“The dollar question: Where are we?”

By Kati Suominen, Trans-Atlantic Fellow at the German Marshall Fund in Washington, cross posted from VoxEU

The global crisis has led some to question the dollar’s place as the dominant currency. This column discusses three camps in the literature: those advocating a new synthetic global currency, those arguing that a new reserve currency will emerge, and those suggesting a return to sharing the role. It concludes that talk of the dollar’s death – or even its decline – are exaggerated.

The global crisis and US economic travails triggered a firestorm debate on the future of the global currency regime.

* At the London G20 Summit in April 2009 China’s central bank governor Zhou Xiaochuan slighted the dollar-centric order, calling for a super-sovereign reserve currency – a reference to special drawing rights (SDRs) housed at the IMF.1
* Russian President Dmitry Medvedev called for a mix of regional currencies;
* Some western opinion leaders warmed to the euro’s leadership (see for example Zoellick 2009).

Washington refuted these notions. Instead it pledged fiscal discipline to help buttress the greenback. ECB head Jean-Claude Trichet also argued for the dollar’s importance in the world economy (Reuters 2009a).

At last week’s G20 Summit in Toronto, currencies went practically unmentioned. This reflects the US recovery; the fall of its most plausible contender, the euro, amid Europe’s economic woes; and perhaps China’s deflecting attention from its exchange-rate management. Despite this, the debate continues to simmer as US debt and trade deficits grow. In line with the Triffin Dilemma2, this raises concerns about the dollar’s viability and trade protectionism in America. Three main camps of literature explore the alternatives to the dollar as the global reserve currency – yet each has important drawbacks.
Global currency

In his March 2009 comments, Zhou argued that Keynes’ vision for a global currency (expressed at the famous Bretton Woods conference that set up the IMF and World Bank) “may have been more farsighted” than the dollar-centric system that came into being.

Keynes envisioned an International Clearing Union (ICU) that would issue “bancor” – a currency based on the value of 30 commodities (including gold) and exchangeable against national currencies at fixed rates. Countries would maintain bancor accounts and draw from the ICU when experiencing balance of payments problems. In 1967, the IMF forecast that Special Drawing Rights (SDRs) would account for over half of total world reserves before the end of the 20th century (Polak 1967). Nobel prize laureate Robert Mundell (among many others) has advocated similar notions since the 1960s (Mundell 1968).3 The idea has gained momentum following Zhou’s comments.

* Bergsten (2009) and Wijnholds (2009) support a substitution account that would enable countries to reduce their dollar exposure by swapping dollars for SDRs.4
* More ambitiously, a UN commission (2009) led by Joseph Stiglitz suggests a “greatly expanded SDR” system akin to the bancor system.
* Strauss-Kahn (2010) argues that the IMF could in the long-run issue SDRs.
* An IMF team laid out detailed thinking on a global reserve currency issued by the international monetary institution – an independent central bank with an unrivalled AAAA rating (Mateos y Lago et al. 2009).5 Member states could issue bonds and other instruments denominated in this global currency.
* Stiglitz (2009) proposes a global reserve system whereby countries obtain paper gold (like bancor) from the IMF for their reserves as crisis insurance so as to attenuate reserve accumulation.6

These more ambitious proposals would provide exchange rate stability, global network benefits and scale economies, and be considered “fair” in that no nation would enjoy exorbitant privilege.

Authors acknowledge, however, the tall assumptions. The dedicated central bank would have impeccable judgement, and be able to reconcile independence with accountability to member nations. Practical constraints are enormous.

The G20 expanded the SDR pool by $250 billion, but even then SDRs make up only 4% of global reserves. Making SDR the principal reserve asset would require $3 trillion of fresh SDRs, more than the GDP of France. At the same time the IMF would need to be made a world central bank able to print money.7 It would take years for the SDR to be accepted across global transactions and reserves (Cooper 2009), particularly as the first SDR liabilities would face competition from existing assets.

Politics would be the thorniest part. The US would likely be opposed so as to protect the dollar, and Washington holds a veto at the IMF on SDR issuances. The composition of the SDR basket would also be contested. The current basket is composed of the dollar, euro, yen, and sterling – major emerging markets would push for inclusion of their currencies. Economists would argue for Australian, Canadian, Chilean, and Norwegian currencies so as to link SDRs to commodity price cycles.8 The larger the SDR system grows, the more fiercely its governance is likely to be contested.

A new reserve currency

Another camp sees the dollar as becoming supplanted by a new reserve currency. A number of analysts – Reisen (2009), Roubini (2009), Aiyar (2009) – hold that the renminbi could replace the dollar as a reserve currency in a few decades. Reisen sees 2050 as the tipping point away from the dollar, when the Chinese economy is projected to be nearly twice as large as that of the US (Goldman Sachs 2007).9

The euro has, since the 1990s, been seen as a possible dollar replacement, with the Eurozone’s size and prominence in world trade taken as the main drivers.10 Galati and Woolridgde (2008) find that the liquidity and breadth of euro financial markets are approaching those of dollar markets. Chinn and Frankel (2008) argue that given UK’s liquid financial markets, British accession to the Eurozone would be a tipping point. As the US economy stumbled, Zoellick (2009) saw prolonged problems as leading to flight to euro. De Cecco (2009) suggests that the euro would be to the 21st century what gold was to the 19th.

Yet neither the renminbi nor euro is a perfect substitute to the dollar.

The renminbi is hardly used as a reserve currency, and plays a minor role in international exchanges.11 A global reserve currency requires liquidity and convertibility, but the Chinese government securities market is underdeveloped, illiquid, and the renminbi is not convertible. If it were, it would likely appreciate and torpedo the government’s export-led growth paradigm – not unlike Japan’s problem in the 1980s – and undercut its political grip. China is preparing Shanghai as a global financial centre by 2020, but Hong Kong, with its convertible dollar, seems far likelier to play the part (Steinbock 2009). The renminbi’s regional reach will be stunted by rivalries with India and Japan, the once-envisioned core of a yen bloc (Katada 2008).

