How then, do we move backwards? How does a society, with most of the people having no clue of future events, move from being dependent on a vast and intertwined network of goods and services produced by the indigenous people of whereever, to a local resource and renewable energy based society, and do so in the timeframe available (20-30 years using the most liberal extimates, 10-20 with resonable estimates, 5-10 with worst case scenarios), all the while prices on everything increasing, world politics getting more militaristic, governments continuously reducing civil liberties, shortages of goods on the market and weather patterns resembling bad Hollywood movies?
Posted: Tue Jan 10, 2006 9:09 am Post subject: Why the Euro can't replace the USD as reserve currency
1) The Euro is an inherently unstable currency. Its central bank has been in existence for only 5 years. The last of the old guard Bundesbank leaders - the only Europeans with inflation-fighting credentials - will all be retiring to their beach houses in Majorca over the next 10 years. Every central bank needs to be battle tested i.e. they need to demonstrate their political authority to restrain an overheating economy with a painful high interest rate policy. The Euro central bank has not been battle tested. This is the key to controlling inflation and protecting the intrinsic value of a currency. The Federal Reserve earned its stripes with the high interest regimen of the early 80's Reagan/Volcker era. The Euro has an inherent instability in this regard because it is issued by a loose confederation of sovereign nation-states, each of whom has the right to opt out of the system if the currency becomes uncomfortable for them.
A good example of the fundamental issue that undermines the Euro is the situation the state of Texas faced during early 80's. The Saudis glutted the oil market and forced a collapse of the oil price from $30 a barrel to $10 a barrel. This ruined the economy in Texas, which had made large investments in the 70's that projected a continuation of rising oil prices. Although their economy was suffering a double digit contraction, the American coastal economies and the economy overall was overheating. Volcker had instituted a severely restrictive money supply policy just at the time Texas needed an aggressively expansive policy. If the US did not have a strong federal system at the time, Texas would have opted out of the Union (believe me, they were talking about it anyway at the time. I have a brother-in-law who went bankrupt and never recovered financially.)
2) Despite having good liquidity in the currency markets, the Euro's equity and bond markets remain Balkanized. The Euro zone is composed of multiple small stock and bond markets. They are very inconvenient and price inefficient, especially for large players. On top of that, the currencies of Europe's two primary financial centers, London and Zurich, are not part of the Euro. Compared to the unity, breadth and depth of the US market, it is still strikingly parochial.
3) As we see from the recent Ukraine gas dispute, Russia is still a scary neighbor and Europe continues to depend on a foreign country (US) for their security. Since China has become a concern vis a vis the imbalances in the international holding of dollar reserves, this may be particularly important. Since China already has a long vulnerable border with Russia, it would be a Texas hedge to diversify their assets to an area with another long vulnerable border to Russia.
4) Finally, all of the above are systemic issues that will not change - ever.
Posted: Tue Jan 10, 2006 10:28 am Post subject: Re: Why the Euro can't replace the USD as reserve currency
Well, it is clear that you are intrinsically euro-skeptic. 10 years ago we heard from euro-sketpics that the "Euro was a great idea, but it will fail." You sound just like the British banking elites of the 1920's and 1930s, who thought the sterling pound could not be supplanted by the dollar as the world reserve currency. The "sun always shines on the British Empire"...
In reality, your premise #1 is undermined somewhat by the facts. You may not know this, but the high interest rates of the late 1970s were designed to thwart a dollar crisis after it lost its "good as gold" backing which resulted in a lot of inflation. Federal Reserve policy in the 1970s was in many ways designed to prevent OPEC from moving oil prices towards a basket of currencies (12 currencies in those pre-euro days). Their was a possibly purposeful strategic issue with oil prices suddenly going down in 1985-86 re the USSR, but I digress...
Regarding inflation, who do you think is more inflation adverse: the Fed Reserve or the ECB? Some have suggested the removal of M3 statistic in March 2006 could be a good way of temporarily hiding inflation and the further debasement of the dollar...but again, I digress (but I do hope you notice these treads are sort of intertwined...)
