Mea culpa on the need for a new currency

A few days ago I wrote a post “Japanese defend dollar’s status while China tears it down” in which I defended the Japanese support of the dollar, saying it was in no one’s interest to see a change in the currency markets right now.  I have to admit this was wrong-headed and short-sighted.  In truth, the currency market, with the U.S. dollar as the principal reserve currency is in great need of an overhaul.

When I wrote the post last Friday I said: “it makes no sense to talk the dollar down here and now and risk a disorderly fall.  It certainly is not in China’s best interest as all their U.S. dollar assets will lose value.”  But, if we are to move to a more stable world financial system, when is the right time?  There probably is no ‘right’ time. So, in retrospect, I would say the Chinese are probably taking the right approach by aiming to at a minimum discuss the currency issue here and now – something I had advocated in the past.

I see the U.S. dollar as a weak currency due to the excess consumption in the United States. Meanwhile, the Chinese currency, the Renminbi, is controlled by the State, leading to distortions in trade that most pundits believe create severe trade imbalances. While discussions about a new currency regime would probably not lead to any major changes in the short-term, making preparations now would lead to more stability in the medium-term.

  1. Stevie b. says

    Ed – it must be really difficult to post views every day with consistent clarity of thought. I know I couldn’t do it. It’s good that you are so open to reconsideration, as we all should be as part of the learning process

  2. aitrader says

    In truth, the currency market, with the U.S. dollar as the principal reserve currency is in great need of an overhaul.

    Fine. An overhaul to what? When Bretton-Woods took place the US was in a similar place to China in an economic sense. It had current account surpluses, an overwhelming industrial base, it was a primary victor in WWII, and it had the funds and political will to rebuild both its allies and fomrer enemies.

    China has only the current account surplus. Its political system is a trevesty and its currency is manipulated. Its industrial base is still decades behind the developed nations’.

    So where do we go from here? The IMF drwawing rights as a world reserve? The Yuan? How about the Lat? Come on, let’s be serious.

    It’s fine to poo-poo the dollar and we’re all ears as to the next altetnative. Can we find one in the midst of a depression without crashing the whole system? I just don’t see it happening. At least not without serious repercussions.

    In the current sitch we might just as well go back to gold & silver. They would at least be stable and beyond most attempts at manipulation.

  3. Name says

    Excess consumption? Have you looked at the savings rate recently? I guess many Dollar bears assume it will go right back to negative territory in a V shaped recovery. What if a 10% savings rate and a lower trade deficit are here to stay as a secular scheme? Frugality anyone?

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