The euro has become the unquestionable runner-up reserve currency, but it is now seriously weakened by the debt crisis and the tardy response to it. The euro is also constrained by fundamentals – a fragmented euro-bond market, Europe’s inverted age pyramid, lacklustre growth, and the absence of a Federal Reserve-like lender of last resort.12 Foreign policy concerns may also continue enticing countries even in the European periphery to peg to dollar instead of euro (Posen 2008). Europe’s debt problems, as well as its other issues, will likely persist longer and be thornier than those of the US (Cooper 2009 and James 2009). Germany in particular is unlikely to want a more prominent role for the euro should that entail appreciation. If the euro rose to rival the dollar in 2020, European extra-regional exports would decline by 10% (McKinsey 2009).

In turn, the yen is a long-shot as Europe’s growth and demographic problems meet with China’s market rigidities in Japan.


Still another widely discussed idea is a system of co-currencies. Before 1914 several currencies periodically shared the role of the global reserve currency (Eichengreen 2005). Diversity could also produce healthy policy competition among issuing nations for investor confidence (Eichengreen 2009 and Genberg 2009).

Three factors could facilitate a co-currency world.

* First, financial innovation could reduce the costs of converting currencies, lowering incentives to hold reserves in a single currency (Genberg 2009).
* Second, further regionalisation of world trade could make China, Japan, Germany, and countries surrounding them, more decoupled from the US economy and thus less interested in holding dollars.13
* Third, liberalisation and integration of Asian financial markets could eventually lead to a regional currency bloc, perhaps even the occasionally discussed monetary union.14

A system of regional currency blocs need not be trade-diverting (Eichengreen and Irwin 1993). Studies on the Eurozone, for example, find evidence of trade creation, not trade diversion (Micco 2003).15 But a system of equal co-currencies is leaderless and prone to conflict, as would be intra-regional currency competition (Cohen 2009 and Stiglitz 2009).16 An unmanaged system would lead to instability in the exchange rate (McKinsey 2009).

Perhaps the most feasible outcome in the next decade is some further diversification, with one or two regional currencies alongside the global dollar, and/or some type of SDR substitution account. To the extent that it alleviates the Triffin Dilemma and provides stability while also not undercutting confidence in the dollar or disrupting the network benefits the dollar provides, such a system could be favourable for the US.

Dollar’s death – even dollar doubts – are exaggerated

The greenback’s resilience has been questioned at least three times in the post-war era – in the 1960s as gold reserves ran short, amid Japan’s rise in the 1980s, and upon the founding of the euro in the 1990s. Yet, the dollar has always rebounded in a reflection of US economic prowess, unrivalled liquidity and stability of US financial markets, scale benefits of the dollar in global transactions, and sheer path-dependence. A tipping point has not occurred due to the lack of alternatives and need. Alternatives continue to be tenuous.

The dollar’s prominence is as indisputable as is US safe haven status.17 But the literature agrees that global reserves will need to grow robustly to keep up with import demand.18 This accentuates the Triffin Dilemma. The soaring US debt risks undermining the dollar and America’s enjoyment of its hard-earned exorbitant privilege, jeopardising US global economies.19

Whether pariah America or safe haven America will result depends on policy. Size, growth, liquidity, and solvency require fiscal discipline, non-inflationary policies, and capital investments. Yet solvency and central bank independence are not sufficient. If the US private sector deleverages and other countries accumulate dollar-denominated assets as reserves, the US government would re-emerge as the borrower of last resort (Wolf 2009, Posen 2008).20 The G20 drive to contain global financial imbalances is a means to avert such an outcome.

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  1. attempter

    Peak Oil has nothing to say about this?

    Actually, I looked in vain for any acknowledgement of, um, watchyamacallit, oh yeah, the real economy.

    I know that’s not what the piece is about, but that’s precisely the problem – economics has become so psychopathic that it’s considered normal to write like this. It’s just gangsters discussing their cash flow unheeding of how the businesses they shake down function in reality in the first place. As we Peak Oilers ask, where does food come from? Most people, as a day-to-day way of thinking, think it comes from the supermarket by magic.

    That’s how an oxymoronic term like “jobless recovery” (it’s not a concept) can become so propagated in the first place. It’s of course first malevolently invented as an Orwellian term, but from there it memes out, foaming on the general insanity of the discourse of the financialized economy, which in turn imposes its frames on all economic and political discourse.

    Oh well, I just keep asking if anyone’s seen a real economy around here somewhere.

    (My Peak Oil question wasn’t actually off-topic. Rather, Peak Oil is why the global currency hasn’t long to live. The dollar’s only the “reserve currency” in the first place because it’s the currency paid for oil.)

    1. LeeAnne

      attmpter, thank you for all your comments.

      On peak oil.

      The combination of Obama and BP oil spill criminal negligence following Bush/Clinton deregulation and anything goes China products (is my premium priced Organic Whole Milk contained in a Made-in-China plastic package? am I legally permitted to know?), US military in the Straits of Hormuz and inexplicably Costa Rico, gives rise to thoughts of the chances for success of a US revolution against corporate finance driven government fascist system:

      Peak Oil + US revolution + military blockades of oil = US mass starvation.

      There will be no American revolution.

      The only escape is subsistence agriculture wherever you can find it.

      1. Bates


        Curiosity makes me ask you if you are practicing what you preach? Have you purchased some agricultural plot, moved to occupy and cultivate it? Have you put in a well, windmills for power and lifting water? Purchased a team of mules/plow and learned how to use and care for them. Have you learned how to can your own harvest and dug a root cellar? Have you converted your dollars into silver/gold? Have you joined a community of like minded people?

