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OfflineAsAboveSoBelow
The matrix has you


Registered: 02/06/08
Posts: 2,515
Last seen: 12 years, 3 months
Can any economic folks explain this article to me?
    #14058350 - 03/03/11 03:31 AM (12 years, 10 months ago)



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You're gonna get hurt real bad :smile:

They that sow the wind, shall reap the whirlwind


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Invisiblememes
Blessed


Folding@home Statistics
Registered: 01/11/05
Posts: 27,785
Loc: In a Tree
Re: Can any economic folks explain this article to me? [Re: AsAboveSoBelow]
    #14058524 - 03/03/11 06:13 AM (12 years, 10 months ago)

Here's another article that might help shed some light on the situation:

http://www.economist.com/blogs/freeexchange/2010/07/currency
Quote:

EVERY three months the IMF publishes data on the composition of official foreign exchange reserves. There are two things predictable about this release. One, the level of reserves continues to rise and two, renewed speculation about the role of the dollar as a global reserve currency.

This time round was no different. Total worldwide reserves stood at $8.3 trillion in the first quarter of 2010, up from $7.2 trillion during the same period last year. As a share of allocated reserves, the dollar's weight has fallen from 73% in 2001 to 61%. Even China, which makes up the bulk of the $3.7 trillion unallocated reserves, is thought to be diversifying away from the dollar.

But adding weight to the numbers are two reports—one from the Asian Development Bank and the other from the  UN—calling for a new global reserve system. Both reports correctly point out that as a store of value, the dollar is too volatile. The dollar-dominated regime probably worsened the crisis due to a liquidity shortage, before the Fed opened swap lines with other banks. Rising deficits and slow growth in America are also making central bankers weary of holding additional US debt.

These are all valid points, but I think they overlook an important aspect of a reserve currency—ease of transaction. Central bank reserve managers are not like traditional asset managers who need to trade in and out of currencies. Nonetheless, a reserve currency must have a deep and liquid market. This is where the dollar scores over other currencies. Even the euro, which was a viable alternative before the current crisis, has not been able to displace the dollar's dominant position as an international medium of exchange. One explanation is obviously inertia. Banks are used to dealing with a set of bilateral exchange rates and will continue to do so. But these attitudes can change, particularly with a crisis. What is more difficult to get over is network externalities—if dollars can be exchanged easily against other foreign currencies, then any domestic currency can be exchanged against dollars.

To understand how difficult it is to break this network, consider the natural experiment that is highlighted in the BIS annual report. In Hungary, the forint had a well-developed swap market for exchanging the domestic currency into both the dollar and the euro. The left graph shows the spread of the implied interest in dollar swap over that of the euro swap. The right graph shows swap volumes in the two currencies. Before the crisis the currency of choice for swaps was the dollar. But after the collapse of Lehman Brothers in September 2008, dollar shortage was acute. Consequently the price of a dollar swap rose over that of the euro swap, and traders switched to the euro.

Once the Fed provided dollar funding to the European banks, the yields on the dollar went down and traders switched back to the dollar. Why not stay with the euro once you have made the switch? The report concludes that in Hungary, as in other eastern European countries, loans are denominated in Swiss francs. So banks that were looking to hedge, ultimately needed to convert domestic currency into francs. And since the Swiss franc/dollar swap market overwhelms the Swiss franc/euro market, traders reverted to swapping the domestic currency against the dollar in the aftermath of the crisis.

That I think highlights the biggest challenge in designing a new global reserve system. Beyond just a store of value, the currency must be at the centre of international banking and cross-border lending. Introducing a new currency into this network will be hard, even if it's the right thing to do. Like Facebook, the dollar may not be the best system around, but it's what everyone else uses, hence its hard to displace.








To sum it up in a paragraph from a different article:
Quote:

Even so, this is unlikely to provoke a sudden crisis. Although America’s fiscal mess will last for years, it is not acute (see article). Inflation will not soar suddenly. With neither the euro nor the yuan yet ready to usurp it, the dollar will not quickly lose its reserve-currency status. The lesson of the past year is that it is still a currency to flee to, not from. None of this absolves American policymakers from hard choices. But a dangerous collapse in the greenback is unlikely.





http://www.economist.com/node/14699877


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InvisibleArmFromTheAbyss
Old Hand

Registered: 10/09/02
Posts: 1,368
Loc: Down here in Babylon
Re: Can any economic folks explain this article to me? [Re: AsAboveSoBelow]
    #14058679 - 03/03/11 07:58 AM (12 years, 10 months ago)

In order for the Yuan to be the reserve currency, the US would have to run a surplus, and China would have to run a deficit. Without a Chinese form of treasury bonds it's impossible.

If the entire world decided to transact in Yuan, demand would exceed supply,  it would skyrocket, and destroy Chinese exporters. There is no logical reason for China to complain about the current system.


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Offlinehumawebdesign
Stranger
Female
Registered: 03/11/11
Posts: 45
Loc: India
Last seen: 12 years, 10 months
Re: Can any economic folks explain this article to me? [Re: ArmFromTheAbyss]
    #14112893 - 03/13/11 03:12 AM (12 years, 10 months ago)

I don't think it will harm to US economy, its strong enough to handle all these.


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