Will there be a new reserve currency

I was just looking at this
http://www.usdebtclock.org/

The US can't pay their debts and instead of trying to reduce them politicians seem to want to increase them e.g. Obamacare. Do you think the dollar will cease to be the world's reserve currency? If so, what will replace it and what do you think the consequences will be ?

 

what will replace it and what do you think the consequences will be

 

the euro?

lol

 

The dollar will continue to be the reserve currency of choice for a while. The fact that it will suffer from some inflation won't change that.

China is not nearly the economic superpower that it appears to be, and anyway, they're trying like mad to keep their currency cheap while they slowly peel of the plaster of their economic policies of the recent years.

The Euro doesn't have a chance until the nature of the economic and political union is finally hammered out and stable, so we're looking at decades minimum.

Any change is likely to be more of a diversification of reserves rather than a sharp change of one to another. Even in the case where China or the Euro become a real contender I imagine they'll just become a real portion of some basket of currencies.

Remember as well, that some of the US's debt is because it's a reserve currency, so even if there were a switch - that economy would also increase their debt load beyond what it would normally be as the reserve status forces the borrowing rates of that nation to be lower than they would be otherwise.

Also, the US has the largest military in the world with complete, unquestioned Naval dominance. This is not irrelevant to the choice of reserve.

 

That was certainly the plan 5 years ago. Even with all America's problems, I don't think there's a currency as stable as the dollar.

 

There was a video in the Financial Times regarding the "rise" of the Chinese Renminbi about a week ago, which spelled out that only a fraction of China's export trade is executed in RMB.

I have also heard that the Chinese banking system has a form of capital controls which makes it difficult to take large sums of RMB to a foreign Bank.

Until these 2 aspects are a) clarified - what I posted above is not real evidence - just some indication; and b) rectified - opening up to foreign exchange without restrictions; it is very difficult to see the RMB replacing the $ as the world's reserve currency.

Also China is running into its own financial troubles with the demands of its no-longer sub-serviant population and a housing/asset bubble that could make the sub-prime crisis seem like an annoying pimple.

Yes the US has immense problems with debt, but there are significant industries, natural resources and is almost certainly the largest Banking system (including all its inescapable evils.)

Also the US is the only country that has successfully engineered its way out of a significant financial crisis i.e. the Hoover Dam project borrowed vast sums, that generated electricity and power that wheeled industry to sell and export technology and munitions (to us Brits in WW2.) This was the best example of Keynsian economics ever executed - or indeed of any other persuasion.

This is not to diminish the size of the problems that the US faces in tackling its debts or to promote Keynes's model as the be-all-and-end-all for economic recovery - but its the best example that anyone has come up with so far in history.

Personally I suspect that Keynes's model was pretty good for its time - 1930s, but our time is much more complex and diverse e.g. we consume much more energy than in the past - and conventional oil production now has visible limits - and the developing world is a) developing and b)wanting to consume energy as we do.

So an alternative understanding may yet be required to get us out of the current malaise - but I don't see the $ diminishing. The US will probably lose some space in the global pie - just like us in Europe. The $ is also strengthened by uncertainties in the eurozone.

One question that comes to mind, is whether loans will have to be backed up somewhere along the banking/government chain (of US ad Europe) by the issuing of Government Bonds and forced purchase of them by Pension companies and Banks e.g. maybe land and resource assets could be factored into the lending as a way of guarantee. In the UK Pension funds are being decimated by the constant quantitive easing of the last 3 years or so (can't quite remember how long it has been going on - but it never seems to stop.)

 

The keynsian model will not solve this problem.You cannot get out of debt by creating more debt. What will happen with the US is that they will eventually make the dollar worthless by printing too many dollars.
There are certain interesting things to watch. When the petro/dollar is threatened the US goes to war. This is what happens when countries use other currencies than the dollar to trade oil. Sadam wanted to trade in Euros and Gadafi wanted to use Gold. Iran is now using gold..........but you also have China,Russia and Japan agreeing trade deals in their own currencies or in Gold and missing out the use of dollars. What will derail the US dollar is when countries generally stop using it, and that is starting to happen now.America has the greates military strength but Russia and China cannot be ignored. China could bring America to it's knees by not using US dollars and by asking that their exports be paid for in Gold or some other currency

 

The keynesian model will not solve this crisis - but I can't see the free market coming to the rescue either - the free market hinges on the availability of capital by way of Government Bonds. The free market is not healthy right now and Government Bonds are a poisoned chalice of an asset for any investors right now.