Since 2002, we have seen a notably shift away from the dollar by the EU, followed with diversification by OPEC and China in 2003-2005. Even Canada has significantly reduced its dollar holding in exchange for euros. These trends are accelerating, and I see no reason why these broad trends will abate in the near to intermediate term.
Moreover, the US is acting as if the euro is a threat to dollar/petrodollar supremacy, and the EU is acting as if the euro deserves equal standing as a 2nd world reserve currency - and petroeuro. For those who have researched these issues, this dynamic was understood well before the euro was launched...
First, here's a mini-history lesson...
Quote:
The monetary integration of Europe could alter ‘the political character of Europe in ways that could lead to confrontation with the United States’ …. and could lead to a world that was ‘very different and not necessarily a safer place.’
– Martin Feldstein, former head of the President’s Council of Economic Advisors, 1997
Quote:
Americans do not yet understand the significance of the euro, but when they do it could set up a monumental conflict, it will change the whole world situation so that the United States can no longer call all the shots.
– Helmut Schmidt, former German Chancellor, 1997
While the EU certainly has some problems, your claim that the euro is "inheritable unstable" is simply not supported by the facts. In fact, the consensus view is that the dollar has become inheritly unstable due to the emergence of a $1.1 trillion dollar twin deficits from now until the foreseeable future. This critcism of "Bushonomics" has been reiterated by the IMF, BIS, ECB, OPEC, Japan and most recently, China.
In essence, the US economy, as it is currently structured, has no mechanism to reverse the massive trade imbalances that are causing the nation to sink deeper into debt and into an unfavorable financial dependency on other nations, especially China and Japan. In 2003 the prestigious Bank of International Settlements (BIS) warned, “The global economy faces a fundamental dilemma, which is becoming more acute with time. How can imbalances in growth and external accounts across the major economic regions be resolved while maintaining robust global growth overall?” The BIS suggested that the rest of the world has been far too dependent on the US economy and that deflationary pressures would build unless “expansionary demand management policies” were implemented in both Europe and Asia.
In other words, the world’s most prestigious bank publicly stated its concerns about a declining dollar caused by US structural imbalances and indicated that the real goal for the rest of the world was to become less dependent on the US economy by creating additional engines for global growth. Without a doubt, further increases in US trade deficits, budget deficits, and consumer and corporate debt, along with a corresponding disparity with regard to domestic savings are unsustainable.
Compounding these problems are the ideologically driven tax cuts in 2001 and 2003. Current levels of US consumption instead of production are not a rational model for wealth creation in any nation, including the United States. Of course nothing I say will likely change your mind, but here's what some others have said about this issue...
....here's an interesting article from Sept 2002...
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Beneath the surface of current security debates, therefore, and in stark contrast to the perceived mismatch of strategic competence and geopolitical power between the US and Europe, lies a sleeping tiger. Despite the many arguments that would question Europe’s capacity to take economic and political advantage from such a tectonic shift in monetary realities, the only likely future scenario of change in the realm of currencies is one of greater relative weight for the euro. This is the one area in which long-run dynamics seem to place Europe in a relative structural advantage vis-à-vis the US — despite the appearance of the contrary in the realm of economic productivity and with respect to the current military gap.
– Paul Isbell, “The Shifting Geopolitics of the Euro"
..here's some comments from 2003 that are worth noting ...
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The position of the dollar today is similar to that of sterling in the 1920s and 1930s, when sterling ceased to be the automatic global reserve currency and started to face competition from other currencies, notably the dollar.
– Paul Donovan, economist at global investment bank UBS, 2003
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In the last century, American people were pioneers of system and technology innovation. However, the interests of a few American financial monopolies now lead this country to war. This is such a tragedy for the American people.
...
