Friday, November 19, 2010

A short note on the United States dollar 

Once again, the United States dollar has defied naysayers who say it is doomed as the world's reserve currency. The reason, it seems, is that greenback sucks less than the alternatives. Barely.

Given all that stress that the Federal Reserve's currency debasement program is laying on the global economy, last week's G-20 summit in South Korea should have been the monetary equivalent of a military degradation for the U.S. dollar. The greenback should have been slapped across the face, stripped of its medals, and cashiered from the ranks of respected currencies. Instead the dollar escaped unscathed, retaining its privileged status as the world's reserve.

However, the meeting did have its dark moments for America. The troubles starting even before the summit began with the failure of president Obama to conclude a long-planned trade deal with South Korea. Once the G-20 meetings began in earnest, the United States made scant headway with its main initiative to pressure the Chinese on Yuan revaluation. Just when it looked like the dollar would benefit from strife in Europe, a joint statement by key European leaders signaled that potential problems within the euro-zone may have been averted. In other words, nothing from this meeting should give any confidence that the dollar has a bright future.

Over the past three years, while the Chinese Yuan has appreciated ever so slightly against the U.S. dollar, it has depreciated against almost all other major currencies. As a result, one may have expected wider support for America's calls for appreciation of the Chinese Yuan. But in Seoul this issue was buried amidst rancor and fractious all-night meetings between splintered partners. Most participants were so focused on America's second campaign of quantitative easing, that the question of Yuan appreciation was moved to the back burner.

In an effort to avert competitive devaluations, the U.S. proposed that nations should restrict their current account surpluses and deficits within agreed percentages of economic output. Ironically, this idea had been proposed by the British at Breton Woods in July 1944. But this was at a time when war-ravaged Europe was in huge current account deficit. America was in massive surplus and vetoed the idea. Now that America is in chronic deficit, it is surplus countries such as China, India, Brazil, and Germany that oppose the idea.

Read the whole thing.


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