        Do you have any concept how much hard work is involved in what you are advocating? Try living on a small truck farm and working it for a few years…then you will be qualified to preach the benefits of what you are advocating for the rest of us. Better yet, try a dairy operation that runs about 500 milkers and grows most of it’s own silage.

        How do your two ideas reconcile…1)Move to agrarian land…2) but need oil for transporting produce to market plus fertilizer plus tractor plus grain delivery to feed chickens,etc?…Or, is your little ag project a perpetual motion machine with no input but continual output?

        BTW, there will be no Peak Oil today, or tomorrow, or next year…As oil becomes scarce it will be priced out of reach of joe six pack…but not war mongers.

        Your best bet is to stick to moderating the choir at TOD and hope like hell you never have to look at a pair of mule butts in 100 degree sun.

    2. i on the ball patriot

      Good comment as usual!

      Concerns about peak oil have been shunted aside by the real problem, peak corruption, as all of the gangs outdo each other in creation of enslaving peak credit out of thin air — debt bubble traps and their bogus financial derivative products that in the global aggregate have caused gross mal-investment and are beyond repayment — none of which will be resolved by a global currency. These are gang wars.

      TSTS — Too Sleazy To Save unfortunately.

      What good is saving in such a volatile and shaky currency environment?

      The trust is gone. Global election boycotts are in order!

      The people need to get into the loop.

      Deception is the strongest political force on the planet.

  2. Bruce Krasting

    I got a laugh out of this line form the article:

    Reisen (2009), Roubini (2009), Aiyar (2009) – hold that the renminbi could replace the dollar as a reserve currency in a few decades.

    A few decades? One thing for sure, Reisen and Roubini have no idea what the currency market will be like in twenty years. These guys opine about the future like they have a clue what the world will be like that long from now.

    I doubt they have any idea where we will be this coming Wednesday…

    1. Bates


      Another topic the economists avoid in this missive is the role of soverign politics.

      Bob Reich (I am not a huge Reich fan) recently published an opinion piece re; ‘The Vanishing American Consumer and the Coming Trade War’ http://robertreich.org/post/789574303/the-vanishing-american-consumer-and-the-coming-trade

      If one concedes that the bankers are running soverign fiscal policies, and I do, that state of affairs could change quickly if the Main St economies of the world and the people affected by macro economic policies decide to take serious economic action to change soverign policies. Is there not some limit to the amount of theft, corruption, ignoring the rule of law, etc, by the politicians and bankers that citizens will tolerate? At some point citizens will say enough and take actions to stop the non sense…and the action can come in the form of non payment of mortgages, buying only necessities, labor strikes (less likely now), voting all incumbent politicians out of office in every election, etc.

      I believe that there already exists a move to thrift among the populations of many soverigns by those on the lower end of the economic totem pole while those on the upper end of said pole are continuing to spend but at a reduced level. The question of whether this move to thrift is voluntary or forced by lack of credit is not entirely clear, but some portion of the new thrift is certainly voluntary…a natural reaction when people are losing confidence in their leaders and in soverign economic policies.

      The world has depended on the US consumer for a few decades but now the US is committed to ‘double exports within five years (Obama)’…While at the same time all soverigns are similarly depending on exports for sustaining their economies. The US is caught up in Triffin’s Paradox and the remainder of the soverigns are stuck, attempting to increase their internal consumption to offset declining exports…and here is the real rub…fiat currencies everywhere are being devalued to make the soverigns exports more attractive to other soverigns consumers. Voila! is it any wonder that some citizens of the world are holding up the price of gold denominated in all fiat currencies even though there is ample proof that central banks in collusion with large money center banks are doing all possible to keep down the price of gold denominated in fiat currencies?

      The last paragraph from Reich’s opinion article:

      “And watch out for under-the-radar protectionist moves. Since the start of 2008, when the Great Recession began, countries around the world have already imposed at least 443 measures to block imports, according to the Center for Economic Policy Research.

      This is just the start.”

      1. alex

        “Another topic the economists avoid in this missive is the role of soverign politics.”

        On the contrary, while they don’t explicitly point it out, the question of the world’s reserve/exchange currency is strongly connected to sovereign politics. For example, China’s sovereign decision to accumulate enormous forex reserves ($2.45T, or about 50%/GDP) keeps their currency undervalued and their export machine rolling. Meanwhile it has lead to the de-industrialization of America and a loss of jobs. The original bancor proposal was designed to stop this sort of situation from ever arising.

        1. Bates

          “For example, China’s sovereign decision to accumulate enormous forex reserves ($2.45T, or about 50%/GDP) keeps their currency undervalued and their export machine rolling. Meanwhile it has lead to the de-industrialization of America and a loss of jobs.”

          You seem to conviently forget that China could not have unilaterally made the decision to export American jobs to Chinese shores. The decisions to allow China favored nation trading status and US Corporations to offshore jobs to China was made by a series of administrations over the last 30 years…administrations that were lobbied heavily by big corporations to allow production to move to China…iow, this was a conscious fiscal policy decision and China could not have accomplished it without US help…btw, funny how US wages have been stagnant during that same 30 year time frame, eh?

          “I’m not sure how much weight we can give Obama’s assertion that “the US is committed to double exports within 5 years.”

          I give Obamas assertion on exports a snowball’s chance in hell. No way is it going to happen but he has to appear to have a plan…even if it is only a lame one that only fools the sheeple.

          “I don’t think that even someone with Obama’s oratorical skills can move the citizenry to sacrifice in the name of some vague concept they don’t exactly grasp”

          I agree…Obama cannot move the American people to get off their azzes and go to work, become good citizens active in their communities and schools, elect a person with a bad hairdo but brains and goals to represent them… but, hunger might.