While [the dollar’s dominance] has been bringing to America economic prosperity and hegemonic power over money, it has its own inborn weakness. In order to sustain such prosperity and hegemonic power, America has to keep unilateral inflow of international capital to the American market .… If America loses its hegemonic power over money, its domestic consumption level will plunge 30-40%. Such an outcome would be devastating for the US economy. It could be more harmful to the economy than the Great Depression of 1929 to 1933.
– Wang Jian, Chinese bureaucrat, 2003
...and lots of comments in 2004....
Quote:
The dollar has been the leading international currency for as long as most people can remember. But its dominant role can no longer be taken for granted. If America keeps on spending and borrowing at the present pace, the dollar will eventually lose its mighty status in international finance. And that would hurt: the privilege of being able to print the World Reserve Currency, a privilege which is now at risk, allows America to borrow cheaply, and thus spend much more than it earns, on far better terms that are available to others.
– “The Disappearing Dollar,” the Economist, December 2004
Quote:
A switch away from the oil-dollar nexus would be [of] major strategic and political significance, said a senior official with an international economic agency who declined to be identified. … [the senior official said] ‘This would be considered by the U.S. as an unfriendly act.’ (emphasis added)
– “OPEC Boost Euro Deposits Over Dollars,” Washington Times, December 8, 2004
...and during 2005 the comments are getting more candid...and dire..
Quote:
The US dollar is no longer … in our opinion [seen] as a stable currency, and is devaluating all the time, and that's putting troubles all the time. So the real issue is how to change the regime from a US dollar pegging ... to a more manageable reference, say Euros, yen, dollars — those kind of more diversified systems.
– Fan Gang, director of the National Economic Research Institute, China Reform Foundation, quoted at the World Economic Forum in Davos, Switzerland, January 26, 2005
...and just as I expected, China did divorce itself from the "unstable" dollar and move towards a basket of currencies...likely including the yen, euro and dollar, just as F. Gang stated a year ago...Here's a recap:
...and even our allies in Japan have had enough of Bushanomics. The Japanese government, the 2nd largest holder of US Treasury bills, took the unusual step of warning the White House in December 2004 that it will unload its US Treasury/debt holdings if the Bush administration “maintains its laissez-faire approach to the mounting currency crisis.”
The criticism of President Bush’s inaction, by a senior member of the ruling Liberal Democratic Party, will be taken as a veiled threat that Japan could start to sell off its multi-billion-dollar holdings of US Treasuries. ‘The Japanese government is going to ask for a strong dollar policy; if it continues to fall, there would be enormous capital flight from the dollar,’ said Kaoru Yosano, chairman of the LDP’s policy council.
Geopolitics impact the macroecomics of the dollar's status:
If Washington continues to pursue the neoconservative global strategy by threatening countries such as Iran, Syria, or North Korea, this could create a capital flight out of the US and a panic on the dollar. Some economic commentators has stated the obvious:
Quote:
The most profound and damaging expression of [US] unilateralism has been through the pursuit of the war on terrorism. The invasion and occupation of Iraq explicitly contravened the United Nations and abrogated international law.
Nearly $1 trillion of foreign capital is funding the US public sector and current account deficits. About $800 billion of this foreign money is invested in US government, agency and corporate bonds …. The weight of foreign investment in the US financing the large twin deficits indicates that the risk of much greater dollar weakness is substantial. Expected dollar depreciation, the large current account and fiscal deficits and increasing geopolitical instability, driven by US electoral politics, make the dollar a very unlikely safe haven for global investors. Foreign capital flight from the US could easily trigger a large dollar devaluation.
Fortunately, the dollar’s slide in 2002–2005 was relatively gradual, but appeared to accelerate after the 2004 election before slightly rebounding in 2005. However, I think we should pay very close attention to the largest holder of US debt - China. Just before the Nov 2004 US elections the Chinese unloaded on the Bush doctrine, another sign that the world community wanted Kerry to be president. Although seemingly censored by the US given the unusual candidness of these remarks by the Chinese elite, I think the message was clear...