Investors are even buying UK Bonds because they believe them to be less volatile than any other European Government Bond issuer - save for maybe Denmark and Switzerland.

To get round this Government Bond - IOU dilemma, will require trading in other assets.

The Russians are an interesting case - because of their oil assets - but thats all their economy has to trade with. Japan to be frank is in a terrible condition. Yes, the Yen is high, but their debts are simply astronomical - something like 216% of GDP - compared to 136% of Greece. Japan also has the minor matter of dealing with Fukushima and the likelihood of no more nuclear power - which spells disaster for its exporting capacity.

As soon as China opens up its currency to Foreign Exchange markets - their internal market will suck in cheaper imports - and shake the vastness of the internal Chinese economy and ultimately the RMB - but most likely in unpredictable ways - which is why the Chinese are very cautious about opening up the RMB to foreign exchange.

It really isn't a given that the RMB will replace the $ next week as the global reserve.

Trading in the Gold reserve standard in the 1930s is what crashed European economies - I think Holland and Germany in particular - which led to that funny Adolph chappie with the dodgy 'tash.

 

I hear similar arguments all the time, but no one ever explains how it would be in China's best interests to do such a thing? The reason for that is simple - it wouldn't be in China's best interests to do such a thing, nor is it ever likely to be in China's best interests.

 

The US may get deeper into the brown stuff, as may us Europeans - its something that we just have to get used to - but its much more likely that countries like North Korea and Iran get into severe financial troubles.

 

This is the vid from the Financial Times and a couple of others on trading in RMB.

Some fairly Banker types explain some aspects of this phenomena.

Im not aware of everything economic in the US, but it doesn't sound like the RMB is going to takeover from the $ in the next couple of weeks.

The vid entitled "revaluing the dollar and renminbi" is perhaps the most telling one. The essential message is that currency and foreign exchange markets are in for a bumpy ride some time soon and credit facilities are diminishing- it doesn't sound as if the US is in a significantly worse position than anyone else, possibly better due to the action of the FED. The main speaker does point out that credit is tightening in the "Anglo-Saxon world". Is credit availability any better in China? - difficult to know.

Without credit availability, I can't see the Chinese engineering the RMB to replace the $ as the reserve currency for the world.

Also, to expand the existing trade of RMB in foreign exchange markets requires a great deal of Finance Risk Hedging skill and associated IT trading infrastructure - currently the Chinese don't have much expertise in this area - the UK is probably best placed to exploit this - but its not a given (largely due to complex politics in the UK with Europe and what falls-out of the Eurozone saga.)

The news from the IMF today would indicate that there is a significant financial deterioration afoot, so we can expect further volatility but not much more than that.

http://www.ft.com/global-renminbi

 

You only have to ask your self what qualities did the US enjoy which enabled her to become the reserve currency. She doesn't have them anymore but China does. As they say history doesn't repeat itself but sometimes it rhymes.
The United Kingdom was once the global superpower only to be overtaken by the US , now it looks like the US will be overtaken. I think it is only a question of time.

 

Do you think it will be outright China, considering the growth of other countries such as India?

Raz

 

It's very hard to know. Generally people talk about the BRICS i.e. Brazil, Russia, India, China and south Africa, being the countries for economic growth ....but there are other countries that are growing like Indonesia and countries that have commoditees like Canada and Australia, even Mongolia looks good, really.
so it's hard to know, but all the factors that propelled America to being the reserve currency are now evident in China ( even though they talk about a housing bubble there)......and they are certainly not there in the US.
I have to say though, I look at this with a sense of forboding. I don't like the way things are unfolding.
China has recently surpassed India as the main importer of gold. Always usefull to have if yoiu want to be a reserve currency