I think the Australian Dollar can be seen as a proxy or representative currency of all the other currencies of countries in my proposed South Pacific Confederation. Here are the other currencies and their exchange rates:
AUD/USD: 1.0474, UP from .9871 1 year ago
AUD/HKD: 8.129, UP from 7.773 1 year ago
AUD/KRW: 1186.8, UP from 1118.0 1 year ago
AUD/MYR: 3.2529, UP from 3.0471 1 year ago
AUD/NZD: 1.2989, DOWN from 1.3028 1 year ago
AUD/SGD: 1.3327, UP from 1.2701 1 year ago
AUD/TWD: 31.38, UP from 28.9 1 year ago
AUD/XPF: 96.997, UP from 86.88 1 year ago
Showing posts with label reserve currency. Show all posts
Showing posts with label reserve currency. Show all posts
Sunday, January 22, 2012
Saturday, December 31, 2011
Reserve Currency Theory
Reserve Currency Theory is a new term I just invented to describe why the US can issue so much debt. It is simply because the US Dollar is the world's reserve currency. So long as the dollar continues in this role, then the US can issue an almost infinite amount of debt.
MMT (Modern Monetary Theory) is the latest preferred term for theory that was previously called Keynesianism. Keynesianism, if I understand it correctly, states that the government should run a surplus when times are good and a deficit when times are bad to counterbalance the economy. MMT, if I understand it correctly, states that government debt is necessary for private savings, and to increase the money supply, and so government deficits are not bad per se. However, even so, under MMT, there is a limit to how much debt a country can incur before it reaches the Keynesian endpoint.
Another version of it is called Monetary Sovereignty, and advocate it as the cure for whatever economic ails a country has. So Monetary Sovereignty adherents would tell Greece to regain its monetary sovereignty and inflate away its debts. However the truth is that nobody would want to use the Greek drachma unless they were forced to.
So under my theory, world currencies are split into 4 categories. First, the dollar (which I will come back to). Second, the currencies which are linked to the dollar and for all practical purposes are also dollars, just under a different name. Third, the "normal" currencies, such as the Euro, Canadian dollar, etc. which are commonly traded on the Forex markets and to which MMT may have some relevance. Fourth, the "local" currencies, such as the Botswana pula, or the proposed Greek drachma, which are used only as a local currency. No foreigner would buy debt denominated in the local currency.
The dollar is exempt from the "laws of gravity". The US can issue an almost infinite amount of dollars. When the US issues enough dollars to deflate their value, then the other countries issue more of their currencies in turn in a process called competitive devaluation.
But what about a gold-backed currency? Maybe it would make sense for some country to issue a gold-backed currency, like the gold dinar, meant to be an alternative to the dollar. But people wouldn't use it as a currency for most transactions simply because of Gresham's law ("bad money chases out good"). It would be used as a store of value, however.
What about the euro or yuan? At the moment it appears that neither of these will replace the dollar. For a currency to do so, it would have to have a Lender of Last Resort, and a well-developed centralized market for debt.
So, assuming my theory is true, what should the US do? It should use the power it has been given, issue more debt, and buy up debt of European countries (earning the interest that they pay), and invest in big infrastructure projects, like a tunnel under the Gibraltor straits.
I will be looking for arguments to further develop or to challenge this theory.
========
Update: I am tagging this as a projection that the US economy can survive almost indefinitely or at least until 2099.
===========
Update 6/19/12. This isn't a model, its an article on the almighty US dollar. If the US runs into severe problems, there will be alternatives, even if we can't see what they would be right now.
MMT (Modern Monetary Theory) is the latest preferred term for theory that was previously called Keynesianism. Keynesianism, if I understand it correctly, states that the government should run a surplus when times are good and a deficit when times are bad to counterbalance the economy. MMT, if I understand it correctly, states that government debt is necessary for private savings, and to increase the money supply, and so government deficits are not bad per se. However, even so, under MMT, there is a limit to how much debt a country can incur before it reaches the Keynesian endpoint.
