●The more budgets are cut and taxes increased, the weaker an economy becomes.
●Austerity is the government’s method for widening the gap between rich and poor, which leads to civil disorder.
●Until the 99% understand the need for federal deficits, the upper 1% will rule.
●To survive long term, a monetarily non-sovereign government must have a positive balance of payments.
●Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
People often predict the dollar’s imminent demise as world’s “reserve currency,” and cite this as proof of something or other – i.e. U.S. bankruptcy, hyper-inflation, depression, global warming, the Chicago Cubs or anything else that’s bad in this universe.
The following article is an example:
Radio Free Europe Radio Liberty
China, Others, Urge Move Away From Dollar As Reserve Currency
March 24, 2009
(RFE/RL) — Should the world ditch the dollar as its reserve currency? It’s an idea that seems to be gaining ground.
The latest call came from China’s central bank governor, who said on March 23 there should be a new international reserve currency. And a UN panel this week is to recommend moving away from the dollar and adopting a shared basket of currencies instead.
Zhou Xiaochuan’s message seemed aimed at an international audience. His essay was published on the central bank’s website in English, as well as Chinese.
In it, the governor said the global financial crisis had revealed “vulnerabilities and systemic risks” in the current monetary system.
Instead, he said the world needed something more stable — what he called a “super-sovereign reserve currency.”
Zhou didn’t mention the dollar specifically. But his comments came two weeks after the Chinese Prime Minister Wen Jiabao expressed concern over the safety of China’s estimated $1 trillion worth of U.S. investments.
A “reserve” currency is nothing more than the currency most nations use in international trade. It is just a trading convenience. International trade is easier if nations quote the same currency when pricing goods and services, and nations use the same currency when paying bills. And that’s it: A convenience.
The euro was invented as a European reserve currency, and it functions quite well in that role, though it’s a screwed up mess in its role as a common currency. Any benefit that accrues to the U.S., as a result of the dollar being the reserve currency, is so minuscule as to be unworthy of mention.
Getting back to China’s “concern over the safety of China’s estimated $1 trillion worth of U.S. investments”:
1. China isn’t concerned about the safety of its financial investments.
2. It’s a political concern. China’s aspiration is to be viewed as the big dog of international economics, and ending the dollar as reserve currency is part of that political aspiration.
Let’s assume that a giant meteor selectively destroys the U.S., and the dollar, not just becomes worthless, but disappears from the world. Is this a problem for China and its $1 trillion worth of T-securities? Not a bit. China is Monetarily Sovereign. It can continue to buy goods and services as always, using its unlimited availability of renminbi. China would be no poorer for the loss of all its dollars.
And as for Chinese citizens who owned T-securities: The Chinese government merely could give them renminbi to make up for their losses, and everything would be as before.
The giant meteor might be a problem for the euro nations, because they are monetarily non-sovereign, so can’t create euros — except the EU could do what it should have been doing all along: Provide euros to all euro-using nations. It might be a problem for a tiny island nation that pegs its currency to the dollar (are there any left?), but they simply could peg to some other currency.
The whole reserve-currency brouhaha is silly, which is why government leaders pay attention to it. (Heaven forbid they address real economic issues.)
China Not Alone
The worry is that U.S. efforts to tackle the financial crisis — including printing money — could erode the value of the dollar and of China’s dollar-denominated reserves. Chinese officials are not alone in calling for a move away from the dollar as the world’s chief reserve currency.
Earlier this month, Russia said it would propose a new reserve currency for discussion at the G20 summit set for April 2. And a UN panel of experts is this week recommending a switch away from the dollar as part of an overhaul of the global monetary system.
If anything should send shivers of fear up your spine, it’s the thought that a UN panel of “experts” (experts at what?) has become involved. Are these related to the experts who created the disastrous euro, or the experts who run the International Monetary Fund, those austerity loving buffoons?
And if China is worried about a U.S. inflation that would result from erroneously called “printing money,” where is the inflation? The U.S. has “printed” more than a trillion dollars each year, for the past four years, and we are closer to deflation than inflation.
(In fact, money creation has not caused inflation in the U.S. The reason: The Fed controls inflation by controlling demand for dollars via interest rate changes.)
