Subscribe Feed (RSS)The dollar must be replaced – yet again
March 24th, 2009 by Michael Pettis | Filed under Currency regime, Financial crisis, Global liquidity, PBoC.Beijing music and art
Things have been so busy that I haven’t been posting as much as I would like. Besides my increased writing commitments and the constant barrage of news, I would like to mention that over the past weekend we completed the second annual festival of experimental and avant garde music, featuring the best Chinese composers and performers from all over the country, and several of my regular blog readers attended – thanks for that, even though this blog is no longer available inside the Chinese firewall.
Twenty hours of music over two days is not always easy, especially when some of the music is “challenging,” to say the least, but I am pleased to say that this festival has become the premier event in China for new and experimental music and the turnout was larger than expected and very enthusiastic. So far we don’t seem to have been affected by the economic crisis. In particular performances by Mamur, Li Jiahong and Li Tieqiao, Shouwang’s White Ensemble and a number of others were exceptionally good. We’re all still exhausted, but already I have been getting urgent enquires about our plans for next year.
While on the subject of art I should note that the People’s Daily had an article today on difficulties facing the Chinese art market.
The global economic meltdown has hit the city’s art exhibition industry, with several big international events attracting less funds than before or even being postponed, exhibition organizers said.
The article goes on to discuss difficulties facing the 798 Art District in Beijing “a center featuring primarily non-government-funded art events, where many shows were cancelled.”
I am not totally sympathetic because it seems to me that the commercial art scene here was simply part of the late stage credit bubble, and the young artists I like best were never really able to participate. But it is a nonetheless interesting story because historically art bubbles have always been part of the bubble cycle.
On that topic, I thought I would make a quick, and perhaps a little snide, reference to an article in last month’s New York Times about the Chinese art market. About a year ago I had dinner with a group of people which included a couple of gallery owners specializing in contemporary Chinese art. Not surprisingly, they were ebullient about the seemingly inexorable rise of Chinese contemporary art prices, and perhaps also not surprisingly, I was enough of a wet blanket to argue that we were soon going to see a total collapse in art prices.
Why? Because every serious financial bubble in history was, towards its later stages, accompanied with an even more ferocious bubble in art prices, and when the bubble burst, art prices were among those worst hit (I refrained from adding that although there are a number of young Chinese underground artists whose works I really love – stand up, Cult Youth Collective – for the most part I was very unimpressed with the commercial stuff getting most of the attention).
Needless to say most of the dinner guests were politely skeptical, and my pointing out the examples of the Japanese art market in the 1980s and the Arab art market in the 1970s – two markets that people don’t talk about much anymore, it seems – didn’t make much difference. One month later I read in one of the British newspapers that some well-known London-based art dealer had announced that prices in the art market had reached a level that represented long-term artistic value, and would not be affected by the crisis (art prices have reached a stable plateau? I hope he was otherwise as good an art dealer as Irving Fisher was an economist).
So what does the New York Times article say?
A global financial crisis has wiped out vast amounts of personal wealth, prompting a plunge in art prices. Suddenly bereft of visitors, galleries are laying off staff members, and the collectors who patronized them now worry that their art investments may prove a colossal folly. “It’s been a long, cold winter,” said Zoe Butt, director of international programs at Long March Space, which is closing two of its three Beijing galleries. “The era of Chinese contemporary art commanding such high prices is over.”
…Globally, the recent rise in Chinese artists’ fortunes was unparalleled. Only one Chinese artist — Zao Wouki, a traditional painter who lives in France — ranked among the Top 10 best-selling living artists in 2004, according to Artprice.com, which tracks auction sales. (He ranked ninth.) But by 2007, 5 of the 10 best-selling living artists at auction were Chinese-born, led by Zhang Xiaogang, who trailed only Gerhard Richter and Damien Hirst. That year, Mr. Zhang’s auction sales totaled $56 million, according to Artprice.com. Many collectors were seduced by the numbers. “For people who got into the market three years ago, I feel sorry for them,” said Fabien Fryns, who runs F2 Gallery in Beijing.
When people say that it isn’t easy to know if we were in the midst of a bubble, I can only respond that when, in just three years, the number of Chinese artists in the top ten living best-sellers zooms from one to five, it must be obvious that we are in a particularly frothy bubble. No matter how rapidly talent and access to collectors improve, the quality of an art scene simply cannot adjust at anywhere near that speed. I am sure even Renaissance Florence under Cosimo de Medici’s very wise patronage took much longer than three years to move so far up the artist-income scale.