Quote:
The current US predicament in Iraq serves as another example that when a country’s superiority psychology inflates beyond its real capability, a lot of trouble can be caused. But the troubles and disasters the United States has met do not stem from the threats by others, but from its own cocksureness and arrogance…The 21st century is not the ‘American Century.’ That does not mean that the United States does not want the dream. Rather it is incapable of realizing the goal.
– Qian Qichen, former Chinese minister regarded as one of the “main architects” of China’s foreign policy, October, 2004
...and then we have this week's decision to "diversity" its reserve holdings...and thus, the dollar is not going to apprecite much in 2006..
...and while the EU has been rather polite in its criticism of the Bush administration, I think we should pay attention to the researcher who predicted the downfall of the Soviet Union in 1976. In an interview with Prospect magazine, Emmanuel Todd, French author of After the Empire: The Breakdown of the American Order (Après l’Empire) prophesized the decline of American hegemony. Todd provided insights into the widespread global concerns of US foreign and monetary polices. He argued that while the global community is fully cognizant of US military superiority, it does not mask our economic vulnerabilities, which are most apparent in the dollar’s steady devaluation since 2002. Todd implied that the cumulative economic and geopolitical stresses created by the neoconservatives’ drive for global supremacy will ultimately undermine US national finances.
Quote:
Until recently, [the US] was the most important factor in maintaining international order. But now it is a factor for instability. The industrial core of the US has been hollowed out. The American trade deficit amounts to $435bn a year. The country needs $1.5bn a day in foreign capital. The US is no longer self-sufficient. Europe, with its strength in exports, is .. . As far as the balance sheet and financial flows are concerned, the US has long been a drain on the whole world. The Europeans can no longer react to this in a friendly manner; they must counter America with industrial and financial methods.
Similar commentary has also appeared in Asian media sources, most recently with the Chinese government making a concentrated effort to create bonds and other financial vehicles to facilitate credit expansion in the region, which will soon reduce their purchase of US Treasuries. Additionally, the European Central Bank (ECB) is also creating monetary debt vehicles in an effort to absorb the eventual influx of surplus petroeuros — should Russia convert to a petroeuro system.
Imprudently, domestic observers continue to assume that the US economy will remain the only engine for global economic growth into the foreseeable future, assuming that European and Asian countries will be either unable or unwilling to reduce their dependency on the US consumer demand, given the potential economic disruptions that would occur if they pursue alternative economic strategies.This assumption on behalf of the current US policy-makers may turn out to be one of the fatal flaws inherent to neoconservative geostrategy.
Bottom Line: With the exception of the euro-skeptics who have been wrong for the past several years, various economic and strategic analysts contend that a major restructuring of the global monetary system is imminent.
From an international trade perspective, the EU economy is much more balanced than that of the US. The EU nations have done a more effective job constraining their debt formation/dependence on foreign capital, while retaining much of their crucial domestic manufacturing base. Because of this past management of its respective economic zones, the EU is poised to become a major pole of global power.
Conversely, successive Republican administrations in the US have left themselves little room for error and squandered the opportunity offered by Clinton’s surplus economics. Even though much of the surpluses projected in 2000 were bubble-based, they should have been properly taken advantage of to reduce future debt-servicing.
Instead, a policy of tax cuts and massive military spending was pursued. While France and Germany have not been able to strictly adhere to the debt provisions in the Growth and Stability Pact, their external balances are, according to an OPEC executive, much more “balanced” than that of the United States economy.
Furthermore, while European governments have a sometimes stifling policy structure, they have retained a great deal of room for reform when necessary. For example, in 2003 German Prime Minister Schroder pushed through major reforms of the German economy, Agenda 2010, which is slowly beginning to pay dividends, while in contrast, the US in a similar recessionary phase has no such option.
These structural imbalances suggest that the ongoing bubble distortions of the American economy will ultimately hit a tipping point soon, with a poor prognosis of quick recovery. If this occurs, the euro would serve to increase domestic demand in the EU via expansion of the monetary supply, counterbalanced with a decrease in US domestic demand as its monetary supply contracted. Whether the global impact would be a net increase or net decrease in aggregate demand depends on whether the EU monetary supply expanded more rapidly than the US monetary supply contracted.