“Now is the moment to think seriously about a new reserve currency, a shared reserve currency,” panel member Avinash Persaud told Reuters. “When part of the world wants to save more than it did before, this won’t lead to a concentration of assets in one place, but more spread around the world. It’s good for those people who’ve got the savings, [because] their assets are diversified, and it’s good for those people where the money is flowing.”
A beautiful example of gibberish. A reserve currency has nothing to do with a “concentration of assets” or “where money is flowing.”
Zhou, the Kremlin, and to a lesser degree the UN panel — all are advocating an expanded role for the SDR, or “special drawing right.” That’s a kind of artificial currency created by the International Monetary Fund 40 years ago. Its value is based on a basket of “real” currencies — the dollar, the euro, and others.
And this is where it really gets squirrelly. A basket of currencies has a value based on the cumulative values of all the currencies in the basket. But that leaves the problem of weighting. Say you have a basket consisting of dollars, yen, euros, renminbi, zlotys, pounds and a few other currencies. How many of each will be in the basket? How will that be determined, and will that allocation always remain the same?
All forms of money are forms of debt, and all debt requires collateral. The collateral for the U.S. dollar is the full faith and credit of the U.S. government. What would be the collateral for a basket of currencies?
The basket of currencies is a complex, cockamamie solution to a non-problem — in short, a perfect “panel of experts” solution.
Zhou says the SDR could become a “widely accepted” means of payment in international trade and financial transactions. He also advocates creating financial assets denominated in SDRs. Such a move would, the argument goes, reduce the kind of “global imbalances” that contributed to the current economic crisis.
Chief among them are America’s huge current-account deficits and China’s equally huge surplus. China invested its surplus in massive purchases of U.S. treasuries, a factor blamed for contributing to low borrowing costs in America that fueled its housing bubble.
More gibberish. America’s current-account deficit merely means the U.S. imports more than it exports. Does the world really want America to import less? And China’s “massive purchases of U.S. treasuries” did not create low borrowing costs. It is the Fed, not the treasury market, that determines borrowing costs.
So the United States might even take a favorable view, says Vanessa Rossi, a senior research fellow in international economics at the Chatham House think tank in London. “Since they’ve complained so much about these problems about imbalances, and the flows of money associate with it, they might welcome some of the strain being taken off the dollar and the dollar markets in the future. Very immediately they might think that,” Rossi says.
“Imbalances,” “flows,” “strain,” blah, blah, blah. It’s all meaningless spouting, with no basis in reality. But I will allow that U.S. politicians might favor something ridiculous. They are good at that.
But Rossi says a new reserve currency would pose major challenges, and any move would be over the longer term. That’s because even if the idea picked up more steam, it’s likely to face huge technical, logistical, and political obstacles.
And it would clearly have negative implications for the dollar. Even those taking aim at the dollar wouldn’t welcome a sudden move, as this could trigger a sell-off of the dollar and erode the value of their holdings.
Perhaps explaining why Zhou said the establishment of a new reserve currency “may take a long time.”
Sergei Seninski of RFE/RL’s Russian Service contributed to this report
Yep — “huge technical, logistical and political obsticals — in addition to being foolish. Which probably is why it will remain a topic of discussion.
Bottom line: A reserve currency is just a convenience. It needn’t be an “official” reserve. The market naturally seeks a reserve just to make trading easier. In our ever-more computerized world, there very well may emerge a non-political currency — a currency of no specific nation.
But whatever emerges, let’s not give it more significance that it deserves. It’s just a convenience.
Rodger Malcolm Mitchell
Nine Steps to Prosperity:
1. Eliminate FICA (Click here)
2. Medicare — parts A, B & D — for everyone
3. Send every American citizen an annual check for $5,000 or give every state $5,000 per capita (Click here)
4. Long-term nursing care for everyone
5. Free education (including post-grad) for everyone
6. Salary for attending school (Click here)
7. Eliminate corporate taxes
8. Increase the standard income tax deduction annually
9. Increase federal spending on the myriad initiatives that benefit America’s 99%
No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption – Net Imports