing of China’s trade surplus with the United States
may result in reduced Chinese purchases of American bonds in any case.
By some accounts,
China’s trade surplus could fall by as much as half this year,
to around $155 billion.
That would leave China with fewer dollars to buy foreign bonds,
particularly as the pace of investment flows into China has also slowed sharply.

During her visit here last month,
Secretary of State Hillary Rodham Clinton publicly assured China that
its American holdings remained a reliable investment.
But the sheer size of China’s holdings of American debt ensure that
the countries’ partnership will endure,
some analysts say.
“The only possibility, really, is that
China will have to hold these bonds until maturity,”
said Shen Minggao, the chief economist at Caijing,
a Beijing-based business magazine.
“If you start to sell those bonds, the market may collapse.”

China Urges New Money Reserve to Replace Dollar
New York Times, 2009-03-24

[An excerpt; emphasis is added.]


In another indication that
China is growing increasingly concerned about holding huge dollar reserves,
the head of its central bank has called for
the eventual creation of a new international currency reserve
to replace the dollar.

In a paper released Monday,
Zhou Xiaochuan, governor of the People’s Bank of China, said
a new currency reserve system controlled by the International Monetary Fund
could prove more stable and economically viable.

A new system is necessary, he said, because
the global economic crisis has revealed
the “inherent vulnerabilities and systemic risks in
the existing international monetary system.”

While few analysts believe that
the dollar will be replaced as the world’s dominant foreign exchange reserve
anytime soon,
the proposal suggests that China is preparing to assume
a more influential role in the world.
Russia recently made a similar proposal.

China’s bold idea,
released more than a week before world leaders are to gather in London
for an economic summit meeting,
also indicates that
Beijing is worried that
its huge dollar-denominated foreign reserves
could lose significant value in coming years.

China has the world’s largest foreign exchange reserves,
valued at nearly $2 trillion,
with more than half of those holdings estimated to be made up of
United States Treasuries and other dollar-denominated bonds.

On March 13,
China’s prime minister, Wen Jiabao, said
he was concerned about the safety of those assets,
particularly because

huge economic stimulus plans could lead to
soaring deficits in the United States,
which could sink the dollar’s value.

Should China lose its appetite for Treasuries,
the United States’ borrowing costs could rise,

making it more costly
for Washington to carry out economic stimulus packages and
for Americans to pay off their mortgages.

Nicholas Lardy,
an economist and China specialist at the Peterson Institute in Washington,
said that through its proposal,
China was indicating that
the dollar’s long dominance was unfair,
allowing the United States to run huge deficits by borrowing from abroad,
and that the risks to holders of Treasuries were growing.

“Chinese are quite concerned that
the large U.S. government deficits will eventually lead to inflation,
which will erode the purchasing power of
the dollar-denominated financial assets which they hold,” Mr. Lardy said.
“It is a legitimate concern.”


Geithner Affirms Dollar After Remarks Send It Tumbling
New York Times, 2009-03-26

Treasury Secretary Timothy F. Geithner on Wednesday said that the dollar would remain the world’s dominant reserve currency for some time to come, clarifying earlier remarks that sent the dollar tumbling.

“The dollar remains the world’s dominant reserve currency,” Mr. Geithner said after a speech in Midtown Manhattan to the Council on Foreign Relations. “I think that’s likely to continue for a long period of time.”

Mr. Geithner’s comments came in response to a question regarding a proposal by Zhou Xiaochuan, the governor of the People’s Bank of China, that suggested a possible replacement for the dollar as a global reserve currency. The proposal called on the International Monetary Fund to increase the use of "Special Drawing Rights" — a basket of currencies made up of the euro, yen, pound and dollar that has served as a reserve asset.

The dollar plunged earlier in the morning after Mr. Geithner, in response to another question, said China’s suggestion “deserves some consideration,” though he added that he had not read the proposal.

The dollar rebounded later on Mr. Geithner’s clarification.

Still Mr. Geithner said that the “evolution of the dollar’s role in the system depends really primarily on how effective we are in the United States in getting not just recovery back on track, our financial system repaired, but we get our fiscal position back to the point where people will judge it as sustainable over time.”

“As a country,” he added, “we will do what’s necessary to make sure we’re sustaining confidence in our financial markets and in — and in the productive capacity of this economy and our long-term fundamentals.”