          “Haven’t you noticed how hard the Obama administration has been addressing the problem of currency misvaluation? Someday they may even state the obvious and declare China a currency manipulator”

          Very silly assertion by someone living in the country (making an assumption that you are living in America or an American citizen?) that manipulates currency (FX) markets more than any other country in the world. Indeed, not only FX but all markets. You should feel fortunate that China and our many other creditors have not pulled the plug on their treasury holdings. I doubt the vampire squid would have shown so much patience if the shoe were on the other foot.

          “The US dollar as the world’s reserve currency has become a golden noose for the US.”

          ‘The Triffin dilemma (less commonly the Triffin paradox) is the observation that when a national currency also serves as an international reserve currency (as the US dollar does today), there are fundamental conflicts of interest between short-term domestic and long-term international economic objectives. This dilemma was first identified by Belgian-American economist Robert Triffin in the 1960s, who pointed out that the country issuing the global reserve currency must be willing to run large trade deficits in order to supply the world with enough of its currency to fulfill world demand for foreign exchange reserves.’

          For a more complete explanation of Triffin’s Paradox see this wiki link: http://en.wikipedia.org/wiki/Triffin_dilemma

          1. alex

            “You seem to conviently forget that China could not have unilaterally made the decision to export American jobs to Chinese shores. The decisions to allow China favored nation trading status and US Corporations to offshore jobs to China was made by a series of administrations over the last 30 years…”

            Not only have I not forgotten it, I often loudly complain about it. But since the topic of the post was the choice of international currency, it seemed more relevant to comment on the currency valuation question.

            “Very silly assertion by someone living in the country … that manipulates currency (FX) markets more than any other country in the world.”

            Pray tell, how and when does the US do that?

            “You should feel fortunate that China and our many other creditors have not pulled the plug on their treasury holdings.”

            You mean they’ve decided not to shoot themselves in the foot? How surprising. A gradual selloff of their forex reserves though would push down the US dollar and help us immensely.

            “The Triffin dilemma …”

            I’m well aware of the Triffin dilemma and the blessing/curse for the country issuing the world’s reserve currency. Our currency problems though go beyond the Triffin dilemma.

      2. alex black

        I’m not sure how much weight we can give Obama’s assertion that “the US is committed to double exports within 5 years.” What, praytell, will we be exporting in such large quantities? New Age music? Community Organizing seminars? Well, maybe Lipitor, in the wake of our expansion of fast food franchises worldwide….

        I question our “commitment” to this goal as a nation. Is the US populace willing to reverse decades of consuming more than we produce, and suddenly start working long hours to make stuff that we then send off to others? I don’t think that even someone with Obama’s oratorical skills can move the citizenry to sacrifice in the name of some vague concept they don’t exactly grasp (current account defecit).

        I think if Kennedy’s announced commitment to put a man on the moon had the same oooomph that Obama’s commitment to double exports had, we never could have gotten an unmanned rocket out of the atmosphere.

        1. alex

          Haven’t you noticed how hard the Obama administration has been addressing the problem of currency misvaluation? Someday they may even state the obvious and declare China a currency manipulator (just as soon as they work up the courage to announce that the sun rises in the east).

    2. shrek

      I remember five years reading an Alan Blinder editorial in the WSJ or Times writing how India and China would be the super stars of the next fifty years. At that moment I realized that economics is complete BS. Someone should ask the Fed whether making any kind of forecast longer than a year is even worth it. No one knows the future, but everyone is a sucker for prediction

  3. alex

    Great article, but what’s omitted is that the original bancor proposal included rules to limit the trade surplus/deficit that any country could run. It’s a key part of the proposal and eliminating such provisions would render any international currency a terrible idea.

    Specifically the bancor rules were that any country that ran too large a trade surplus would have the exchange value of it’s currency increased, and any country that ran an excessive deficit would have it’s currency’s exchange value reduced. If a country continued to run too large a trade surplus it would have its bancor reserves taxed to reduce them. That solves the problem of a country that uses import barriers (perhaps non-tariff) or export subsidies to maintain a large trade surplus in spit of currency revaluation.

    Keynes understood that excessive trade surpluses/deficits are destabilizing. The large US trade surplus and net debtor status contributed to the international banking problems of the Great Depression. Today China is in the same position as the US was then.

    Talk about the Chinese “savings glut”, rather than Chinese currency manipulation, being the source of the trade imbalance are ridiculous and ignore the point that the cause of the trade imbalance doesn’t matter as much as the simple fact that there is a large trade imbalance. Large trade imbalances are a problem in and of themselves, as shown by long history. Exchange rates should be set to minimize trade imbalances, regardless of the cause of those imbalances. The whole point of an exchange rate is to facilitate trade. In fact the entire concept of an exchange rate is useless without trade.

    In light of the above it’s ironic that Zhou and Stiglitz (who I generally agree with, except that he nay-says Chinese currency manipulation) supposedly advocate something close to the bancor. How close? Would it include the key trade balancing provisions of the bancor? If so, how would Zhou reconcile that with his country’s reliance on an undervalued currency? Is his supposed advocacy of SDR’s as an international currency just a ploy to get the US to back off from insisting (ok, occasionally sheepishly and half-heartedly requesting) on yuan revaluation?

    I like the bancor proposal. The modern equivalent (SDR’s or whatever) would be a great idea, but only if it includes the key trade balancing provisions. Governance is a major issue. The thoroughly discredited IMF would be a poor choice to administer it, but that doesn’t mean that another body couldn’t.

    The US dollar as the world’s reserve currency has become a golden noose for the US. The privilege of being able to run a small (much smaller than the last decade) trade imbalance indefinitely is more than outweighed by the ability of other countries to manipulate our currency and the lack of independence of our monetary policy.