A new reserve currency
But back to less exalted things. The number one topic of conversation right not seems to be an essay posted in both English and Chinese on the PBoC’s website by PBoC Governor Zhou Xiaochuan. In it Governor Zhou argues that the world needs a new and better reserve currency, one not dominated by a single country, and that it is in the best interest of the world that this reserve currency be created by a body like the IMF. Funnily enough for all the attention the essay received I saw no mention of it on either Xinhua or the People’s Daily.
We have heard these kinds of arguments many times before over the course of the 20th century, and usually in response to a global balance of payments crisis. Is there anything new about this proposal? Some commentators saw this essay as a purely political move. Jamil Anderlini of the Financial Times, for example, had this to report:
China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund. In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said the goal would be to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies”.
Analysts said the proposal was an indication of Beijing’s fears that actions being taken to save the domestic US economy would have a negative impact on China. “This is a clear sign that China, as the largest holder of US dollar financial assets, is concerned about the potential inflationary risk of the US Federal Reserve printing money,” said Qu Hongbin, chief China economist for HSBC.
Although Mr Zhou did not mention the US dollar, the essay gave a pointed critique of the current dollar-dominated monetary system.
Others were more intrigued by the theoretical implications of the essay. A number of people including Columbia University’s Joseph Stiglitz, are supportive of the idea, arguing that the status of the US dollar as the world’s reserve currency creates unnecessary problems for both the US and the rest of the world.
Most importantly for the US it means that it is very difficult for the Fed to manage domestic monetary policy because the US financial system must accommodate not only conditions in the US but also distortions introduced by the use of the US dollar as a reserve currency, and these distortions can be massive. The most obvious example is the way over the past decade systematic industrial policies mainly in China and East Asia aimed at running trade surpluses and the accumulation of reserves meant that the US economy and its financial and monetary systems were forced to adjust in ways that created large and serious imbalances, which only now are we resolving.
But although I think the world would be better off if there were an active alternative to the US dollar, I can’t help but think all this flurry of talk is a waste of time and driven mainly by political considerations almost wholly divorced from any understanding of exactly what a reserve currency is and how its status is achieved. Every decade or so there are calls for the replacement of the US dollar with a more international reserve “currency” but they always lead exactly nowhere, and I can’t think of any reason why this time will be different. On the contrary, one of my working assumptions is that with the end of the global liquidity cycle the value of liquidity will be higher than ever. New currencies and currency unions thrive during the liquidity cycle. They almost never survive the end of the cycle.
Perhaps Governor Zhou has much more faith than I do in the role policymakers have in creating reserve status – as if you could fill a few boxes, make a political decision, and then simply create a new, widely used reserve currency. But the fact is that excessive reliance on the US dollar was not a policy decision. If the world truly wants a more “balanced” reserve currency system there are, after all, many currencies that could have functioned alongside the US dollar, but investors, central banks, and international traders seem to have had little interest in acquiring a “balanced” portfolio of reserve currencies.
For one thing liquidity is key, and I think not even the euro – and certainly not SDRs or alternatives to the SDR – can ever hope to achieve anything like the level of liquidity implicit in the US dollar market. For another thing, for a currency to achieve reserve status there must be some systematic way of delivering the currency to central banks and other players who want to acquire it, and the US does so by its ability and willingness to run persistent trade deficits. How will the IMF or whoever controls the SDR create and assign reserves?
More specifically, if the SDR is indeed a true reserve currency, and not simply an accounting entry that allows central banks to pretend that they are not holding dollars but whose value ultimately rests on its convertibility to the US dollar, who will determine the global money supply and how do we prevent this from becoming a horribly politicized process? After all the Fed has an interest in seeing stability in the value and use of the dollar, and so it can be counted on more or less to act in the best interest of the reserve currency, but why should anyone care about the value of the SDR over the long term and, more importantly, how can prudent behavior be enforced? More worryingly, if Europe has had so much trouble managing monetary policy among a group of neighboring countries with fairly similar social and economic conditions, how do we manage monetary policy on a global scale?
Perhaps the SDR is a covert way of getting back to something resembling the gold standard by creating a fiat currency with very strict rules about its expansion. If that is the case, the SDR almost certainly won’t last long. Since we’ve gone off the gold standard we have forgotten how brutal and unforgiving gold-standard discipline can be, and I think it was Barry Eichengreem who argued in Golden Fetters that the gold standard could only work in a society in which the poor and the weak have little political power, the voting franchise is limited, and the impact of monetary policies on underlying economic conditions was not widely understood.