Beijing’s Would-Be Houdinis
By Sebastian Mallaby
Washington Post Op-Ed, 2009-05-26

With extraordinary speed,
China has morphed from a diffident player in international finance
into an impatient table-banger.
Six months ago,
one could muse about whether the Chinese were interested in
a larger role within the International Monetary Fund
or in helping to rebuild the crisis-battered global system.
Now, the Chinese are pumping almost $40 billion into
a new East Asian version of the IMF,
browbeating trading partners into using the yuan,
and floating fantastical ideas about a new international reserve currency.


China Confident in U.S., Geithner Says
State Media Denounce American Policy
By Ariana Eunjung Cha
Washington Post, 2009-06-03

BEIJING, June 2 –

Even as China’s state media on Tuesday
slammed the country’s massive U.S. debt purchases,

U.S. Treasury Secretary Timothy F. Geithner said China’s leaders believe in
“the basic resilience and dynamism of the U.S. economy.”

Geithner said the economic and finance officials he met with during his two-day trip
did not repeat concerns they have expressed publicly over the past few months
about the deteriorating value of their holdings of U.S. Treasurys
and about the U.S. dollar’s position as the world’s dominant reserve currency.

“What I sense is a fair amount of confidence,
not just in the basic underlying strength and resilience of the U.S. economy,
its dynamism,
but in our capacity not just to solve this crisis, get growth back on track,
but to go back to living within our means,”
Geithner told a small group of reporters.

Further, he added, “I believe the Chinese expect the dollar to be the principal reserve currency for a long period of time, as do we.”

Geithner’s remarks stand in sharp contrast to the commentary in China’s official papers.

An editorial in the English-language China Daily said
it will be “regrettable
if [Geithner] underestimates and
shuts his ears to voices from China’s civil society,”

noting that there are worries that
“Washington’s mushrooming deficit,
generated by massive government borrowing
to fuel its economic recovery plan . . .
will undermine both the dollar and U.S. bonds.”

The Global Times, which is affiliated with the Communist Party, said,\
“Ordinary Chinese people [!] are discontent with
the declining value of
China’s huge foreign exchange reserves denominated in U.S. dollars.”

And Economic Information Daily,
which is part of the official New China News Agency
and affiliated with the State Council,
in a headline demanded to know of Geithner:
“How do you propose implementing fiscal discipline?
How will you maintain the stability of the dollar after the crisis?”

Yu Yongding, a former central bank adviser who is now a researcher with
the government-affiliated Chinese Academy of Social Sciences,
interviewed Geithner for the China Daily on Tuesday.
He said that the interview focused on the security of China’s foreign reserves
that are held in dollars and that
he was skeptical of the Treasury secretary’s assurances.

“I did not hear specific measures the U.S. will be taking
to assure the safety of Chinese foreign reserves.
That is something worrisome to me,”
Yu said in an interview.

“The U.S. government should not be complacent, and it should understand that
there are alternatives to China buying U.S. bonds and bills,”
he added.
“Investment in euro assets is such an alternative,
and there are lots of raw materials we can buy, too.
China should not close its options.”

Geithner emphasized that
he has been speaking about these issues with his counterparts for several months
and said
the main purpose of the trip
was more to lay the foundation for long-term cooperation
than to discuss specific issues.

“We’re overwhelmingly focused on getting the world economy on track,”
he said.

To that end, Geithner said,
“We want to be very careful that as we come out of this
we don’t re-create the conditions established, really, in the last recovery
that led to, helped contribute to,
this extraordinary financial and economic crisis.”

During his trip,
which included meetings with President Hu Jintao and Prime Minister Wen Jiabao,
Geithner called for increased cooperation between the United States and China
in leading the world out of economic crisis.
He said the United States
would make sure its current account deficit is reduced
and would increase its savings rate.

[Pardon me if I am skeptical about this actually happening.]
And he called on China to shift from its export-driven model
to one focused on domestic consumption.
He said he supports a larger role for China
in global financial institutions such as the International Monetary Fund.

“The world is not going to be able to look to the United States
as it was able to do in the last several recoveries
and expect consumption in the United States to lead the world out of this,”
Geithner said.

Emerging Powers Prepare to Meet in Russia
New York Times, 2009-06-16


Leaders of some of the world’s most powerful economies
are gathering on Tuesday
to plot how they can exert more control over the global financial system
as it takes its first wobbly steps toward recovery.

Yet not an American or Western European will be in the bunch.