    Why do we even want to hang on to the US dollar as the world’s reserve currency? Perhaps in part because it benefits the US finance industry, which Washington knows is the only important part of our economy. Maybe it’s because of the “prestige” and international influence. Whatever it is, it ain’t worth it anymore.

    1. alex

      On second thought, might Zhou (and China) be serious about SDR’s? They might think America is reaching the end of its tolerance for dollar manipulation and be looking for an alternate strategy. By making SDR’s the world’s global currency they could manipulate the yuan against SDR’s and spread out the pain amongst countries whose currencies are in the SDR basket, instead of concentrating the pain on the US. This could actually benefit the US a little. Perhaps they hope to placate us for another 10 years. It would also make sense in light of the declining value of the euro, as that hurts a major Chinese export market.

  4. i

    I have to agree with the gentleman who pointed out that oil depletion doesn’t seem to be even on Reisen’s, Roubini’s or Aiyar’s radar.

    To put not too fine a point on it, any economic analysis that ignores the physical, real-world aspects of the economy is little more than intellectual, um… self-gratification (ahem).

    Our current population of over 7 billion people is made possible by oil and a complex, fragile, interconnected web of systems, one of which, is the economy. I know that the economy is their focus, but to ignore ecology, physics, technology, astronomy (Google “Carrington event” to see why I include this), and so on makes them appear intellectually bankrupt, even vapid.

    1. Conor

      I must agree with this… i, whoever you r? I sometimes think the peak oil crowd has gotten a little odd… Lest I be the pot calling the kettle black, Jim Kunstler has gone bonkers.

      That said, I think it has become peak EVERYTHING! Certainly the most salient is oil – not only are we running out of the stuff; but by doing so, will make what is left prohibitively expensive, and everything we derive from it. Just think of all the things we make with petroleum? It boggles the mind.

      *sigh*… I love the comment section on Naked Capitalism.

      1. alex

        “Jim Kunstler has gone bonkers”

        Kuntsler has never had any interest in serious discussion of peak oil or other energy and resource issues. As an urban planner he’s latched onto any excuse to promote his vision of small town utopia as the One Way that will work in the future. When Y2K turned out to be a minor affair (thanks to the planning that preceded it) instead of the apocalypse he predicted, he latched onto peak oil. Along the way he also claimed that 9/11 would mean the end of skyscrapers.

        Somebody please tell Mr. Kunstler that the most energy efficient place to live in America, and especially the most oil efficient, is not his beloved hometown of Saratoga Springs, but Manhattan. My apologies if that fact doesn’t suit his vision of a bucolic existence.

        As for locally grown food, NY was importing vast quantities of food in the 1820’s via the Hudson River and mule drawn barges on the Erie canal (which itself was dug by hand). Ancient Rome imported vast quantities of food from Egypt via ships on the Mediterranean.

    2. alex

      “any economic analysis that ignores the physical, real-world aspects of the economy is little more than intellectual, um… self-gratification (ahem)”

      That would be a valid complaint if Suominen and the economists claimed to be discussing their economic Theory of Everything rather than the specific question of world reserve currencies. BTW, peak oil or any big oil price spike would make the world reserve currency question even more important than it is now. The whole Latin American debt crisis of the 1980’s was due to OPEC countries looking for a place to invest their petro-dollars from the oil price spikes of the 1970’s.

      OTOH if you believe that peak oil with be the apocalypse, then the only world reserve currencies worth discussing are canned goods and firearms, and this whole thread is moot.

      1. Conor

        A moot point? Hmm.

        On the other hand – and this may reflect my own limited knowledge of this topic – I wonder about all that surplus in existence in real terms. If China holds such a large amount American treasury notes – since it is our debt they hold – where is the surplus? Of course, the Chinese are now developing a large consumer class of their own, and that may alter the playing field. But, if America’s economy collapses completely; I just can’t see how China – and the rest of the world – won’t be affected. We talk about a surplus – what surplus?

        The amount of wealth that has vanished because of the subprime mortgage meltdown is staggering. And because of SIV’s and CDO’s and all the amazing ways we’ve chopped and diced these obligations, nobody can make heads or tails of who to hold responsible… And of course stuff we already know about. So now we – effectively the entire world – have written a super giant IOU that still doesn’t hold a candle to the actual debt that exists. That IOU amounts to rubber-bands and chewing gum holding together The Titanic.

        I think in the near future it will be a matter of a balloon popping *bang*, or a balloon deflating *ssssssssss*.


        Maybe the drug lords of Mexico can help us out a little, but I ain’t counting on that.

        P.S. (heh,heh)… I’m not taking back what I said about Kunstler.

        1. Bates

          The only thing Kunstler has going for himself is that he is a pretty good scribbler and knows how to press the right buttons of a lot of people that don’t know thier azz from a hole in the ground…and…that is my sugar coated version.

      2. Conor


        Oh! And one more thing… I totally agree with you about cities. Let rake over the slurbs as soon as possible. Cities are where it’s at!

        1. Conor

          Anyway, forget about reserve currencies. Even gold is worthless if it is held and not circulated. As I understand it, wealth is a dynamic thing.

  5. the.Duke.of.URL

    I don’t like agreeing with the strength of view put forward by i, but I feel I must. I also agree with the statement that forecasting over more than a few years is nonsense, a position substantiated many years ago by Karl Popper and elaborated by Imre lakatos. In respect of the philosphical soundness of much economic theory, a nice readable account is Latsos, Method and Appraisal in Economics, based on the work of Lakatos. That it was published in 1974 is irrelevant, as most of its contentions still apply.

  6. Siggy

    We are at a point in time where it is becoming more and more apparent that the global reserve status of the dollar is becoming untenable.

