

The demise of the dollar - cwan
http://www.independent.co.uk/news/business/news/the-demise-of-the-dollar-1798175.html

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Perceval
It's an interesting threat, and one that we're going to have to keep out eye
on. But I have reservations about how effective multinational cooperation on
international monetary policy can be.

One of the reasons that the dollar is the global reserve currency is because
there is so much of it in circulation. No other currency is as liquid. Moving
oil purchases of a bloc of countries to a non-dollar basket of currencies
ought to be a significant hit to global demand for the dollar. But those same
countries will have to correspondingly increase the amount of their own
currency in global circulation, if the basket is to be used for international
trade contracts. Despite being a strong currency and having a strong central
bank, the EU has not pursued a policy of making the Euro a globally viable
reserve currency, precisely because they do not want to have to deal with the
problems that stem from creating the massive amounts of currency in
circulation necessary for global use.

However, something similar was done in the past in Europe. During the
transition to the Euro, the currency was brought into existence for use in
financial transactions three years before it was brought into physical
circulation
([http://en.wikipedia.org/wiki/Introduction_of_the_euro#Prepar...](http://en.wikipedia.org/wiki/Introduction_of_the_euro#Preparation_for_transition_to_the_euro)).
So the euro existed really as a reified basket of national currencies fixed
against each other in certain proportions. This was possible because of the
end goal of bringing into being a fully unified monetary system and because of
the close political integration of all the major players, who were subject to
the financial constraints necessary to keep their currency locked into a fixed
ratio with the others.

It's not clear to me that the Arab nations, Iran, Russia, and China can
sustain the level of economic cooperation necessary to make their basket of
currencies stick. Further, it's not clear that they can maintain stable
financial policies at home, while allowing enough of their currency to be used
abroad. Secondary foreign markets for a nation's currency can have difficult-
to-predict effects (e.g. the Eurodollar market:
<http://en.wikipedia.org/wiki/Eurodollar>). For a nation like China, who keeps
very close control over their currency, won't allow it to float, and doesn't
allow full convertibility
([http://www.chinadaily.com.cn/hkedition/2009-09/18/content_87...](http://www.chinadaily.com.cn/hkedition/2009-09/18/content_8706002.htm)),
it will be quite difficult for it to seriously play a role in supplanting the
dollar.

Having one actor (the Fed) is far less prone to problems than having half a
dozen or more actors facing coordination and cooperation problems when faced
with currency speculators operating in secondary currency markets. Just look
at how Soros was able to tear the Pound Sterling out of the ERM by massively
shorting it
([http://en.wikipedia.org/wiki/European_Exchange_Rate_Mechanis...](http://en.wikipedia.org/wiki/European_Exchange_Rate_Mechanism#Pound_sterling.27s_forced_withdrawal_from_the_ERM)).

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jeromec
Great insights, but I think we have to do more than keep our eye on it. I
think it's imperative that we transition significantly to non-oil based energy
consumption (as the Obama administration is encouraging). The problem is we've
allowed ourselves to become too dependent on spending, accounting for 70% of
our economy. Americans have become accustomed to cheap products, and gas,
while at the same time turning a nose up at menial jobs. If we truly want to
keep ourselves safer, from needing to go to war in the Middle East, then
maintaining reliance/placing value on oil means gas prices comfortably around
$10 (or more) along with the corresponding inflation and further vanishment of
any middle class. An unemployment rate of 10% would begin to look normal.

I think we need to do two major things: 1. increase the transition to high
mpg/non-gas cars; 2. Begin to make things again and increase exports taking
advantage of increased purchasing power abroad. (cheaper electricity would be
third)

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warfangle
I wish we would make things again. I really do. There's so much tech that can
be invested in to make a cleaner, more beautiful America - and yet all the
factories for it are going overseas (Germany, Taiwan, and so forth). Why are
we so far behind on the high-tech manufacturing curve? Did we just rest on our
laurels for too long, or is something more nefarious afoot?

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DanielBMarkham
It's a question that's easy enough to answer.

Pick a product. Then go do the research and work to determine how much it
would take to make it here. Then repeat that process with somewhere else.

This is the same process that companies go through. There's nothing mysterious
about it.

~~~
warfangle
Why is it more expensive here than in, say, Germany? Is it just the unions?
Can't be, 'cause Germany has trade unions too. If anything, they're bigger
there - The German Confederate of Trade Unions claims 25% of the working
populace as members. Is it the healthcare? Oh, wait. Is it the education? Hrm.
Is it pork? Is it 'cause we've got a lot of tornados, or is it the hurricanes?

It just doesn't make much sense. What makes it cheaper to operate a chip or
solar panel factory in Dresden than in, say, North Carolina?

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jeromec
I have to agree with DanielBMarkham, and say a factory movement conspiracy is
less likely than real world circumstances. (I'm not saying other conspiracies
are as unlikely) I was in a store years ago talking with a guy doing contract
work there, changing lighting etc. As the owner he was doing it himself
complaining that "no one wants to work."

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idm
My own take on this is that, while it's possible for a bunch of countries to
invent a new pseudo-currency, it's probably easier to use an existing pseudo-
currency, and I think the IMF's XDR is a likely candidate:

<http://en.wikipedia.org/wiki/Special_Drawing_Rights>

This is a weighted average of several currencies, in addition to the USD. I
think it's much more likely that, if oil is to be traded in any non-USD
currency, it will first be traded in a pseudo-currency that includes the USD.

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anigbrowl
Fisk has a bit of a chip on his shoulder. I think he's a fantastic reporter,
but I'm little skeptical of his analytical abilities. Of course, he has earned
the right to be cynical, but in his editorial pieces it's sometimes hard to
tell if he's watching or wishing.

The flaw in the theory here is that the US basically guarantees Europe's
military security and so there's a tradeoff with our economic security. This
is one reason that the US, while occasionally grumbling about the huge cost of
maintaining a nuclear umbrella, makes few moves to encourage any kind of pan-
European security force.

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davidw
Ugh. "The dollar is falling! The dollar is falling!" is one of the four memes
of the redditocolypse. It's one of those things that people don't have
rational discussions about, and nothing ever gets resolved.

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byoung2
A lot can and will happen between now and 2018. True, Britain will likely be a
Euro state, but China's inevitable slowdown over the next decade will likely
stall the transition away from the dollar.

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prat
"China's inevitable slowdown" - what is the basis of that prediction?

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cr0tus
oh thats an easy call. even as we speak they are engaged in a stimulus program
every bit as strange as our own and even stranger - their banks are FORCED to
make loans!

the pressure to keep the growth machine going in china has been immense...but
nothing grows to the sky, particularly in a global recession. the chinese will
learn the hard way, as we are, not to fight economic cycles.

its not an issue of when china will have a major crash, but when and how deep

~~~
prat
I agree - the question always IS when and not whether:) slowdown has a non-
zero probability and will happen - the nontrivial part is predicting whether
in a decade or five?

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cr0tus
these oil-valuing articles have been coming out nonstop over the last few
years. i'd be amazed if anything comes of it. washington simply cannot allow
the dollar to be usurped, and frankly neither can these other nations. the
dollar may be a toilet-paper currency, but everyone is holding it...who can
afford to have the dollar lose substantial value? no one. i have to give the
Fed credit, they've made america's problems the world's problems.