The first summit meeting of the so-called BRIC group —
Brazil, Russia, India and China —
is intended to underscore
the rising economic clout of these four major developing countries
and their demand for a greater voice in the world.
And Russia, the group’s host and ideological provocateur,
is especially interested in
using the summit to fire a shot across Washington’s bow.

All four countries have expressed
varying degrees of discomfort with Washington’s financial stewardship,
and are particularly concerned about the value of the dollar
at a time of rapidly mounting indebtedness in the United States.
At the same time, most economists say the BRIC countries
can do little to change
the current architecture of the global financial system,
and that the outcome of this meeting will be largely symbolic.

The BRIC countries comprise about 15 percent of the world economy
and, perhaps more important,
have about 40 percent of global currency reserves.
Brazil, India and China have also weathered the financial crisis
better than the world as a whole.

While they are far from a monolithic group,
they are generally united in their frustration with

the dollar’s status as the world’s reserve currency,
which enables Washington to run budget deficits
without fears of facing
the kind of budgetary day of reckoning
that other countries risk.


The excess dollars fill up in foreign central banks,
leaving those countries with a difficult choice:
reinvesting the dollars in United States securities
holding them and facing an increase in the value of their own currencies,
making their products less competitive in world markets.

While there have been periodic complaints about the dollar through the years,
the criticisms from the BRIC countries have become
more frequent and more acerbic lately,
and have included calls for a supranational currency to replace the dollar.

In March, the prime minister of China, Wen Jiabao,
expressed concerns about United States budget deficits,
suggesting they might lead to inflation,
a weaker dollar and rising yields on Treasuries,
any one of which would hurt
China’s $1 trillion investment in American government debt.
Later that month, the head of the Chinese central bank called for
a new international currency to replace the dollar.

For the Kremlin,
undermining the dollar as the prevailing medium of exchange
reflects a broader Russian belief
that the United States exercises a dominance in global affairs
that exceeds its diminishing power.

“What we need are financial institutions of a completely new type,
where particular political issues and motives, and particular countries,
will not dominate,”
Russia’s president, Dmitri A. Medvedev, said this month.

Senior officials in most of the BRIC governments —
India, which does not depend as much on trade, is something of an exception —
assert that
while the United States has acted irresponsibly over the last 30 years
by amassing too much debt,
they will be the ones who suffer.

“The world economy should not remain entangled, so directly and unnecessarily,
in the vicissitudes of a single great world power,”
said Roberto Mangabeira Unger, Brazil’s minister for strategic affairs.
“The developing countries should not have to see
painfully accumulated hard-currency reserves
fall under the shadow of major devaluations.”

China, Brazil and Russia have said recently that
they will purchase notes from the International Monetary Fund
to begin diversifying their reserves.

Still, the reality is that
even many forceful critics of the dollar
see no immediate alternative to it
as the vehicle for international trade.
No other markets in the world
have the depth and liquidity of those in the United States,
experts say.
[I wonder how many experts will go on the record on that,
and what penalty, if any, they will face if they are wrong.
If they are wrong, it is the American people who will suffer,
not the experts.]

And the four BRIC countries, while newly emboldened,
have starkly different economies and relationships with the United States, complicating their attempts to unite.
Each of the four also has a currency
that either has been historically unstable
or is not easily convertible.

“Between the BRIC countries, there is really little in common,”
said Yevgeny G. Yasin,
head of research at the Higher School of Economics in Moscow.
“Each of them has its own destiny,
its own special character,
and it will be much more difficult for them to agree among themselves
than separately with Western countries.”

China, whose economy dwarfs those of the other three,
depends on the export of manufactured goods to the United States and Europe.
Russia sells oil, natural gas and other natural resources abroad.
Brazil focuses on agricultural exports,
while India’s growth has been largely based on its domestic market.

The four countries do not necessarily do much business with one another.
Only two percent of China’s trade last year was with Russia,
though the countries are neighbors, according to official statistics.

At the same time,
Brazil announced this year that
China had surpassed the United States as its largest trading partner,
and said last month that
they would look for ways to finance their trade without the dollar.

The very notion of the BRIC nations
was conceived in 2001 by an economist for Goldman Sachs,
and only then embraced by the countries themselves.
Their leaders have conducted informal discussions before,
but the event on Tuesday in the central Russian city of Yekaterinburg
will mark their first formal gathering, officials said.