    The Bancor proposed by Keynes was a very interesting concept in that it used a collection commodities as part of a benchmarking scheme. While I disagree with Keynes as to the desirability of sovereign intervention to create demand where private demand has collapsed, I do believe that the creation of the proposed Bancor might have operated to constrain the mercantilist labor cost arbitrage being executed by the Chinese.

    As to the observation that no one knows what the markets will be like in say 10 or 20 years, that is a very correct and profound observation. This economic structure we have today is, as it has always been, a dynamic feedback mechanism that seeks equilibrium yet rarely, if ever, achieves it.

    Recognizing trends and conceptualizing where they lead is an instantaineous process. The actual occurence takes time, sometimes a generation or more. For the moment, the Dollar enjoys its reserve status more because of the political stability of the US than for its inherent worth. So long as we remain politically stable the Dollar will be a safe haven currency.

    In that, it is still possible that the reserve status of the dollar may well be diminished. That’s where we are going, diminished status; or, our standard of living is in the process of declining and we are at the increasing effect of a shrinking middle class.

    More than anything else, it is my opinion, that the engine of our decline is our embrace of easy credit and the allowance of rampant and unprosecuted financial fraud.

  7. Gonzalo Lira

    This piece is of the “move along, nothing to see here, folks” stripe that I for one find infuriating.

    The piece acknowledges that the dollar’s position is tentative at best, discusses options to replace the dollar—then comes to the conclusion (all evidence to the contrary) that the dollar is fine and dandy, and all this talk of the dollar’s death are premature.

    Yves wrote in “Econned” how the economics profession left a lot to be desired. This piece by Suominen is a case in point: It creates the illusion of seriously discussing a pressing issue, then sidesteps the issue for a bit, and finally concludes that the issue is a non-issue—”Nothing to worry about, folks, just move along.”

    And then these people such as Suominen are surprised when the shit hits the fan . . .

    1. alex

      If the author believes that it’s most likely that the dollar will continue as the world’s international currency, what is she supposed to write?

  8. Joe Costello

    This is good article, but limited in the sense it stays, except for Keynes’ idea, in the conventional financier/economist view of money. The simple but sublime thing about money is it remains modern culture’s greatest voodoo. It is a complete social construct, very much a faith based system, with no meaning beyond the culture that creates it, which upsets all the gold bugs, who want the surety of one god, well that, and of course gold is shiny.

    Keynes’, “Treatise on Money”, which he finished in 1930 is probably a much better read for the times than the “General Theory.” It’s Keynes very radical thinking on the history and meaning of money. It is here he first brings forth the idea, and it deserves much greater thinking, of a “tabular standard”, tying money to a bunch of commodities, in an attempt to tie the creation of money directly to the real economy, instead of some abstract standard like gold, even though it is shiny.

    In understanding money at some point needs connection to the real economy, it also needs connection to politics, understanding economy without the political in front of it, is at the very best insufficient. Keynes brief, but enlightening touching on this matter wasn’t satisfying either.

    So, from this perspective, Id say the global monetary system is in a much more precarious situation than Kati Suomenin concludes:

    1)Debt is money. Until the current debt crisis is brought to some sort of conclusion, money will also be in crisis. With Greece and the Euro, we watched the beginnings of the debt crisis actively becoming a monetary crisis. All the extraordinary moves of the central banks will eventually impact currencies, in what way is the question.

    2)The great structural problems of the global economy, most importantly those due to the Pax Americana, and particularly America’s ability, until this point to remain the global banker despite being the planet’s greatest debtor, are unsustainable. However, money being a social construct, the idea of Pax Americana could hold things together longer, not much, than the reality. Three things right off the top, and by no means these things alone, could be problematic for the Pax Americana — internal discord, military failure, and oil.

    3)Replacing the dollar as global reserve, also means replacing the Pax Americana, which would be a highly political endeavor. There is no power and none on the horizon that could just step-in, say for example the Europeans or Chinese. Meaning the idea of some sort of currency coordination amongst many players is the best resolution, but this is much easier in concept than practice, particularly since some sort of coordinated effort would require some underlying political structure, which doesn’t exist. For example the IMF, which as a solution is nauseating, is very much a product of the Pax Americana. I suppose it could evolve, but the question is do we really want that?

    So, I’d conclude that the monetary situation is much more unstable and it will take years to play out. It offers plenty of opportunity to restructure things, most importantly the entire corporate globalization experiment of the past half-century. But much more importantly, the very question of “what is money” and its relation to political economy, which economic thinking is at best bereft. The money question and its relation to political economy was at the heart of the late 19th century American Populist Movement and that was the last time the politics of money was in play in the United States.

    1. alex

      “Replacing the dollar as global reserve, also means replacing the Pax Americana”

      That can be overstated, as the “Pax Americana” (itself a vague notion) consists of a lot more than the US dollar as the world’s reserve currency. For years now the US dollar as the world’s reserve currency has been hurting the US more than it helps.

      Do you have any predictions of what might happen, or what would be desirable?

    2. Bates

      Keynes was full of crap and the only reason that his economic prescriptions were/are favored by governments is that Keynes was saying what governments wanted to hear…print fiat money and spend it, lots of it, lots more than GDP will support…and that is why we are in the mess we are in today…btw, gold is not abstract and if you had any you would certainly not make such an ignorant comment…but it is shiny.

      When gold/silver were in common use or in use in tandem with convertible currency we had real money; ie, money that was not debt but an asset because it was based on the past labor it took to mine/refine it. Gold is an asset with no liability to anyone. With fiat currency the situation is reversed and we have debt for money; ie, money based on future production which is not an asset. Any damn fool, like Bernanke, can print endless fiat based on future production but that game will end when our creditors decide ‘no way America can produce enough to pay off all the debts’…Think about it.