Unemployment
All this talk of new currencies and new financial architecture is obviously aimed at the upcoming G20 meetings. I very much doubt anything useful will come of the meeting except for diplomatically restrained name-calling, and I am currently writing a piece to be published by the Carnegie Endowment (who I recently joined), which I hope to have by the end of this week, discussing some of the issues the participants are going to face.
Bu away from the world of high finance I thought I would mention two things. The first is an article in last week’s Xinhua on hiring prospects.
The latest report by major job service provider Manpower indicates that hiring prospects in China may continue to drop by a “considerable 10 percent” in the second quarter as the global financial crisis began to affect the real economy. The report, based on a survey which covered 4,149 employers across the country, showed that the eastern job markets were experiencing the weakest hiring climate in four years.
The next article, on the same topic, is from today’s People’s Daily. It focuses specifically on the job outlook for college graduates. Last week I read an article – also in People’s Daily, I think, but I can no longer find it – in which it was claimed that the share of Guangdong students graduating in 2009 who already have job offers was less than half of the share last year at this time. Today’s article seems to confirm this:
In an unfortunate reversal of fortune, more than 70 percent of upcoming graduates have yet to secure a job. “Normally about 70 percent of graduates have job offers in March, but now the situation is completely upside down,” Wu Xiaohui, senior campus recruitment consultant with Shanghai Foreign Service Co Ltd (SFSC), told China Daily yesterday.
The article goes on to say:
According to another survey by SFSC, about 55 percent of the city’s 104 multinational corporations didn’t intend to recruit new staff this year amid the deepening recession. Among those who plan to hire, half will recruit fewer than 10 people, compared with an average of 50 to 100 people in previous years.
Along with this gloomy outlook the World Bank last week cut its growth forecast for China. When they cut their forecast last year, I said they would revise it downward at least one more time. Perhaps this time will be the last downwards revision for 2009, but if it is, expect a series of downward revisions for 2010. This is from last week’s Xinhua:
The World Bank (WB) has cut its forecast for China’s 2009 economic growth yet again — this time to 6.5 percent from 7.5 percent, it said here Wednesday. This is the second cut the bank has made for China’s 2009 gross domestic product (GDP) growth forecast. Last November its prediction stood at 9.2 percent.
This came after the bank lowered its forecast for the 2009 world economy, which was expected to decline 1.5 percent from 2008. In November, the WB forecast the world economy would grow 1 percent this year.
Tags: Art bubble
Regarding the Chinese job market:
I am told (by a mid-sized foreign-invested company which intends to downsize by not replacing departing staff) that staff turnover has slowed to a crawl since late last year. Poaching by competitors has gone down sharply, and anybody holding a reasonably secure job doesn’t want to risk anything by jumping ship.
Thomas: Are you after a prize for stating the well documented?
There really is no real competition, MPettis has confidently predicted the exact opposite of turnout reality over the past 1.5 years of his blog history.
Speculate and be wrong? Doesn’t matter, bullshit baffles brains after all. Ears listen to what they want to. Journalists cite people easy to cite.
Re SDR flyer, this looks like China trying to avoid legacy of their trade policy over past two decades. Keeping Yuan low by buying US debt with trade surpluses, now piling up, and dollar now effectively devaluating as Obama investment spends to compensate for and restore hollowed out productive capacity. Imbalances rebalancing.
Good stuff Mike — you’ll secure your fame as a polymath!
If you have a chance tell us whether you think there is one more end-of-cycle bubble about to make the headlines: higher education; the flip side of the employment outlook. You and I met teaching dueling Tuesday night seminars at Columbia U, and I believe CU just celebrated the opening of a Beijing Center. Is this another bubble in the latte froth?
Dear Mr Pettis,
People talk a lot about the support of SDR mechanism in the BOC Chairman address. However there is a also very strong praise for the original Keynes Bretton Woods proposal, and there must be a reason for that. As I understand it, this proposal had two essential components :
- mandatory penalties for countries refusing to adjust their exchange rates in case of excessive deficits AND surplus.
- an international currency based on a basket of commodities.
I am not sure China will be pushing strongly on the first component (for obvious reasons), but promoting the second, even on its weaker SDR version, could be a way for the POBC to escape the “numeraire fallacy” as far as judgment by its political masters are concerned : once one expresses international reserves in terms of a basket of commodities, having reserves in dollars does not protect much more from fluctuations than having reserves in any other currencies, or metals, or future deliveries of oil, such as engineered in the 25 billion USD loan to Rosneft (actually, future deliveries of oil would likely be more stable from a “bancor” perspective !) .