The crucial issue at hand is the realization that the EU and the European Central Bank (ECB) will have more monetary flexibility in such an event, which the US no longer has, due to its unbalanced external accounts. This is compounded by foreign holdings of its federal debt, which is now approximately 45 percent of a total $8 trillion debt. Ironically, despite the US’ history of seeking political and economic independence, its economy and military are simply unable to operate independent of massive foreign investment - and this investment is waning as industrialized economies and sevaral OPEC and non-OPEC oil exporting nations continue their broad movement away from dollar hegemony.
The ascendance of the euro and ultimately the yuan/RNB has likely been fortified given the structural debt, trade, and fiscal imbalances in the US economy. The US consumer cannot go into indefinite debt as the single engine for global growth, nor can the Federal Reserve continue to reinflate bubbles indefinitely.
Both the EU and East Asia will have to recognize that the party is over and they cannot ride the American consumer in perpetuity. Whether or not they wish to confront the challenges of this transition, they will find these imposed by brutal economic realities.
(note: many of these were exerpts from my recent book, and it was my research into the plausabilty of a petroeuro that launched my inquiry over 3 years ago. As the below article attests, this process begin around 2000, and by 2010 I expect we will see the solidification of the euro as the 2nd world petrocurrency, and thus, a de facto 2nd world reserve currency)
Quote:
Breaking US hegemony in the Arab world by using oil revenues to promote the currency of an alternative, and more friendly, power might be a sensible move. It would make US interference in Arab affairs less effective.
Perhaps a new bipolar economic system, between the US and EU is set to emerge in the early part of the twenty-first century, and Arab nations can play a vital part in creating this new world order by switching oil payments from the dollar to the euro. In the process Arab nations will create a world order far more in line with their own interests. At the moment the US has it all its own way, something the EU is strong enough to correct.
– Peter J. Cooper, Middle East Finance and Economy, AME Info, October 2000
Quote:
Dollar Dilemma: Why Petrodollar Hegemony Is Unsustainable
‘In the future the euro is (going to be) taking a place in the inter- national markets in general as the money of exchange.’ Asked if a switch to pricing oil in euros was possible, ‘Of course, in the oil market and in any market. It’s a stable and a strong currency, the role of the euro is going to be increased step by step. It’s normal.’
— Loyola de Palacio, European Energy Commissioner, June 16, 2003
...you likely fall into this category "the sun never sets on dollar hegemony"...
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I don’t see any particular merit in [pricing oil in euros] for the average oil producing country. It really is question of which currency (oil producers) feel most comfortable with over the long run – and the dollar’s always won out.
— Guy Caruso, director of the U.S. Energy Information Admintration, June 17, 2003
...but Russia and several members of OPEC have a different opinion about petrodollar hegemony...
Quote:
OPEC Secretary General Alvaro Silva said the oil producers' cartel is considering trading oil in euros or a basket of currencies other than the dollar to compensate for the decline in the value of the greenback. ‘There is talk of trading crude in euros – it is one of the alternatives,’ Silva told.
— OPEC Secretary Gerneral Alvaro Silva, December 9, 2003
"Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passions, they cannot alter the state of facts and evidence."
– John Adams, 2nd US President, 1770
Last edited by Petrodollar on Tue Jan 10, 2006 3:46 pm; edited 6 times in total
Joined: Dec 03, 2004 Posts: 1131 Location: Seattle, Wa.
Posted: Tue Jan 10, 2006 11:02 am Post subject: Re: Why the Euro can't replace the USD as reserve currency
Do you see any threat of the dollars global position as a reserve currency if the US economy goes into a major recession because of increasing energy prices resulting in a softening of the housing market? In the past there never was an alternative to the dollar when the US went into recession and the dollar weakened but the Euro today does offer an alternative that is certainly more attractive than the British pound or Deutschmark ever was. Europe is still the leading global exporter and is not burdened with the debt the US economy has. I can't help but imagine that the dollar's systemic weakness will slowly weaken it's position as a reserve currency.