      1. alex

        “money that was not debt but an asset because it was based on the past labor it took to mine/refine it”

        No, the value of gold is based on its scarcity, not the cost of mining and refining it. That’s why 49’ers shouted eureka when they made a strike – they could make a fortune for a comparatively small effort in mining/refining. If you doubt that the value of gold is based on scarcity, look up the history of inflation following the establishment of the Spanish New World empire.

        BTW, if you think a gold standard is so magical for financial stability, look at the history of the US under the gold standard. The panics of 1837, 1873, 1893, 1907 and 1929 are among the biggies, but there are plenty more. Other countries with gold standards had similar results.

        “Any damn fool, like Bernanke, can print endless fiat based on future production but that game will end when our creditors decide ‘no way America can produce enough to pay off all the debts’…Think about it.”

        Do you honestly think China holds $2.45T in forex because they think it’s a good investment?

        1. Vespasian

          I’d argue all of those panics under the Gold Standard were due to Fractional Reserve Banking run amok, creating more bills in circulation than gold in the bank. You can’t blame gold for the results of bankers’ fraud.

  9. scharfy

    China doesn’t need to use dollars. Neither does Russia, or anyone else for that matter. No one has a gun to their head. Sell those bitches if you must.

    They use them because we are 25% of global GDP and we have a representative democracy that has “some level or responsibility” to its people. (Before you flame that statement drink it in.) on a relative basis we answer to the people.

    The dollar is king. Strongest military, massive economy, free (relatively) and open markets.

    The If China can triple its GDP and float its currency and open its books to the people, they will be in the running,

    And of course the Euro is reserve #2 for as far as the eye can see in my book.

    The dollar arose to its prominence not by accident, or by design at Bretton Woods. It rose because we make and buy alot of shit, and people actually trust our Gov relative to many other Gov’s (obviously less so recently)

  10. Frank Ohsen

    “Yves wrote in “Econned” how the economics profession left a lot to be desired.”

    Indeed. What is very much needed now instead is a plethora of Deconomists – economic deconstructionists if you will. Let’s face the facts: today there are no modern Keynes, no singular giants of economic thought who can devise a new paradigm; the extent of original ground-breaking economic thought has unfortunately reached a dead end. But it is not their fault.

    All the ‘heavies’ today are essentially baffled. Through their bafflement the rest of us are then expected to side with one or the other. From Aiyar to Roubini to Zhou. It is like the economic equivalent to the Tower of Babylon.

    But during the course of discussion on ‘what needs to be done’ to reset the financial woes of the world back in their proper order the obvious is overlooked

    When you have fraud underpinning and permeating the economic foundational structure of any sovereign entity much less its relational roles within globally interconnected markets, the present-day and future solutions to economic woes are impossible to attain.

    Since financial fraud has and is the order of the day (the dissolution of Glass-Steagall was in retrospect the predominant initiator and global-setting template of this reality) everything else that flows out of those discoursing their views of economic policy is but smoke and mirrors in a nightmarish circus funhouse. There are those such as Yves (deconomists if you will) that have essentially pointed this out already in laser-like terms.

    Until the pervasive fraud ensconced within our global financial systems is delegated to a minor role in history the rest of all that is said and done from here on out by Aiyar to Roubini to Zhou is destined to promote but only insurmountable instability, confusion, and a future of relentless unrest and turmoil.

    As the present day fraud and its attendant obfuscation of mathematical and economic moral realities continues unabated it won’t matter enough what a Keynes said. Much less what a Roubini has to say. The game as it stands right now is already over. The rest is academic.

      1. Frank Ohsen

        Mad Men and Economists. What could’ve been a great Joe Cocker song.

        All that’s left now is for economists to opine on how the global economy can function in a fraudulent environment. That’s all they’re doing. That’s all they have.

        The end result of these futile opines is akin to 10 unfriendly mobsters from 10 uncooperative crime families deciding on how best to divvy up the proceeds after all of them robbed the same bank and then entrusting each of them to do so amicably and equitably.

  11. Joseppi

    Reading the comments these days reveals that there is a growing understanding that we live under a psychopathic economic system which has created the illusion that money is debt and can only be created by Banksters.
    The financial criminals have had the political process and the dominant media captured, but thanks to the internet this strangle hold is loosening.
    The conspirarcy of capture and control will not concede unless they are forced to. The Chinese are the agents that will wrestle control from the western power elites.
    The question is timing. The Chinese are long range goal orientalists. The timing of their planning is not reliable because of flocks of Black Swans, the emotions of international politics and the criminal cleverness of the elites those days are numbered.
    The timing of all predictions of change are dependent are the evolutionary theory of accelerated punctuation. Long term stability of the status quo can be destroyed in the blink of a revolutionary’s eye.

  12. Jim Haygood

    Why did the pound sterling lose its primacy as a reserve currency? Maybe it had something to do with Britain getting in over its head in two major wars, becoming indebted and dependent upon imports of capital and material. Ultimately Britain’s war debt was ‘negotiated’ with the U.S. (i.e., restructured), which Rogoff and Reinhart define as a default. A reserve currency issuer can’t be a defaulter.

    As can be seen in Britain’s case, political stability is a necessary but not sufficient condition for reserve currency primacy. Imperial overextension is a proven path toward losing the exorbitant privilege of issuing the reserve currency. The U.S. is marching along it double-time, with its twin vulnerabilities of utter dependence on energy and capital imports, and its capital-draining foreign wars.

    The dollar’s fall from grace is unlikely to be gradual. The enormous rollovers of short-term Treasury debt which occur every Monday morning are flagrantly risky and imprudent, as is the Federal Reserve’s vast, off-balance sheet $3.1 trillion ‘custody account.’

    What would a run on the custody account look like? When do you reckon it will start? Just remember: it ain’t FDIC insured! ;-)

    1. alex

      “the exorbitant privilege of issuing the reserve currency”

      How is it such a great privilege? I think it’s hurting the US more than it’s helping. It seems to me more like a prestige factor than anything of concrete value.