Another version of it is called Monetary Sovereignty, and advocate it as the cure for whatever economic ails a country has. So Monetary Sovereignty adherents would tell Greece to regain its monetary sovereignty and inflate away its debts. However the truth is that nobody would want to use the Greek drachma unless they were forced to.
So under my theory, world currencies are split into 4 categories. First, the dollar (which I will come back to). Second, the currencies which are linked to the dollar and for all practical purposes are also dollars, just under a different name. Third, the "normal" currencies, such as the Euro, Canadian dollar, etc. which are commonly traded on the Forex markets and to which MMT may have some relevance. Fourth, the "local" currencies, such as the Botswana pula, or the proposed Greek drachma, which are used only as a local currency. No foreigner would buy debt denominated in the local currency.
The dollar is exempt from the "laws of gravity". The US can issue an almost infinite amount of dollars. When the US issues enough dollars to deflate their value, then the other countries issue more of their currencies in turn in a process called competitive devaluation.
But what about a gold-backed currency? Maybe it would make sense for some country to issue a gold-backed currency, like the gold dinar, meant to be an alternative to the dollar. But people wouldn't use it as a currency for most transactions simply because of Gresham's law ("bad money chases out good"). It would be used as a store of value, however.
What about the euro or yuan? At the moment it appears that neither of these will replace the dollar. For a currency to do so, it would have to have a Lender of Last Resort, and a well-developed centralized market for debt.
So, assuming my theory is true, what should the US do? It should use the power it has been given, issue more debt, and buy up debt of European countries (earning the interest that they pay), and invest in big infrastructure projects, like a tunnel under the Gibraltor straits.
I will be looking for arguments to further develop or to challenge this theory.
========
Update: I am tagging this as a projection that the US economy can survive almost indefinitely or at least until 2099.
===========
Update 6/19/12. This isn't a model, its an article on the almighty US dollar. If the US runs into severe problems, there will be alternatives, even if we can't see what they would be right now.
Why the dollar reigns supreme
This is from an older article. The author's thesis is that the dollar's reign is about to end, but I get a different conclusion.
==============
"To understand the dollar's future, it's important to understand the dollar's past—why the dollar became so dominant in the first place. Let me offer three reasons.
First, its allure reflects the singular depth of markets in dollar-denominated debt securities. The sheer scale of those markets allows dealers to offer low bid-ask spreads. The availability of derivative instruments with which to hedge dollar exchange-rate risk is unsurpassed. This makes the dollar the most convenient currency in which to do business for corporations, central banks and governments alike.
Second, there is the fact that the dollar is the world's safe haven. In crises, investors instinctively flock to it, as they did following the 2008 failure of Lehman Brothers. This tendency reflects the exceptional liquidity of markets in dollar instruments, liquidity being the most precious of all commodities in a crisis. It is a product of the fact that U.S. Treasury securities, the single most important asset bought and sold by international investors, have long had a reputation for stability.
Finally, the dollar benefits from a dearth of alternatives. Other countries that have long enjoyed a reputation for stability, such as Switzerland, or that have recently acquired one, like Australia, are too small for their currencies to account for more than a tiny fraction of international financial transactions."
--http://online.wsj.com/article/SB10001424052748703313304576132170181013248.html
==============
"To understand the dollar's future, it's important to understand the dollar's past—why the dollar became so dominant in the first place. Let me offer three reasons.
First, its allure reflects the singular depth of markets in dollar-denominated debt securities. The sheer scale of those markets allows dealers to offer low bid-ask spreads. The availability of derivative instruments with which to hedge dollar exchange-rate risk is unsurpassed. This makes the dollar the most convenient currency in which to do business for corporations, central banks and governments alike.
Second, there is the fact that the dollar is the world's safe haven. In crises, investors instinctively flock to it, as they did following the 2008 failure of Lehman Brothers. This tendency reflects the exceptional liquidity of markets in dollar instruments, liquidity being the most precious of all commodities in a crisis. It is a product of the fact that U.S. Treasury securities, the single most important asset bought and sold by international investors, have long had a reputation for stability.