On a more personal note I sold an export business last year. I was importing optical instruments exclusively from European manufacturers and marketing these in Latin America. The US$ lost over 40% of it's value during the past 5 years against the Euro and the products we sold increased accordingly in price. There are no US manufacturers any longer of the products we sold. This is the case in many industries. The trade imbalance the US has is not only because we import so much foreign oil but also because we dont make much of anything anymore to export. Many of the key accounts in Latin America discontinued the practice of opening letters of credits in US$ through our business and changed to opening letters of credits directly in Euros with the manufactueres we represented. I just watched this whole change occur during the 10 years I was in business. I cant help imagining this transition has happened on a much larger scale.
Posted: Tue Jan 10, 2006 11:11 am Post subject: Re: Why the Euro can't replace the USD as reserve currency
Ibon asked:
Quote:
Do you see any threat of the dollars global position as a reserve currency if the US economy goes into a major recession because of increasing energy prices resulting in a softening of the housing market?
In short, my answer is yes.
You have made some astute observations, including..
Quote:
...the Euro today does offer an alternative that is certainly more attractive than the British pound or Deutschmark ever was. Europe is still the leading global exporter and is not burdened with the debt the US economy has. I can't help but imagine that the dollar's systemic weakness will slowly weaken it's position as a reserve currency.
...and I have nothing to add. It is, in fact, self-evident.
Posted: Tue Jan 10, 2006 11:44 am Post subject: Re: Why the Euro can't replace the USD as reserve currency
Once again, WHERE WOULD EUROS COME FROM?
US run deficit to supply the rest of the world with USD. ECB is chartered to keep the Euro stable, i.e. not to print money for Chindia and such. To be reserve currency, the currency need to be readily available. Where would trillions of Euros to deversify China or Japan position would come from?
Posted: Tue Jan 10, 2006 11:57 am Post subject: Re: Why the Euro can't replace the USD as reserve currency
Quote:
...
While [the dollar’s dominance] has been bringing to America economic prosperity and hegemonic power over money, it has its own inborn weakness. In order to sustain such prosperity and hegemonic power, America has to keep unilateral inflow of international capital to the American market .… If America loses its hegemonic power over money, its domestic consumption level will plunge 30-40%. Such an outcome would be devastating for the US economy. It could be more harmful to the economy than the Great Depression of 1929 to 1933.
Yes, the threat of deflation is genuine and with the rate of declining savings it is very close to the trigger. The quality of consumer debt hinges on the housing bubble. Deflation could halt this economy very quickly once it sets in.
Quote:
These structural imbalances suggest that the ongoing bubble distortions of the American economy will ultimately hit a tipping point soon, with a poor prognosis of quick recovery. If this occurs, the euro would serve to increase domestic demand in the EU via expansion of the monetary supply, counterbalanced with a decrease in US domestic demand as its monetary supply contracted. Whether the global impact would be a net increase or net decrease in aggregate demand depends on whether the EU monetary supply expanded more rapidly than the US monetary supply contracted.
And the crux. Does Europe very quickly fill the export gap from China and the rest of Asia? If so, where do these consumers get their capital for all these new exports? A lot of Europe is also experiencing a housing bubble. Do you think the ECB will reduce rates to the point that would rapidly inflate the Euro? Europe would have to create some $1trillion of new spending a year to replace the dollar. In other words, can Europe really save Asia from implosion?
The real issue is that Asia is geared to export finished products in large quantities. Having Europe fill the gap only makes them the new world consumer and puts them in the same boat the U.S. is in.
Best, Dan.