It also highlights more directly the value of having a currency that is accepted for international trade (the famous exorbitant privilege) : when it is the case, the lucky country can simply create “reserves” out of the printing presses (a technology that the Chinese invented, together with paper money !). From the point of view of China , it sounds to me that liquidity of reserve doesn’t necessary mean the ability to trade it globally against a fiat currency in a milliseconds, but more importantly the ability to exchange it against wheat or oil to propel the economy. The recent currency swaps entered by PBOC with countries like Malaysia or Indonesia (both commodities producers) could fit quite well in this pattern.
As a consequence, the inevitable losses in real terms on the “foreign” reserves would be more obviously mitigated by the gains in global seignoriage access (the “domestic” reserves). Presented like this, it could be a deal more palatable both by the Chinese population and its leadership.
Is this a credible interpretation ?
Michael,
Has Japan ever expressed concern about the effects of China’s treasury purchases, and the inevitable effect of such?
Michael: Art has been my passion for decades and my favorite artist is Nicholas Roerich. Ironically he had a love and hate episode with FDR and Henry Wallace (FRD’s Secretary of Agriculture)during The Great Depression. Nicholas Roerich apart from being a great artist in his own right he was a great collector of works of art himself and he had a priceless collection of ancient amber carvings. Being a collector myself I have been for decades running around the world in the quest for his lost ambers. I became a full time treasures hunter just before the Asian financial crisis when I divested all my interest in a major American financial group and handed over my position as managing director to someone else. I sold because I didn’t like what was brewing then and I was correct.
Since we have another common interest i.e. art maybe we can talk in private about it as I don’t want to talk about it in this blog.
Michael, one trend which I’ve observed is China buying more equity and hard assets (oil swaps, Aussie mining companies, etc) as perhaps a play to move out of treasuries. The only problem is that this (and particularly company takeovers) becomes a bit more of a political issue: once you get into the equity part of the capital structure and have voting rights it is much, much more likely to fire up protectionist sentiment, especially if the cash China (and its SOEs) got to do this comes from what would be called currency manipulation. Do you think this move, while rational from a diversification point of view could force the point on FX changes?
I have been following this issue on my blog and I think it’s one of the most crucial things being discussed right now. Good thinking spotlighting it.
Is a reserve currency necessary if, rather than build large reserves in order to perpetuate a perceived trade advantage, trade surpluses are invested in infrastructure and other strategic investments, rather than financial assets?
America will need a new currency before Geithner and the politicians are finished expanding the debt and destroying the dollar but the solution is a gold backed currency free of government manipulation. The Campaign to Cancel the Washington National Debt by 12/21/2012 through constitutional amendment begins. See our facebook page at http://www.facebook.com/group.php?gid=67594690498&ref=ts
We are also planning to have a booth at FreedomFest 2009, the world’s largest gathering of free minds! July 9–11 http://www.freedomfest.com in Las Vegas. Ron
Michael: I agree with you nothing constructive or specific will come out of G20 next week. Time will be better spent at D2. The only thing that will happen in London will be tons of debris created by demonstrators. Furthermore, news of G20 will be overshadowed by the North Korean’s missile test and Japan/US trying to intercept it.
This proposal from the Chinese makes me think they haven’t thought through the consequences of their currency / pegging choices.
China, it seems to me, wants to maintain 2 things: the value of their reserves, and the ability to maintain an undervalued exchange rate wrt the dollar, to protect and promote their exports.
So why do they want to replace the dollar? It seems to me this course would undermine the dollar and make the peg more difficult to sustain.
What this proposal shows, to me, is that they are demonizing the dollar, rather than thinking sensibly. This is an emotional proposal that is not even in their own interests.
“So why do they want to replace the dollar? It seems to me this course would undermine the dollar…”
It is not in the interest of China to undermine the dollar. Why should they want to do it when they are holding a massive amount of assets in dollars term? The dollar will undermine itself over time when the US keep printing money. The dollar has only a perceived value and soon it is not worth the paper it is printed on and when that happened a Big Mac will cost $50.00. The US will then be exporting super inflation to the rest of the world.
Knowing how busy you are with your writing commitments, probably one should be very sparing in ones comments. And this would be the most sensible thing, if it were not for the big bold words which tell the reader to “Share Your Thoughts”, on your blog.