Finally, the dollar benefits from a dearth of alternatives. Other countries that have long enjoyed a reputation for stability, such as Switzerland, or that have recently acquired one, like Australia, are too small for their currencies to account for more than a tiny fraction of international financial transactions."
--http://online.wsj.com/article/SB10001424052748703313304576132170181013248.html
Thursday, November 24, 2011
The Renminbi is no threat to the dollar
In contrast to popular perception, evidence from China suggests that the internationalization of the renminbi is stalling — and in many respects it has barely got off the ground.
In its latest monetary policy report, the People’s Bank of China revealed that the amount of cross-border trade settled in the renminbi fell in the third quarter, the first decline since China started using its own currency for imports and exports in June 2009.
Renminbi Threat to Dollar Could Be Stalling
In its latest monetary policy report, the People’s Bank of China revealed that the amount of cross-border trade settled in the renminbi fell in the third quarter, the first decline since China started using its own currency for imports and exports in June 2009.
Renminbi Threat to Dollar Could Be Stalling
Tuesday, September 6, 2011
The Norwegian Krone is the new Swiss Franc
"Norway’s krone rose against all its 16 most-traded counterparts as investors sought an alternative European currency to the euro and franc. ... The krone rose 1.3 percent to 5.3713 per dollar and advanced 1.9 percent to 7.5260 versus the euro. The currency surged 9.5 percent to 6.2634 against the franc."
--http://www.bloomberg.com/news/2011-09-06/franc-slides-against-dollar-euro-as-snb-vows-to-stand-by-currency-target.html
--http://www.bloomberg.com/news/2011-09-06/franc-slides-against-dollar-euro-as-snb-vows-to-stand-by-currency-target.html
Tuesday, June 14, 2011
Is the Federal Reserve the International Lender of Last Resort
First, there is a policy statement advocating this from 1999:
An International Lender of Last Resort,The IMF, and the Federal Reserve
Summary: "Under existing institutional arrangements, the IMF cannot serve as a genuine LOLR. Specifically, the IMF cannot create reserves, cannot make quick decisions, and does not act in a transparent manner in order to qualify as an authentic international LOLR. The Federal Reserve, however, does meet the essential requirements of an international LOLR. It can quickly create international reserves and money, although it has not openly embraced international LOLR responsibilities."
Second, there is evidence that the Fed did in fact act this way during the 2008 financial crisis:
Exclusive: The Fed's $600 Billion Stealth Bailout Of Foreign Banks Continues At The Expense Of The Domestic Economy, Or Explaining Where All The QE2 Money Went
"Courtesy of the recently declassified Fed discount window documents, we now know that the biggest beneficiaries of the Fed's generosity during the peak of the credit crisis were foreign banks, among which Belgium's Dexia was the most troubled, and thus most lent to, bank." Dexia borrowed $31.5 billion from the Fed on 10/24/2008, which, it should be noted, has all been paid back.
So the truth is that the Fed is the international LOLR, and the dollar is the world's currency.
An International Lender of Last Resort,The IMF, and the Federal Reserve
Summary: "Under existing institutional arrangements, the IMF cannot serve as a genuine LOLR. Specifically, the IMF cannot create reserves, cannot make quick decisions, and does not act in a transparent manner in order to qualify as an authentic international LOLR. The Federal Reserve, however, does meet the essential requirements of an international LOLR. It can quickly create international reserves and money, although it has not openly embraced international LOLR responsibilities."
Second, there is evidence that the Fed did in fact act this way during the 2008 financial crisis:
Exclusive: The Fed's $600 Billion Stealth Bailout Of Foreign Banks Continues At The Expense Of The Domestic Economy, Or Explaining Where All The QE2 Money Went
"Courtesy of the recently declassified Fed discount window documents, we now know that the biggest beneficiaries of the Fed's generosity during the peak of the credit crisis were foreign banks, among which Belgium's Dexia was the most troubled, and thus most lent to, bank." Dexia borrowed $31.5 billion from the Fed on 10/24/2008, which, it should be noted, has all been paid back.
