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The dollar can't catch a break lately.
A top Chinese economist warned that the world has fallen into a "dollar trap," as U.S. trading partners lack an alternative to the greenback and can't prevent the Federal Reserve from printing more money.
With the rise of the Chinese economy there has been increasing concern over the U.S. dollar and some economists and policymakers are suggesting what might replace the current dollar-centric system in the coming years. Due to our current economic status here in the U.S. as well as the expansive monetary policy of the Feds, the dollar index is currently reaching its recent lows. "The dollar is down over the past year against the yen in spite of a massive disaster in Japan, and has failed to appreciate against the euro even as the Continent stumbles toward another spring of costly, politically divisive bailouts."
This is a short article but I think is really interesting hearing it from a Chinese economists perspective. Although a free-floating system has been in place here in the U.S. for decades, do you think that it might be time for change? In this article, Xu Hongcai suggested implementing a system of multiple reserve currencies that would be overseen by the International Monetary Fund. What do you think about this proposal? Any other comments about this article?
See article below
http://finance.fortune.cnn.com/2011/03/30/china-warns-of-dollar-trap/
What exactly does "a system of multiple reserve currencies" mean?
ReplyDeleteI highly doubt that the U.S. would acquiesce to any system overseen by the IMF.
I understand the concern from Chinese and other holders of dollars, but investing is always somewhat of a gamble...I don't think "fairness" is an argument that holds water (Unless, you think that the Fed is shorting the dollar...).
The dollar is seeing hard times..Going along with Hongcai's suggestion, I may be wrong, but was the dollar not stronger with both a silver and a gold standard as opposed to paper with intrinsic value?
ReplyDeleteAm I the only one that read this article and thought "That's China's problem, not ours."
ReplyDeleteThe easiest ways to solve this problem is to 1) balance the budget (not likely); 2) disallow China from buying more U.S. Treasury Securities (good luck with that one); 3) to stop buying Chinese manufactured goods (least likely).
I agree with Jared in that it is ultimately a lost cause in trying to get Americans to stop buying Chinese goods. I think there is a fundamental problem with policy that contributed to our trade deficit with China. Policy that makes it alright for American corporations and executives to surrender copyrights and patents in order to enter the Chinese market have left us worse off. There are also issues with policy that allowed us to print money whenever the Fed saw fit. I agree with Laura that we are in a deeper hole now due to policy that allowed the dollar to have no real monetary backing like gold. I think adopting multiple reserve currencies would be a good idea. It would allow countries seeking additional reserves to have a choice to accumulate other currency other than dollars.
ReplyDeleteEconomist Barry Eichengreen argues in this article http://online.wsj.com/article/SB10001424052748703313304576132170181013248.html that:
No one country will be able to run current-account deficits and use foreign finance to indulge in financial excesses as freely as the United States did in recent years. This ability would make the world financially safer.