Russia has sent somewhat mixed signals recently
regarding how determined it is to confront the dollar.
Last week,
it announced that it would purchase bonds from the International Monetary Fund,
but then the finance minister, Aleksei L. Kudrin, acknowledged that
the world was not yet ready for another reserve currency.

Vladimir A. Mau, rector of the Academy of National Economy,
a government advisory organization in Moscow,
said Russia and the other BRIC countries had legitimate worries that
the United States was piling up too much debt.
But Mr. Mau said that at this point,
he doubted that the Kremlin had any recourse.

Mr. Unger, the Brazilian minister, agreed, saying that
the BRIC countries do not see replacing the dollar with
“heavy-handed, bureaucratic machinery,”
such as a global, European-style Central Bank.

In China,
popular sympathies are with Russian and Brazilian demands
for a robust challenge to American control,
analysts said.

Yet there has been no consensus on
what a new financial system should look like,
and China’s dependence on exports
and enormous holdings of dollar-denominated assets
give it a vested interest in the status quo,
leaving China’s leaders reluctant to pursue far-reaching changes.

While China’s official news media often give sizable attention
to coming international gatherings,
they have offered little coverage of the BRIC summit meeting.

Xu Xiaonian,
an economist at the China Europe International Business School in Shanghai,
said the silence reflected a desire not to raise hopes for the meeting.
“What can they agree on? So little,” Mr. Xu said.
“This meeting is more symbolic than of real effect.”

Emerging Economies Meet in Russia
New York Times, 2009-06-17


Leaders of the four largest emerging market economies
discussed ways to reduce their reliance on the United States
at their first formal summit meeting on Tuesday.
But they concluded with only a cautious statement suggesting
a move away from the dollar’s role in global commerce
and a call for
greater representation of developing countries
in global financial institutions.


Fading of the Dollar's Dominance
Other Nations See Opening to Boost Their Currencies
By Anthony Faiola
Washington Post, 2009-06-24

The days of calling the dollar almighty may be numbered.

Since World War II,
when the dollar eclipsed the British pound as the king of world currencies,
the United States has reaped the rewards of its monetary strength.
The greenback’s sense of indestructibility
allowed the U.S. government to borrow cheaply
and gave rise to an era of rich American globetrotters
toting the world’s most easily convertible form of cash.

But the financial crisis that started in the United States
is dramatically intensifying the debate over the future of the dollar,
and whether it can, or should, remain at the top of the financial food chain.
Although a meaningful shift away from the dollar is likely to take years or more,
some analysts believe that the debate is now reaching a tipping point.

Last week, the leaders of Brazil, Russia, India and China --
whose governments are some of the world’s largest dollar holders --
jointly declared the need for
a “more diversified international monetary system,” sparking a drop in the greenback on world markets.
In recent months, China in particular
has led a campaign for a new world monetary order,
arguing that the financial crisis has exposed profound vulnerabilities
in the U.S. economy and financial system.
Those flaws, critics argue, show it is simply too risky for the world’s central banks to rely largely on the dollar for their global reserves.

At the same time, Beijing has taken unprecedented steps to increase the international role of its own currency, the yuan, to a level commensurate with China’s relatively new status as a major economic power.
In the coming weeks, the International Monetary Fund --
the institution charged with
the monitoring and stability of the global economy --
will issue a vast amount of currency-like assets known as Special Drawing Rights,
which some analysts see as a long-term substitute for the hordes of dollar reserves being held by central banks around the world.
Some now envision that the dollar will fall from
its recent levels of 60 to 65 percent of international reserves
to less than 50 percent a decade from now.

A diminishing of the dollar’s global role
has far-reaching implications for the United States.
The value of the dollar versus other major currencies could markedly drop
as it slips from supremacy,
making millions of Americans overseas feel poorer
while potentially fueling a new golden era for U.S. exporters
as American goods become more cost-competitive.
The U.S. government may also be forced to pay higher rates to investors
when selling, for instance, Treasury bonds to raise cash --
making it far more costly in the future
to cover the kind of massive stimulus spending
the government is now undertaking.

“The dollar’s global status has allowed the U.S.
to have a free pass on financing our deficit
as opposed to countries like Brazil,
who are punished by international currency investors for risky behavior,”
said Martin Weiss, author of the “Ultimate Depression Survival Guide.”
“But if the dollar is no longer the currency everybody wants or must have
to continue doing business,
that is going to be much, much harder to do.”