So the truth is that the Fed is the international LOLR, and the dollar is the world's currency.
Sunday, June 5, 2011
The reign of the US dollar
The US dollar is used by many other countries around the world beside the US, and this usage is called dollarization. Here is a list I have compiled (which may have some errors on it).
In countries that use the US dollar, the US profits by having them use it. A user of a US dollar is in effect giving an interest-free loan to the Federal Reserve. In countries that have a fixed-exchange rate to the dollar, or have a floating rate within a narrow band, the effect isn't quite as dramatic, but they are still tied into the US economy. Their local currencies are extensions of the US dollar.
If the dollar collapsed or went to hyperinflation, all these other countries would be directly affected. If the Fed monetizes some of the national debt, all of these other countries end up shouldering some of the cost.
My point here is to emphasize the unique position of the US dollar in the world.
Countries that officially use the US dollar
American Samoa
Bonaire, Saba and Saint Eustatius (formerly part of Netherlands Antilles)
British Virgin Islands
Cambodia
East Timor
Ecuador
El Salvador
Guam
Marshall Islands
Federated States of Micronesia
Northern Mariana Islands
Palau
Panama
Puerto Rico
Turks and Caicos Islands
US Virgin Islands
Zimbabwe
Countries that use currency pegged to the dollar
Afghanistan: 1 USD =45.2 afghanis
Aruba: 1 USD = 1.79 Aruban florins
Bahamas: 1 USD = 1 bahamian dollar
Bahrain: 1 USD = .376 Bahraini dinars
Barbados: 1 USD = 2 Barbados dollars
Belize: 1 USD = 2 Belize dollars
Bermuda: 1 USD = 1 bermudan dollar
Bolivia: 1 USD = 7 bolivanos
Cayman Islands: 1 Cayman Islands dollar = 1.2 USD
China: 1 USD = ~6.49 yuan
Cuba: 1 USD = 1 Cuban convertible peso
Djibouti: 1 USD = ~ 175 Djibouti francs
Eastern Caribbean States: 1 USD = 2.70 East Caribbean dollars
Eritrea: 1 USD = 15 Nakfa
Honduras: 1 USD = 18.89 honduran Lempiras
Hong Kong: 1 USD = ~ HK$7.8
Iraq: 1 USD = ~1200 Iraqi dinars
Jordan: 1 USD = 0.709 jordanian dinars
Lebanon: 1 USD = ~1500 Lebanese pounds
Liberia: 1 USD = ~72.5 Liberia dollars
Macau: 1 USD = ~8 Macanese patacas (1 MOP$=1.03 HK$)
Maldives: 1 USD = 12.85 maldivian rufiyaas
Myanmar: 1 USD = 6.51 kyats
former Netherlands Antilles: 1 USD = 1.79 Caribbean guilders
Oman: 1 USD = .385 Omani rials
Qatar: 1 USD = 3.64 Qatari riyals
Saudia Arabia: 1 USD = 3.75 Saudi riyals
Taiwan: 1 USD = 32.84 NT$
Trinidad and Tobago: 1 USD = 6.25 Trinidad and Tobago dollars
United Arab Emirates: 1 USD = 3.6725 UAE dirhams
Venezuela: 1 USD = 2.60 Venezuelan bolivars
============================
I see that there are 4 categories of countries that use the US dollar. First are those nearby small countries whose economy is dominated by the US, such as the Bahamas. Second, those whose economies are completely unstable and see the dollar as being stable, such as East Timor and Zimbabwe. Third, the oil producing countries, and fourth, China and chinese territories.
It is the last 2 categories that are important. The oil-producing gulf countries could create their own currency, such as the GCC Dinar and demand that it be used to buy oil. However, this is only in the conceptual stage. China could make the yuan convertible; however, it is still tightly controlled. Here is an article about making the yuan convertible, which says that it will be fully internationalized by 2020: For Yuan, Convertibility Countdown Starts Now
So still, there is no replacement for the US dollar anytime soon. Ironically one of the things that helps the dollar is that so much debt is issued in it.