Last edited by lakeweb on Tue Jan 10, 2006 12:07 pm; edited 1 time in total
Posted: Tue Jan 10, 2006 12:04 pm Post subject: Re: Why the Euro can't replace the USD as reserve currency
Ibon wrote:
On a more personal note I sold an export business last year. I was importing optical instruments exclusively from European manufacturers and marketing these in Latin America. The US$ lost over 40% of it's value during the past 5 years against the Euro and the products we sold increased accordingly in price.
Interesting observation. Did you see your volumes increasing or decreasing in responce to 40% increase in price?
Now think about how many bags of coffee Latin America would have to sell to Starbucks (who btw is buying in USD) to afford same units and what implications it would have on number of people employed in Europe to manufacture those same units?
Posted: Tue Jan 10, 2006 12:29 pm Post subject: Re: Why the Euro can't replace the USD as reserve currency
lakeweb wrote:
And the crux. Does Europe very quickly fill the export gap from China and the rest of Asia? If so, where do these consumers get their capital for all these new exports? A lot of Europe is also experiencing a housing bubble. Do you think the ECB will reduce rates to the point that would rapidly inflate the Euro? Europe would have to create some $1trillion of new spending a year to replace the dollar. In other words, can Europe really save Asia from implosion?
No way - I have been in Europe for the last 4 months and it is self evident that the Europeans face the exact same problems like the US: low savings rates, a housing bubble in at least 4 countries (or at least that's what my colleagues tell me in 4 different languanges )
When the US goes, Asia will implode ... especially since the EU wants to avoid the next part:
lakeweb wrote:
The real issue is that Asia is geared to export finished products in large quantities. Having Europe fill the gap only makes them the new world consumer and puts them in the same boat the U.S. is in.
Best, Dan.
_________________ "Nuclear power has long been to the Left what embryonic-stem-cell research is to the Right--irredeemably wrong and a signifier of moral weakness."Esquire Magazine,12/05
The genetic code is commaless and so are my posts.
Posted: Tue Jan 10, 2006 12:45 pm Post subject: Re: Why the Euro can't replace the USD as reserve currency
EnergySpin wrote:
lakeweb wrote:
And the crux. Does Europe very quickly fill the export gap from China and the rest of Asia? If so, where do these consumers get their capital for all these new exports? A lot of Europe is also experiencing a housing bubble. Do you think the ECB will reduce rates to the point that would rapidly inflate the Euro? Europe would have to create some $1trillion of new spending a year to replace the dollar. In other words, can Europe really save Asia from implosion?
No farking way - I have been in Europe for the last 4 months and it is self evident that the Europeans face the exact same problems like the US: low savings rates, a housing bubble in at least 4 countries (or at least that's what my colleagues tell me in 4 different languanges )
Yep, and I've made that point in another thread. There have been some dramatic trade surpluses, turned to trade deficits, by some of the Euroland countries in the last few years.
Joined: Dec 03, 2004 Posts: 1131 Location: Seattle, Wa.
Posted: Tue Jan 10, 2006 1:07 pm Post subject: Re: Why the Euro can't replace the USD as reserve currency
MOCKBA wrote:
Ibon wrote:
On a more personal note I sold an export business last year. I was importing optical instruments exclusively from European manufacturers and marketing these in Latin America. The US$ lost over 40% of it's value during the past 5 years against the Euro and the products we sold increased accordingly in price.
Interesting observation. Did you see your volumes increasing or decreasing in responce to 40% increase in price?
This is a little off topic. Obviously volumes went down. For two reasons; End users had to increase their budgets to buy the same goods so they preferred to hold on to and repair older units or wait for more funds. The other reason is that competition from Japan was cheaper since the US$ only devaluated around 23% against the YEN during the same time period that it devaluated 40% against the EURO.