  13. kevinearick

    Programming the Gravitational Field

    The only thing worse than an inner loop error is a system that feeds on inner loop errors. That’s evolution, the biggest shark in the tank. The multinational certification system also cuts both tails off the distribution, averaging down the participating populations, systematically commoditizing and marginalizing them along the way.

    Globally, government practice is to subsidize the least common denominator necessary to continue program execution. In its entirety, the system effectively distills out the top tail. America was exceptional when it had exceptional communities. Now, it is the home of the multinational and its best practices.

    The only way to stop program progress internally is to turn off the digital economy, but that would be suicide for the multinationals, along with all of their participants, none of whom can maintain the system, because the errors generated exponentially increase beyond the ability of the error handler, government, to respond.

    For every force, an equal and opposing force develops. That is the analog economy, made up of virtual economies loaded with talent. In a functional economy, talent re-enters in new communities to balance the system in a corresponding, isolated, open-loop circuit. Because the empire has run out of the geography required, the bonds between physical communities and multinationals have effectively excluded natural new family formation, leaving their small businesses to become wards of a system that can only liquidate along a viral parabolic curve.

    The communities that prosper will be those that re-invent their education systems and banks accordingly, those that can escape the gravitational field, by learning to employ it as a catapult. Empires are catapults. Efficient economies cannot be effective. They cannot change direction of their own volition. The dollar is an albatross.

    Contrary to popular mythology, a reserve currency is not annointed, nor does it come from an agreement among failed empires.

    1. craazyman

      Yes Kevin I think you’re right. And this was the critique of the romantic poets against England’s industrial revolution. Blake, I think, referred to the “Satanic Mills” that ripped the people from their craft. And now the people have been so far ripped from their craft they don’t know what it was to be close to it. I am not so sure the industrial revolution was the necessary and sufficient condition for wider prosperity. I tend to think it’s more complicated.

      As for your posts. I imagine an Andy Warhol-like movie, where you stand in front of the camera reading them all. I can imagine a mise-en-scene that cuts in and out — sort of a montage of fast flowing images of galaxies, electrons, city scapes, huge heavy machinery in states of collapse and dsyfunction, sweaty brows of engineers, the absence of the flow of functionality, throngs and throngs of people going nowhere — like Blake wrote in London: “I wandered through each chartered street/down where the charatered Thames doth flow/a mark in every face I meet/marks of weakness, marks of woe” and I’m going off memory so I may have not got it word for word. And I’m starting up with the grape right now, the one with the screw off top from I think it’s Argentina. ha ha ha.

      So anyway, I think there is performance artist possibility here. This could be something we could get an NEA grant for. The movie needs a name, how about “Engineeering the Eschaton” Could be too crusty, something more primal and sharp would be beter. After another wine, I might get closer to the “Source” and grab it. After 3, it’s hopeless.

      1. i on the ball patriot

        Suggested movie title (it must be done in 3D with shear shaped 3D glasses for the movie patrons);

        “Pruning Evolution — The Amputation of Generational Deceptions”

        See the blood! Hear the screams! Watch the masses reclaim lost skills, and wealth as they beat mega yachts and luxury cars into pruning shears and in orgasmic ecstasy cut the wealthy ruling elite to shreds …

        The movie credits roll over the opening scene where people are partying and planning the great pruning and at the same time pissing on pictures of Warren Buffet, Bill Gates, and Jaime Dimon …

        Deception is the strongest political force on the planet.

  14. Glen

    “Whether pariah America or safe haven America will result depends on policy.”

    Seems like our “policies” are attempting to have both:

    Have the pariah Americans (the lower and middle classes) bail out Wall St so that the errors of the power elites safe haven Americans are saved and so that the fortunes of the “power elites” are bailed out. The pariah Americans are going to give up any future pay raises, retirement pensions, 401ks, job advancement, Social Security and Medicare/Medicaid. The dollar will continue to be a good reserve currency so long as required to maintain safe haven America. If this requires a few wars where Pariah Americans pay in blood and treasure, so be it, that’s what the little are there for, cannon fodder and someone to rob.

  15. jfree

    This theoretical nattering on about what can “become” a “reserve currency” is beginning to annoy the hell out of me.

    The ONLY thing — the ONLY thing — that can become a reserve currency is something that is in surplus in world trade flows. This is not theory. It is bookkeeping arithmetic. The reason the US dollar is the current reserve currency is because the US runs huge trade deficits — ie we import lots of stuff in exchange for exporting lots of dollars. That means there are surplus dollars sloshing around outside the US — which are then used to finance third-party trades — ie as reserve currency. And it can only serve as a reserve currency to the degree that holders of that reserve believe that such deficits can be maintained by the country in deficit without significantly eroding the currency.

    The yuan and the euro and the yen will NEVER be a reserve currency because China and the EU and Japan have ZERO interest in ever allowing their manufacturing base to endure the competitive pressure of imported “stuff”. The UN and theoretical economists and other nabobs of nonsense can prattle on until the sun explodes about how they “think” a “different” reserve currency is “needed” — and none of it has the slightest connection with reality.

    Until some other country besides the US is willing to endure the economic disruption caused by perpetual trade deficits; then the US dollar will remain the reserve currency. Period. In cycling analogy — the country whose currency is a “reserve currency” also has to cycle at the front of the peloton.

    To the degree that the US can no longer endure that sort of disruption – and no one else is willing to – then international trade will shrink. PERIOD. That will continue until some raw input commodity itself (ie a currency that is not controlled by any sovereign) is in surplus — and that raw commodity will replace the dollar as “reserve currency”. And what is quite clear is that that is a long long ways away since most commodities are in serious deficit now compared to the existing capacity to consume them.

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