[mattduke]

The title of the Financial Times essay is "How to Solve the Problem of the Dollar". It is written by Fred Bergsten formerly of US treasury. The plan is for the "sovereign wealth funds" to exchange their dollars for IMF SDR's which are backed by US treasuries and gold.

Basically, it's an attempt to prevent sovereign wealth funds from actually "spending" their dollars.

"The world economy faces an acute policy dilemma that, if mishandled, could bring on the mother of all monetary crises. Many dollar holders, including central banks and sovereign wealth funds as well as private investors, clearly want to diversify into other currencies. Since foreign dollar holdings total at least $20,000bn, even a modest realisation of these desires could produce a free fall of the US currency and huge disruptions to markets and the world economy. Fears of such an outcome have risen sharply in both official circles and the markets."

"There is only one solution to this dilemma that would satisfy all parties: creation of a substitution account at the International Monetary Fund through which unwanted dollars could be converted into special drawing rights, the international money created initially by the fund in 1969 and of which $34bn-worth now exists. Such an account was worked out in great detail in 1978-1980 during an earlier bout of currency diversification and free fall of the dollar that closely resembled today’s circumstances."

ft

[MrBill]

Why did you omit this part?
$this->bbcode_second_pass_quote('', 'H')owever, none of the countries into whose currencies the diversification would take place want to receive these inflows. The eurozone, the UK, Canada and Australia among others believe that their exchange rates are already substantially overvalued. But China and most of the other Asian countries continue to intervene heavily to keep their currencies from rising significantly. Hence, further large shifts out of the dollar could indeed push the floating currencies far above their equilibrium levels, generating new imbalances and a possibly severe slowdown in global growth.

[mattduke]

I don't recall. I take none of this article at face value. I really don't know where to begin with that particular bit. The lies are so layered. Literally every single sentence contains multiple falsehoods and misrepresentations.

I had started enumerating them all but ended up having to go into a long post about economics and money and just got bored with it all. Besides, I'm sure you know it all anyway.

I thought this was all a "global savings glut" anyway.

THEY want a super-national global fiat currency. I think this article was a trial balloon.

[Johnvancouver]

Sounds like a good proposal. The current dramatic currency fluctuations are rather disruptive to all economies. A month ago, the Canadian dollar is at CDN$1 to US$1.10, clearly overvalued, and now it's come back to a more fair value of US$0.98. A change of over 10% in such a short time period is just nuts! It's time to explore unconventional solutions such as the one suggested in the article.

[MrBill]

$this->bbcode_second_pass_quote('mattduke', 'I') don't recall. I take none of this article at face value. I really don't know where to begin with that particular bit. The lies are so layered. Literally every single sentence contains multiple falsehoods and misrepresentations.

I had started enumerating them all but ended up having to go into a long post about economics and money and just got bored with it all. Besides, I'm sure you know it all anyway.

I thought this was all a "global savings glut" anyway.

THEY want a super-national global fiat currency. I think this article was a trial balloon.

[Doly]

$this->bbcode_second_pass_quote('MrBill', '
')If I may, I think I can encapsulate global imbalances in a few easy to understand sentences.

[Twilight]

Call me old-fashoned, but I have a problem with someone sitting down and writing a single set of terms and conditions for the whole world. The jury is still out on how well that's working with Europe. Throw everyone else and America into the mix, and... It reminds me of that saying about putting several spiders into one jar: eventually you have one big fat spider. I would rather see an unending fight for temporary advantage than see it settled permanently.

[LoneSnark]

$this->bbcode_second_pass_quote('', ' ')They occur when some countries try to grow faster than trend. If global growth is, say 5%, and China wants to grow at twice that speed, say 10%, then someone else on average has to grow much slower than 5%, say 2.5%.

[Euric]

$this->bbcode_second_pass_quote('LoneSnark', '
')
If the entire country decides it does not like the products made in Maine, then they will stop buying them. Those in Maine that made them will lose their jobs and begin subsisting on savings. In absolute terms, since everyone in Maine keeps buying aircraft from Washington and Pineapple from Hawaii, they are importing stuff and exporting dollars. As dollars leave, they will become scarce and deflation will set in as the monetary supply falls. Similarly, as dollars build up in other states inflation will set in as their monetary supply increases at Maine's expense. As workers flee unemployment by moving to other states, Maine's imports will shrink. Similarly, as widespread unemployment drives down wages, the prices of goods made in Maine will fall, encouraging both exports and import substitution. This process continues until the trade imbalance goes away.

[LoneSnark]

Euric, I think you missed a fundamental feature of any sufficiently complex economic system. The multitude of tradable goods and services produced in Maine is in the tens of thousands. Surely at some price one of them will be of value to neighboring states.

But, you do make an entertaining point. What if it has nothing to do with what Maine produces or the price it charges? Let us pretend Maine's neighbors put up infinite import barriers, what then?

Well, as I said, as Maine has not reciprocated it will continue to import, in-effect exporting dollars to import goods. This will do as I said, cause inflation outside Maine and cause deflation inside Maine. This will continue until equilibrium is restored through the following mechanisms:
A) Producers in Maine will engage in Import Substitution, or producing locally what was once imported, now that imports are becoming ever more expensive
B) As the prices of imported goods rise ever higher from their perspective, the citizens of Maine will learn to live without them
C) Smugglers will have ever more incentives to smuggle the products of Maine through the blockade, transforming the blockade into little more than really high tariffs, otherwise known as the smuggler's cut.
D) Maine, suffering from deflation-induced hardship (double-digit unemployment), will abandon the dollar for its own currency

That was fun. Thanks.

[MrBill]

LoneSnark, I will gladly nominate you for Moderator for Depletion Economics when I retire, which will be very soon.

But you have a unique ability to ignore a whole argument to focus on one or two sentences. I think it is rather pedantic. But whatever?

If global economic growth is averaging 5% and some other country is averaging 10% then by definition some other country or group of countries must be growing slower than 5% otherwise the average growth rate would be higher than 5%. If all countries were growing at 10% then global economic growth would be 10% and not 5%. What is it that you do not understand?

In a world of freely traded currencies, and in the absence of capital controls or currency manipulations, those countries that exported more than they imported would see their currencies appreciate relative to those that imported more.

This assumes forward interest rate parity that is a trade-off between relative growth rates and relative interest rate differentials. In theory it is quite simple, but in reality it is quite complicated.

I will give you a hint. A large domestic economy with developed capital markets has the ability to absorb larger international flows of capital. But as you're an expert on such matters I am happy to leave it to you to explain to others. Cheers.

[LoneSnark]

MrBill, I suspect it was poor phrasing on your part. It sounded as if you were saying global growth was fixed at a given amount. My appologies.

$this->bbcode_second_pass_quote('', 'B')ut you have a unique ability to ignore a whole argument to focus on one or two sentences. I think it is rather pedantic. But whatever?

[MrBill]

$this->bbcode_second_pass_quote('LoneSnark', 'M')rBill, I suspect it was poor phrasing on your part. It sounded as if you were saying global growth was fixed at a given amount. My appologies.

$this->bbcode_second_pass_quote('', 'B')ut you have a unique ability to ignore a whole argument to focus on one or two sentences. I think it is rather pedantic. But whatever?