Despite the current campaign to lessen the dollar’s role,
analysts note that
there has not yet been a major push by foreign governments or private investors
to shed it.
In fact, over the course of the financial crisis, the dollar --
which had been on a downward trajectory for months --
has actually strengthened against major currencies,
including its closest rival, the euro.

That is partly because even nations like China --
with the world’s largest dollar-denominated reserves,
at close to $2 trillion worth --
have shied away from dumping the dollar,
fearing it could trigger a global run
that would severely damage the value of their holdings.
Additionally, other mighty currencies like the euro
have lost their chance to claim the dollar’s crown
because their issuing nations are in even worse economic shape than the United States.
In times of crisis,
the dollar, as well as dollar-denominated U.S. Treasury bonds,
are still seen as safe havens.

“The U.S. had to screw something up
to lose the dominance of the dollar,
and you could argue that
the U.S. starting a global financial crisis
is a pretty big screw-up,”

said C. Fred Bergsten,
director of the Peterson Institute of International Economics
and a top economic official during the Carter administration.
“But the Europeans
haven’t been able to take advantage of that to advance the euro immediately,
largely because they’ve made some pretty big screw-ups themselves.”

[Bergsten’s statement is a real red herring,
as it draws reader’s attention away from
the fundamental cause of the dollar’s weakness
to an event much in the news which has little real relevance.
The fundamental cause of the dollar’s weakness is that
other nations have far more of them than they need or want.
And in turn, the reason for this is quite simply
the cumulative result of years of massive and generally growing trade imbalances.
By pointing to the financial crisis,
Bergsten hurts the attention that the real problem needs
if it is ever to be fixed.]

That said, economists including Bergsten are now saying the end of the dollar’s dominance appears increasingly inevitable. During the 19th and early 20th centuries, for instance, the British pound enjoyed a similar supremacy. It gradually lost that role as Britain’s empire crumbled, was devastated by two world wars and saw the United States emerge as the world’s dominant superpower.

By the same token, economists see the current financial crisis, and the doubts it has raised about the U.S. economy, as accelerating the creation of a new economic order. The easy monetary policy embraced by the Federal Reserve to spark a recovery -- including zero-interest rates and the printing of cash to support stimulus spending -- is also working against the strength of the dollar.

“The dollar may very well see periods of strength in the weeks and months ahead,” said Douglas Rediker, director of the Global Strategic Finance Initiative at the New America Foundation. “But in the long run, I think it is clear that it will lose some of its hegemonic status.”

This has left room for rising nations such as China to seize a broader role in the global monetary system. Though the Chinese currency remains largely non-convertible -- meaning it cannot easily be used in international transactions -- Beijing has taken steps to sign currency exchange agreements worth $95 billion with South Korea, Malaysia, Indonesia, Belarus, Hong Kong and Argentina. Brazil and China announced in May that they are exploring a similar agreement.

Though it may take years before such agreements have any real impact on the dollar, they are coming at a time when governments around the world may find another potential substitute for their dollar reserves: the IMF’s Special Drawing Rights.

The SDRs are a currency-like asset whose value is based on the dollar, the pound, the euro and the yen. They have been issued by the IMF, albeit in highly limited form, since the 1960s to aid nations in need of reserves. In April, however, world leaders including President Obama agreed at an economic summit in London that SDRs should now be used to help stabilize the balance sheets of nations struggling to combat the current crisis.

As a result, the IMF is now set to “print” $300 billion worth of SDRs -- 10 times more than currently exist -- for distribution to nations around the globe. They will effectively be held as reserve deposits by each nation’s central bank.

Some, like Bergsten, have argued the SDRs’ role should be taken a step further, allowing them to serve as a de facto global reserve currency. Bergsten has advocated, for instance, the idea of nations such as China “trading in” their dollars for SDRs, allowing for an orderly transition away from the greenback without causing a sharp fluctuation in the dollar’s market value.

“Like it or not, the dollar is going to lose some of its global status,” Bergsten said. “So maybe it’s time we just accepted that and figured out the best and most orderly way to make that happen.”

World Bank Head Sees Dollar’s Role Diminishing
New York Times, 2009-09-29


The president of the World Bank said on Monday that
America’s days as an unchallenged economic superpower might be numbered
and that
the dollar was likely to lose its favored position
as the euro and the Chinese renminbi assume bigger roles.

“The United States would be mistaken to take for granted
the dollar’s place as the world’s predominant reserve currency,”

the World Bank president, Robert B. Zoellick,
said in a speech at the School for Advanced International Studies at Johns Hopkins.
“Looking forward,
there will increasingly be other options to the dollar.”