Posted: Tue Jan 10, 2006 1:16 pm Post subject: Re: Why the Euro can't replace the USD as reserve currency
Thanks for your response. I agree with most of what you are saying. Yes, imbalances in the global economy are creating numerous serious problems, one of which is the imbalance in USD reserve holdings. Yes, in theory there could be downward pressure on the dollar. Yes, in theory there could be a catastrophic collapse in the dollar. Yes, even without a total collapse of the post WW2 dollar based global economic system, we could be in the midst of a transition where the dollar doesn't play a totally preeminent role in that system. Yes, all of these things could be harmful to the US economy. I did not dispute any of that in my post. So, I can't be dismissed as a starry eyed "don't worry, be happy" commentator. As far as wishful thinking goes, I think that is much more prevalent in the anti-dollar, anti US commentary on this board. A negative political slant on the Bush administration pervades your writings also.
You didn't specifically respond to any of the arguments made in my post. While the Euro is capable of playing a subordinate role to the dollar, it is unable to replace the USD as the primary reserve currency for the global economy and likely never will. If the current system collapses, some other kind of global economic system will evolve. It won't be just like this one, just with the Euro at the center instead of the USD. It will be an substantially different system altogether.
Good luck with your book. I'm sure it is an exciting read. I can recommend another book to readers of this board. It is Michael Mandelbaum's, The Case for Goliath, How the US Acts as the World Government. It's a very mature, knowledgable description of the current global political and economic system, how it works and how it evolved during the 20th Century. I'm not sure if the members so this board would like it so much, though. It is not an anti-US/Bush diatribe.
Posted: Tue Jan 10, 2006 1:17 pm Post subject: Re: Why the Euro can't replace the USD as reserve currency
I personally believe that Russia selling in oil in Euros might be a devastating blow to the US dollar. Has anyone seen any recent news concerning Russia's willingness to switch?
Posted: Tue Jan 10, 2006 1:25 pm Post subject: Re: Why the Euro can't replace the USD as reserve currency
MOCKBA wrote:
Once again, WHERE WOULD EUROS COME FROM?
US run deficit to supply the rest of the world with USD. ECB is chartered to keep the Euro stable, i.e. not to print money for Chindia and such. To be reserve currency, the currency need to be readily available. Where would trillions of Euros to deversify China or Japan position would come from?
Exactly, it's like trying to sail the QE2 up the Thames River. Of course, in the meantime, you crash the very system you are benefitting from and render the rest of your USD holdings worthless.
One more point. I don't know if Dan ever expounds this, but it is a common opinion on this board that the Chinese or Japanese might launch some sort of kamikaze financial market attack on the US by initiating a sudden and massive USD liquidation. This cannot happen. Forex markets would shut down immediately. I know. I used to do this for a living. No market maker will take those dollars. If the Chinese signalled their intent to continue with this behavior when markets reopened, it's possible the US could declare it an act of war and freeze Chinese assets, which are nothing more than bookkeeping entries at NY banks anyway. There is precedent for this and it would not impact USD safe haven credibility with other foreign holders, considering the circimstances of a hostile act that was threatening to ruin them as well. If anything, it would enhance US safe haven status.
Posted: Tue Jan 10, 2006 1:50 pm Post subject: Re: Why the Euro can't replace the USD as reserve currency
Daryl wrote:
The Euro central bank has not been battle tested. This is the key to controlling inflation and protecting the intrinsic value of a currency. The Federal Reserve earned its stripes with the high interest regimen of the early 80's Reagan/Volcker era.
True, the Euro central bank has yet to be "battle tested"....but the USA is a different country today compared to the Reagan/Volcker era. When the dollar starts droping I sincerely doubt Ben aka "Helicopter Commander" will have the stomach to push interest rates up to 18% like what Volcker did. There's no need to state the obvious as to what would happen to the real estate market in such a scenario. There's a lot of people out there who have a vested interest (whether real or imagined) in keeping housing prices over inflated....therefore a high interest rate hike will NOT happen.
In fact the fed reserve has already hinted that they will stop raising interest rates at 4.5%. That statement or "hint" sent the price of gold leap frogging well past $500 and the US dollar has been taking a beating in the forex market. That's not to say Helicopter Ben won't raise rates above 4.5% in the future but I dou
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