The New Monetary System – Made In China

by C Serpa, Grams Gold There is much speculation as to how the collapse of the dollar will manifest itself, as another currency will inevitably take over. Society will not just crumble into the Dark Ages, with no alternative currency, when the dollar loses such value that the world loses all confidence in it. In the book Paper Promises, author Philip Coggan says that “When the world economy heads into crisis, the international currency system often changes.” Read more to see what this author thinks is going to occur regarding the next new monetary system, and how it might unfold: “It did so in the First World War when gold convertibility was abandoned. It changed in the 1930s Depression as countries went off the gold standard. And it happened again in the 1970s, when the Bretton Woods system collapsed. The system breaks down either because the debtors cannot, or will not, meet their obligations, or because creditors fear they are not being repaid in the sound money. This time round, the first symptom has appeared in the euro-zone; the second will emerge in the China/America relationship. So how might the system change? Much of the discussion concerns whether the US dollar will be replaced as the global reserve currency by the Chinese renminbi, or whether it will simply be one of a range of reserve currencies including the euro, renminbi and yen. The global reserve currency is the currency that forms the biggest proportion of the holdings of central banks. More broadly, however, it is also the one most likely to be accepted by merchants in other countries; if you are a tourist in Africa, you will be better off trying to buy good with dollars than sounds or yen. In my view, the debate about whether the dollar will be replaced by the renminbi is a bit of a red herring. Such a shift may eventually occur but it is likely to take a long time. As of 2010, 60% of all foreign exchange reserves were denominated in dollars, giving the US currency a critical mass. Investors are still comfortable with holding it; at times of crisis, the dollar is regarded as a safe haven despite the country’s fiscal problems. After all, sterling was still being used as a reserve currency in the mid-twentieth century long after Britain’s relative economic decline had become apparent. The choice of reserve currency involves many factors. The US’s political, military and economic pre-eminence have undoubtedly boosted the dollar’s status. But it is also important that investors, and other central banks, can easily realize their dollar holdings if they have to – in other word, that the US market is highly liquid. All commodities are still priced in dollars and the US currency is used in around 86% of all foreign-exchange transactions. Nor do investors fear that the US will arbitrarily try to seize their holdings. This confidence is the result of many decades of practical experience. Even if China allows the renminbi to become convertible (it has its markets to become anything like as liquid as those in the US. And it will take even longer for international investors to become confident that a Communist-led government will always respect their rights. Even if the dollar steadily falls in value against the renminbi, as seems likely, it will still have attractions as a reserve currency. Indeed, currency depreciation goes with the territory of being a reserve currency. Ina sense, this dates back to the Triffin dilemma outlines in Chapter 5: for a currency to be used internationally there must be lots of it circulating abroad. For that to happen, however, a country must run a deficit so its currency builds up in the accounts of overseas merchants. Continue Reading>>>

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