Mr. Zoellick, who previously served as the United States trade representative and as deputy secretary of state under President George W. Bush,
said that
the euro provided a “respectable alternative”
for financing international transactions
and that
there was “every reason to believe that the euro’s acceptability could grow.”

In the next 10 to 20 years, he said,
the dollar will face growing competition from China’s currency,
the renminbi.
Though Chinese leaders
have minimized their currency’s use in international transactions,
largely so they could keep greater control over exchange rates,
Mr. Zoellick said the renminbi would “evolve into a force in financial markets.”

The World Bank,
which is financed by governments around the globe
and lends money primarily to poor countries,
has no say over the economic policies of large nations or over currency matters.

But Mr. Zoellick’s comments were unusual,
in part because he seemed intent on being provocative.
He argued that
the United States and a handful of other rich nations
could no longer dominate the world economy
and suggested that America was losing its clout.

He also took issue with
a central piece of the Obama administration’s proposal
regarding the country’s financial regulatory system.

“The greenback’s fortunes will depend heavily on U.S. choices,”
Mr. Zoellick said.
“Will the United States resolve its debt problems without a resort to inflation?
Can America establish long-term discipline
over spending and its budget deficit?”

Mr. Zoellick criticized President Obama’s plan
to put the Federal Reserve in charge of reducing “systemic risk”
and to regulate institutions considered too big to fail.
Saying that Congress had become uneasy about
the Fed’s exercise of emergency powers
to bail out financial institutions and prop up credit markets,
Mr. Zoellick argued that
the Treasury rather than the Fed should get more power because
the Treasury was more accountable to Congress.

“In the United States,
it will be difficult to vest the independent and powerful technocrats
at the Federal Reserve with more authority,”
Mr. Zoellick said, adding that
“the Treasury is an executive department,
and therefore Congress and the public
can more directly oversee how it uses any added authority.”

Leaving the euro behind?
By Sebastian Mallaby
Washington Post, 2010-04-30

The Euro Trap
New York Times, 2010-04-30


What’s the nature of the trap?

During the years of easy money,
wages and prices in the crisis countries
rose much faster than in the rest of Europe.
Now that the money is no longer rolling in,
those countries need to get costs back in line.

[Krugman has posed this issue for the European countries,
but in fact it is equally applicable to America.
For America, the “good times” started immediately after World War II,
when America had a fantastic, and obviously,
if one thought about it, temporary advantage over the rest of the world
due to the fact that the industrial plant
in much of continental Europe, certainly in Germany, and in Japan
had been laid waste by the mass bombing conducted by the Allies
as part of their campaign against the Axis.
Further, China spent the late 1940s engaged in civil war,
then the 1950s and 1960s under Mao Tse-tung’s various anti-capitalist experiments
(including the “Cultural Revolution”).
America’s economic competition was clearly hobbled in those post-war years.

Rather than reflecting on that fact,
and viewing America’s post-war prosperity as an ephemeral windfall,
Americans took that prosperity to be
a result of America’s supposed God-given superiority,
and moved to take advantage of that prosperity in various ways.
The big industrial unions of the 1950s (UAW, USW, UMW, and so on)
escalated pay and benefits for their workers.
Subsequently, of course, that led to the near demise of much of their industry,
and, in the case of the auto industry,
pension benefits which the car companies simply cannot afford.
At the level of government,
Democratic majorities in Congress and President Johnson
enacted in 1965 the Medicaid and Medicare programs.
Now, in the 2000s,
we’ve seen how the unanticipated explosion in per-capita costs of those programs
has put the U.S. on a clear path to fiscal disaster.]

Obama Ends G-20 Summit With Criticism of China
New York Times, 2010-11-13

Though his own Treasury Department,
like those of prior administrations,
has certified that
China is not a “currency manipulator,”
a designation that can prompt Congressional trade action,
Mr. Obama appeared to remove
the remaining wiggle room he had on the subject of the renminbi,
“It is undervalued.
China spends enormous amounts of money intervening in the market
to keep it undervalued.”

[Well, excuse me.
If the statement by Obama highlighted in red above
isn’t the very definition of currency manipulation,
then what the hell is?

Just more Orwellian, Alice-in-Wonderland double-speak from our PC “elite.”
Goebbels could have done no better (or worse).]

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