Do we need a new reserve currency?

From the Emirates Business 24/7 magazine


By Insead Knowledge on Sunday, December 27, 2009

A new global currency should replace the US dollar as the international reserve currency, as the long-term deterioration of America's economy and the greenback is fuelling a "currency-regime crisis", says Martin Wolf, associate editor and chief economics commentator of the Financial Times.

Wolf, who has honorary doctorates from three universities, bases his argument in part on the Triffin dilemma, an economic paradox named after economist Robert Triffin. The paradox shows that the US dollar's role as a global reserve currency leads to a conflict between US national monetary policy and global monetary policy. It also points to fundamental imbalances in the balance of payments, particularly in the US current account.

Account deficit

Speaking at an event organised by the Singapore Institute of International Affairs, Wolf said Triffin believed that the host nation of a global reserve currency will inevitably run up a huge current account deficit that would consequently undermine the credibility of its currency and adversely impact the global economy. "You can't have an open globalised economy that relies for its ultimate liquidity on the currency of one country. That was his [Triffin's] argument. And, therefore, he said the Bretton Woods system would break, which it did. And exactly the same thing happened with Bretton Woods II, which is the system of pegging.

"So I agree with this. And I'm absolutely convinced now, in a way that I was not three or four years ago, that we cannot continue with a genuinely global economy which relies on national money, and that's not sold by just adding another couple (of currencies). It actually means having a global money."

Indeed, Wolf said he's in complete agreement with China's Central Bank Governor Zhou Xiaochuan, who has argued for a new global currency "most credibly and convincingly".

"On the dollar, there is nothing to support this currency except the Chinese government and a few other governments that are prepared to buy it," said Wolf. "Anybody can look at the arithmetic of the fiscal deficit, the monetary policy, the external balance, which has improved but largely because of the recession, the dollar is not adequately supported." The US currently has a national debt in excess of $12 trillion (Dh44trn) or almost $40,000 per citizen, with a debt to GDP ratio of more than 85 per cent. In the July-September quarter, the US current account deficit rose sharply by 10.3 per cent from the previous quarter to $108bn. In the past year, the US dollar index, which measures the performance of the greenback against a basket of currencies, has also fallen significantly.

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New Contract for America? Or same old crap again?

The Republican leadership has come up with a new Contract for America that continues to offer a counterpoint of big government to the Democrats' version of big government. Here are the ten points of the Contract for America drawn up by Dick Army:

BE IT RESOLVED, that the Republican National Committee identifies ten (10) key public policy positions for the 2010 election cycle, which the Republican National Committee expects its public officials and candidates to support:
(1) We support smaller government, smaller national debt, lower deficits and lower taxes by opposing bills like Obama’s “stimulus” bill;
(2) We support market-based health care reform and oppose Obama-style government run health care;
(3) We support market-based energy reforms by opposing cap and trade legislation;
(4) We support workers’ right to secret ballot by opposing card check;
(5) We support legal immigration and assimilation into American society by opposing amnesty for illegal immigrants;
(6) We support victory in Iraq and Afghanistan by supporting military-recommended troop surges;
(7) We support containment of Iran and North Korea, particularly effective action to eliminate their nuclear weapons threat;
(8) We support retention of the Defense of Marriage Act;
(9) We support protecting the lives of vulnerable persons by opposing health care rationing and denial of health care and government funding of abortion; and
(10) We support the right to keep and bear arms by opposing government restrictions on gun ownership.
RESOLVED, that a candidate who disagrees with three or more of the above stated public policy positions of the Republican National Committee, as identified by the voting record, public statements and/or signed questionnaire of the candidate, shall not be eligible for financial support and endorsement by the Republican National Committee.

By including numbers 6 and 7 the Republicans have flatly stated that they will not reduce DoD or intelligence expenditures. The only way that thay can continue to fund two wars and massive presence around the globe is to deal with the Democrats in Congress. That means that the Republicans will not be able to cut any social spending programs and therefore their number 1 point is absolutely impossible.
The rest of the points do not greatly impact the budget and are there mostly to attempt to differentiate mainstream Republicans from Democrats. Some of the points are important, but do not address the existential problem of an out-of-control Federal behemoth. This list of points will result in more unpayable debt and more government, not less.

Now I saw a list on digg.com to replace the list that the Military Industrial Complex wrote for Dick Armey. Here it is:

1. Balanced Budget
2. Tort Reform
3. Repeal the 17th Amendment
4. Term limits
5. End the War on Drugs
6. End all funding of other nations
7. Exit strategy for all miltary involvement overseas
8. Abolish the IRS/Tax code and institute a progressive flat tax for everyone living above poverty level. No exemptions!
9. All congressional salary, benefits require 2/3 vote from public.
10. Any civillian conviction requires dismissal of the Congressman or Senator from Congress


That got me thinking....
I haven't had time to write a list yet, but I might change a couple of Mr. h8f8kes points. In the meantime, what do you think?