In countries that use the US dollar, the US profits by having them use it. A user of a US dollar is in effect giving an interest-free loan to the Federal Reserve. In countries that have a fixed-exchange rate to the dollar, or have a floating rate within a narrow band, the effect isn't quite as dramatic, but they are still tied into the US economy. Their local currencies are extensions of the US dollar.
If the dollar collapsed or went to hyperinflation, all these other countries would be directly affected. If the Fed monetizes some of the national debt, all of these other countries end up shouldering some of the cost.
My point here is to emphasize the unique position of the US dollar in the world.
Countries that officially use the US dollar
American Samoa
Bonaire, Saba and Saint Eustatius (formerly part of Netherlands Antilles)
British Virgin Islands
Cambodia
East Timor
Ecuador
El Salvador
Guam
Marshall Islands
Federated States of Micronesia
Northern Mariana Islands
Palau
Panama
Puerto Rico
Turks and Caicos Islands
US Virgin Islands
Zimbabwe
Countries that use currency pegged to the dollar
Afghanistan: 1 USD =45.2 afghanis
Aruba: 1 USD = 1.79 Aruban florins
Bahamas: 1 USD = 1 bahamian dollar
Bahrain: 1 USD = .376 Bahraini dinars
Barbados: 1 USD = 2 Barbados dollars
Belize: 1 USD = 2 Belize dollars
Bermuda: 1 USD = 1 bermudan dollar
Bolivia: 1 USD = 7 bolivanos
Cayman Islands: 1 Cayman Islands dollar = 1.2 USD
China: 1 USD = ~6.49 yuan
Cuba: 1 USD = 1 Cuban convertible peso
Djibouti: 1 USD = ~ 175 Djibouti francs
Eastern Caribbean States: 1 USD = 2.70 East Caribbean dollars
Eritrea: 1 USD = 15 Nakfa
Honduras: 1 USD = 18.89 honduran Lempiras
Hong Kong: 1 USD = ~ HK$7.8
Iraq: 1 USD = ~1200 Iraqi dinars
Jordan: 1 USD = 0.709 jordanian dinars
Lebanon: 1 USD = ~1500 Lebanese pounds
Liberia: 1 USD = ~72.5 Liberia dollars
Macau: 1 USD = ~8 Macanese patacas (1 MOP$=1.03 HK$)
Maldives: 1 USD = 12.85 maldivian rufiyaas
Myanmar: 1 USD = 6.51 kyats
former Netherlands Antilles: 1 USD = 1.79 Caribbean guilders
Oman: 1 USD = .385 Omani rials
Qatar: 1 USD = 3.64 Qatari riyals
Saudia Arabia: 1 USD = 3.75 Saudi riyals
Taiwan: 1 USD = 32.84 NT$
Trinidad and Tobago: 1 USD = 6.25 Trinidad and Tobago dollars
United Arab Emirates: 1 USD = 3.6725 UAE dirhams
Venezuela: 1 USD = 2.60 Venezuelan bolivars
============================
I see that there are 4 categories of countries that use the US dollar. First are those nearby small countries whose economy is dominated by the US, such as the Bahamas. Second, those whose economies are completely unstable and see the dollar as being stable, such as East Timor and Zimbabwe. Third, the oil producing countries, and fourth, China and chinese territories.
It is the last 2 categories that are important. The oil-producing gulf countries could create their own currency, such as the GCC Dinar and demand that it be used to buy oil. However, this is only in the conceptual stage. China could make the yuan convertible; however, it is still tightly controlled. Here is an article about making the yuan convertible, which says that it will be fully internationalized by 2020: For Yuan, Convertibility Countdown Starts Now
So still, there is no replacement for the US dollar anytime soon. Ironically one of the things that helps the dollar is that so much debt is issued in it.
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