Naturally, the thoughts of the NitWit are 90 percent trash. Or maybe, 99 percent trash, from your perspective. But, the fact is that you are writing your thoughts to be read by a wide distribution of people who read your blog. And, when you ask these readers to “Share Your Thoughts”, then you should not feel angry or disturbed just because some readers’ comments are both weird and also seemingly quite crazy or contrary compared to your point of view.
As a matter of fact, some of the well considered views which you express on this blog seem quite weird to some, probably.
For example, and one can not emphasize this enough, your discussion of the possibility of when China’s economy would overtake that of the US economy sparked much debate, many months ago. But, maybe the downfall of your argument at that time still stems from your neglect to take into account the real world issues of things such as energy production, and the will to control energy resources, either by smart trading ways of China, or by US military might.
For example, it might be better if there were some way to have you input the real world data into your arguments when discussing GDP growth. That is, if you would read the most recent reports being put out by the intergovernmental energy organizations, or the privately funded energy organizations, then this might be extremely helpful to your economic calculations and prognostications of what might reasonably happen soon, economically speaking. Even though there still remains quite a bit of disparity and lack of consensus regarding opinion concerning the dire energy straits in which we now find ourselves, still any thinking individual can not deny that these dire straits are just a matter of degree.
Being a NitWit, and not a member of any group with rarefied intellectual acumen, such as most posters on this blog, sometimes it is difficult to make logical sense of your arguments, when also reading real reports about the real world.
Here is an example: After many years in the petroleum industry, some guy by the name of Matthew Simmons has been saying that petroleum based energy production is headed for a downfall due to depletion of reserves and also due to depletion of intensively trained personnel and also due to rusting away of antiquated infrastructure. And maybe, anyone could denigrate this man’s logic.
But the thing that buggers ones mind is that you can still almost not even take this man’s 30+ years of experience into account, all the while knowing that petroleum production is, and has been, so tightly correlated with past US economic growth, and still not make a SINGLE little mention of these real world energy related constraints which might influence your opinion about whether or not GDP will hit some magical number that you think might miraculously take place, in China.
The point is that in your article many months ago, you stated very clearly your arguments regarding whether or not China would overtake the US as measured by overall GDP.
But, NO WHERE in this article did you mention the energy constraints which might influence the progression from China now to China in 2025. And, as most people seem to know, cheap energy is probably the single greatest factor in predicting growth.
Naming oneself as a NitWit, is a very good idea. At least no one else can call one too much less, easily. But, being a professor from Columbia, then wouldn’t it be better to take in a lot more real world information, as much as possible, and thereby make this blog even that much better than it already is?
Forget about the moral constraints. Better think about the science based physical constraints before making prognostications.
Any good smart social social scientist worth his salt such as you can read the literature. And come to a very smart judgment about so many things.
Forget the ideology. Try to cut through to the facts. And try to read as much as you can OUTSIDE your field of interest. To make your blog that much better.
Of course, the bottom line is that the readers of this blog just want to know what is going to happen next in China, before anyone else knows. Or. At least they want to know what is your best guess. We wish you knew. And we keep reading, mistakenly thinking, that we might find out.
KEEP WRITING.
But, also, keep looking out for new input from energy investment bankers such as Matthew Simmons that just might be able to teach you a thing, or two.
And, also, pls keep in mind that there are some real world researchers who are doing great things and doing great research studying real world issues that might positively influence your blog.
JUST DISCOVERED YOUR WEB SITE. DELIGHTED TO FIND SUCH AN EXCELLENT SOURCE OF INFORMATION ON THE CHINESE ECONOMY.
THE PERCEPTION IN US FINANCIAL MARKETS IS THAT THE CHINESE STIMULUS IS WORKING, AND THAT RISING ECONOMIC ACTIVITY IN CHINA IS BEHIND THE RECENT RISE IN OIL AND OTHER COMMODITY PRICES. MANY BELIEVE THAT THE CHINESE STOCK MARKETS HAVE BOTTOMED AND ARE RECOMMENDING INVESTMENT IN CHINESE STOCKS.
I AM DISMAYED BY THESE OPTIMISTIC VIEWS, AND CONCERNED THAT WHEN THE REALITY OF THE SEVERE AND LONG LASTING ADJUSTMENTS THAT CHINA MUST MAKE BECOME APPARENT THERE WILL BE A SHARP REACTION IN THE MARKETS.
