by Euric » Sat 31 Dec 2005, 11:14:14
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Here is something I posted on another thread. Maybe we can take it from there...
Henry Liu on dollar hegemonyBest, Dan.
I have read some of Henry C.K. Liu's stuff before and it appears he speaks from both sides of his mouth. In this case, he seems to think that since the dollar is so wide spread it is not possible for the euro or any currency to upset this situation. Well, it often occurs that things that aren't suppose to happen usually do.
$this->bbcode_second_pass_quote('', 'T')he euro in its current form can never replace the dollar. With the
exception of some minor African states, there is no precedent in history
where a monetary union preceded a political union. Already in Italy
cries to restore the lira are increasingly vocal. But the main reason is
that there is not enough euro in circulation to replace the dollar and
the ECB is not about to print more euro than its inflation-aversed
ideology would permit.
Nonsense! Who is saying the euro is going to replace the dollar? the euro isn't looking to replace the dollar nor is anybody out there trying to replace the dollar with the euro. Whoever is saying that doesn't know what they are talking about.
What is being said is that the euro and the dollar are going to "share" hegemony. Oil will not go completely to euros, just a share of it. world Central Banks are not going to dump all of their dollars, just some. They all want to re-balance so that they have a better mixture. OPEC originally wanted to have a basket of currencies, not one, to price oil in. The US insisted on the dollar only. Everyone now knows this was a bad decision and there is a movement to go back to the original plan. The euro will eventually be one of many currencies used to buy and sell not only oil but other commodities. The creation of the euro was designed as the first step to break the dollar hold. Once free of the dollar, the world can begin to set up a currency basket to buy and sell commodities, thus forcing national economies to compete fairly in the world markets.
It is the fiat nature of modern currencies that makes it possible to have a currency union without a political union. The value of the euro and dollar are not in the control of governments but by forces outside their nations. Since they don't back their currencies with gold the currency union will work. If it would be backed with gold, nations in the currency union would fight over how much gold from their treasuries they would have to contribute to the stability of the currency. Some may think others will use a currency union to steal gold from each other. Someone always feels cheated, so without a political union these these types of currency unions fall apart. Fiat currencies don't follow the same rules as currencies backed by something of value. Only old fashioned and out of date thinking would insist it is so.
As for the lira, there was some noise being made in early summer by members of the Italian northern League. This coincidentally occurred after the referendum rejections in late May and ended in early July at the time of the London bombings. I personally think the US was behind the Northern League anti-euro campaign and also the media reports of the possibility of a euro collapse during that time period. The Northern League wanted to not only reinstall the old lira, but to fixed its exchange rate to the US dollar. That in itself should tell you something at who is behind the attempts to collapse the euro. If the US could destroy the euro they would not have to invade or bomb Iran to prevent a IOB from using it. The anti-euro rhetoric at that time ended with the bombings in London. I believe the bombings were a warning to the US and UK financial interests to leave the euro alone.
To end the nostalgia for former currencies, the fixed exchange rate between the euro and the old currencies must be ended. The old currencies should be depreciated in value a given percentage per year until they are worthless. It is not possible for the old currencies to still have the same value they once did. If people saw that the old currencies are in fact worthless, the nostalgia will end.
Going back to the old currencies would create a multitude of problems. I'm sure it doesn't take a rocket scientist to figure out what they will be.
As for their not being enough euros in circulation, that is a very, very moot issue. This is the 21-st century, not the 18-th. There doesn't have to be oodles of paper currency in circulation. We are moving or at least suppose to be moving to a more cashless society. You will also note that there are not as many paper dollars in circulation to meet the needs of the world's business.
Much of the money in circulation is electronic. just numbers passed from one computer to another. I surprised Henry Liu doesn't know this and would make such an ignorant comment. the ECB doesn't need to print more euros, just authorize the use of the euro for oil or commodity transactions and create the money electronically as the US does with the dollar. Maybe they do need to increase the cash supply a percentage of what is electronically in circulation, and they did it during the past year. The Iranians wanted to open their bourse in March 2005 but were delayed by one year. This may be an agreement with the ECB not to open the bourse until the ECB can prepare the needed changes to its systems to accept the huge influx of euro transactions when oil sales would be denominated in euros. Software has to be adapted to such a change.
Printing or creating more euros would not affect inflation if it is done to meet the demand for more euros from outside the Eurozone. If it was done to increase the money supply without a real need such as to finance commodity sales, then inflation would result. But again, printing or creating more money that is accepted as a reserve currency would not affect inflation in the same manner if the currency was not accepted as a reserve currency. If Venezuela were to over print Bolivars, there would be inflation as Bolivars is not a reserve currency. A reserve currency as long as it has the faith of the Central Banks will always have value. Only when the faith is lost is the value lost too and inflation rises.
$this->bbcode_second_pass_quote('', 'T')he prospect of the dollar going up or down against other major currencies poses no threat dollar hegemony. The threat can only come from changes in the terms of trade. It is to the advantage of exporting economies to be paid in their own currencies and it is to the advantage of importing economies to pay in their own currencies. The US can pay for its imports and deficits in dollars because of dollar hegemony. OPEC countries cannot demand payment in their own currencies because there is no OPEC currency and the component currencies are all tied to the dollar and not gold. There is talk about a gold dinar but, like the euro, there is not enough gold to replace the dollar unless gold goes to $30K per ounce. All the talk of a dollar crashing is only Chicken Little indication of lack of clear thinking. The dollar has in fact fallen more than 30% from its peak against some currencies, but US asset prices have risen dramatically while the
current account deficit keeps rising. A rising dollar is no longer in the US national interest, because it will bring on domestic deflation.
I don't feel like taking a lot of time to respond to this part, but all i can say if there is no threat to dollar hegemony by the euro, then the US should have no problem sharing its hegemony with the euro. If the US has a problem with sharing its hegemony then the euro is a threat.