THE CHINESE AUTHORITIES ARE UNDERSTANDABLY PUTTING UP A CONFIDENT AND OPTIMISTIC FACE, BUT UNDERNEATH I SUSPECT THEY ARE DEEPLY WORRIED AND PERHAPS EVEN PANICKING. PERHAPS THAT IS WHY YOUR WEB SITE WAS SHUT DOWN.
I AM ESPECIALLY CONCERNED BY THE OUTPOURING OF CREDIT INTO A CONTRACTING ECONOMY, WHICH STRIKES ME AS VERY UNWISE. THIS IS BOUND TO WEAKEN THE FINANCIAL SYSTEM AND CREATE PROBLEMS IN THE FUTURE. I WONDER IF THIS EXCESSIVE LENDING IS FINDING ITS WAY INTO THE STOCK MARKET, WHICH MAY EXPLAIN THE BUOYANCY OF CHINESE STOCKS IN THE FACE OF GROWING INDUSTRIAL DIFFICULTIES.
THE CHINESE AUTHORITIES NEED TO DO EVERYTHING POSSIBLE TO QUICKLY CHANNEL THEIR RESOURCES INTO WELL CONCEIVED INFRASTRUCTURE PROJECTS, ESPECIALLY IN RURAL AREAS AND FOR LOW COST HOUSING. THIS WILL TAKE TIME, BUT I FEAR THAT ARTIFICIALLY PUMPING OUT CREDIT AND SUBSIDIES WILL DO MORE HARM THAN GOOD.
THANKS FOR PROVIDING THIS RESOURCE. I WILL BE RETURNING FREQUENTLY TO TRY TO UNDERSTAND WHAT IS HAPPENING IN CHINA. I FERVENTLY HOPE THAT THE TRANSITION TO A NEW ECONOMY WILL NOT BE TOO PAINFUL FOR THE CHINESE PEOPLE.
For the SDR, I also read through all Zhou’s essay on PBoC. I believe it was written in Chinese first then translated into English. But it was more like raising a topic, rather then suggesting something real with a clear idea or purpose of achievements. At least, it did not contain anything practical when SDR was widely accepted or how we face the following problems, etc.
I agree with you it might be more with political/policy considerations. I guess it has probably achieved what they want, expressed its attitude, created a favorable atmosphere and led to a wider global discussion and joiners.
There is an old Chinese saying, if you deal with a tiger, still not sure it is the right timing facing it directly, the best way would be knocking at the cave where the tiger lives and test it.
Charles, I think you are right in suggesting a reluctance to push for the first of the two components, although I think we are going to move towards more balanced trade anyway, but it is less clear to me what the expectations are for the international currency. It may seem like an obvious point that a reserve currency based on a commodity basket maintains price stability in real terms, but even a very cursory glance at the history of commodity-based currencies – most obviously gold and silver, but all others too – makes it clear that it only does so in the very, very long term. In the shorter term, rigid, commodity-based currencies are very compatible with periods of asset price inflation, goods price inflation, and all the other evils of fiat currency. The difference is that the adjustment process for a commodity-based currency has historically been extremely brutal (and Eichnegreen even argues that the spread of the voting franchise to workers and the poor makes it mercifully nearly impossible for us ever to return to a gold standard).
Nemo, I agree and think we are already seeing very obvious signs of discontent, not least in China, with foreign acquisitions.
Matt, there is a lot of argument about optimal reserve accumulations strategies, but many countries do need liquid reserves to protect their currencies and their access to imports. At any rate reserve accumulation is not a choice separate from trade policies.
Michael,
I am sure that the Chinese are well aware of the pitfalls of commodity based currencies. After all, they had fiat currencies during the Ming dynasty, and replaced it with silver, only to be crushed by a silver shortage toward the end of the dynasty. During the Great depression, bis repetita : the American Purchase Silver Act did a lot to bring China’s Economy to its knees.
Please correct me if I am wrong, but I was under the impression that the Keynes system was not strictly anchored to commodity : it would have been possible to devalue ALL national currencies against the bancor. May be this is exactly what is needed in current circumstances !
In such case, by including the Yuan in the SDR basket, the Chinese just want to claim their share of global seignioriage.
Ref protectionism, they can invest into start up joint ventures and that will be seen in a totally
different light i.e Baosteel’s project in Brazil.
They were being welcomed as Knights in shing armour.
[...] 1. Strong currency, strong country. Build up the Yuan. [...]
[...] 1. Strong currency, strong country. Build up the Yuan. [...]