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One world currency

post #1 of 14
Thread Starter 
This past week on Monday, March 17, Russia unveiled a proposal they were planning to bring before the G-20 summit. It's a proposal for a new world reserve currency called Special Drawing Rights or SDR's. No wonder it was the very next day was the day that the dollar cratered. One of the interesting angles to this development is that China supports their oldest enemy, Russia, in this proposal.

Here are a few of the news stories:

There's been a lot of talk about the coming inflation as a result of the injections of huge amounts of fiat money into the world's monetary systems in order to stimulate their economies. The interesting thing about inflation is that its primary harm is when measured against other currencies. A weak national currency affects that nation's ability to trade, and the prices of imported products. BUT -- if all world currencies are inflating at the same rate, then there is no net effect on trade and import prices. Thus I see this new world currency as a way for all nations to inflate their money supplies and avoid the most serious effects. No doubt this is China's motive -- to maintain their trade with the US and to be able to continue converting their economy to a consumer economy. It will be interesting to see what the official US response is, since the US is the country most in need of an antidote to inflation of imported goods.

The question: is this a good idea? What are your thoughts?
post #2 of 14
I'm not sure I completely understand the concept. Would a world currency mean that it's monetary value is supported from a centralized international "joint account", where the fluctuations of any one nations worth affects everyone else's?
post #3 of 14
Originally Posted by Skippymjp View Post
I'm not sure I completely understand the concept. Would a world currency mean that it's monetary value is supported from a centralized international "joint account", where the fluctuations of any one nations worth affects everyone else's?
Currency specialist Avinash Persaud, a member of the U.N. panel, told a Reuters Funds Summit on Wednesday that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket.
The SDR and the old Ecu are essentially combinations of currencies, weighted to a constituent's economic clout, which can be valued against other currencies and against those inside the basket.

I'd forgotten about the old European Currency Unit. Could that even work with more currencies involved?
post #4 of 14
Thread Starter 
What I gather from the articles is that they haven't fleshed out the details; probabably that's what's coming at the G-20. There's mention of a global regulatory body, a new currency issued by international banks, and replacing the dollar as the reserve currency. One of the articles mentions the creation of a Eurasian currency, kind of like the Euro except covering all of Europe and Asia; they had some goofy name for it I can't pronounce, let alone spell. I don't know if that's the first step or an alternate proposal.
post #5 of 14
I don't know enough about economics to offer a vaild opinion. I don't know if ever like the idea of a "one world _________" (fill-in-the-blank with anything).
post #6 of 14
I don't like this at all. The whole concept to me is actually pretty scary.
post #7 of 14
I am against it b/c of my religious beliefs. One world currency is part of the Bible prophecy of end times. I'm against it but I know it's coming.

I'm against the microchipping humans too. That's just creepy!
post #8 of 14
Wow - I am astounded that The Heritage Foundation called China's backing of this idea "surprising." I'm used to thinking of them as being right wing but informed and "up" on issues like this. I still can't get my mouth to close.

On a separate note, this is actually the first time I'm seeing that it is supposedly Russia's idea. I knew Russia was going to put it forward, but this is definitely The People's Republic of China's idea.

That said...

First of all, I think the whole world makes a mistake in referring to The People's Republic of China as "China." It is still communist China, and to not forget that, we ought to refer to it as the PRC.

The PRC and the U.S. have long-standing issues with the relationship of their currencies. VERY SIMPLY, the argument of the U.S. has been that our balance of trade with the PRC is so skewed because the yuan is undervalued.

For people unfamiliar with the situation, the yuan doesn't trade in international markets like other currencies, the People's Central Bank sets the rate, the yuan doesn't float, and the PRC's Central Bank limits yuan exchange transactions.

For a long time Gary has been of the opinion that the PRC has wanted to displace the U.S. dollar as the primary currency of international trade settlement, and their actions since the advent of the Euro do demonstrate this. The advent of the Euro provided the first opportunity in that regard, and Gary's been writing about the PRC and this desire to displace the dollar since... the late 1990s. At the time, he viewed the issuance of the Euro as the death of the dollar (long term). In fact, we just sent out the same note we wrote in 2002 to remind people that this is NOT a new issue.

Of course the way this issue is being handled now is new. The size of "China's" economy has also changed. Depending upon how you measure it, The People's Republic of China has become either the world's third or fourth largest economy, behind the U.S., Japan, and in some lists, Germany. ....and they are under pressure to let the yuan float, especially in today's world with international trade falling apart and as currencies around the world are weakening, the PRC is under pressure to let the yuan fall. The PRC's argument is that it should be against a basket of currencies, not just the dollar.

Bottom line, this is about politics and purchasing power. The PRC is into blaming the U.S and its lack of regulation for the current world crisis and likes to point to its "prudent" policies of restricting capital investment in the country. That said, the reason The Heritage Foundation was "surprised" at the PRC's position on this issue is that the PRC has been one of the largest buyers of U.S. Treasuries for some time - and owns over $1 trillion in U.S. debt (so if the dollar weakens, the value of their investment weakens). Currency traders and debt traders argue there wasn't a lot of choice. Realistically, the PRC happily financed the U.S. trade deficit by buying low-yielding treasuries for years, as this basically subsidized growth in the PRC through U.S. consumerism (the bulk of Chinese exports to the U.S. are in consumer items and clothes). But then from their own argument, how prudent was it to offer cheap vendor financing to a big customer with a lot of debt?

Gary's take on the announcement when it first came out was that this was a signal from the PRC that they're going to scale back the size of their dollar accumulation. He does NOT expect them to dump any of their holdings. But if they scale back treasury purchases, this is potentially a problem for the U.S. We write to investment professionals, so our recent note by itself isn't very helpful. But I just found an article that explains it pretty well: Reuters, March 24, 2009 China hints at reduction in US dollar holdings

However.... depending upon how things play out longer term, Gary doesn't rule out the PRC effectively "shooting itself in the foot" at some point under various scenarios (that include Taiwan and the Spratley Islands).

One world currency? I doubt it happens in my life time. The yuan becoming one of the largest currencies in international settlement?... that's a different issue.

post #9 of 14
First of all, they're talking about a reserve currency, not a currency in public hands. Right now, the dollar serves that purpose, although the Euro is gaining in favor in some circles.

The reason it's surprising that China would support it is that they have been fiddling with their currency for years, distorting world trade, and they potentially have the most to lose here.
post #10 of 14
Yes, but the importance of "reserve currency" is that is what is used to settle international trade. And yes, the PRC and the U.S. have been dickering for years about how the PRC should fiddle with its currency.

I'm not sure I agree that they have the most to lose. They stand to lose a lot depending upon what happens to the value of the dollar and the U.S. treasuries they hold... but given their dollar reserves and their U.S. Treasury holdings, it could be seen that they have a lot of muscle.

...and it simply surprised me that this new approach to an old pissing match comes as "news" to a place like The Heritage Foundation.

post #11 of 14
Thread Starter 
A new reserve currency is the first step toward a one world currency. Now THAT would be very bad for the US dollar and US markets.

Laurie, I'd be interested in your take on this:
post #12 of 14
...what we're experiencing is US government manipulation of the financial markets on a scale that's wholly unprecedented.
Totally agree. The Fed sparked a huge rally with its announcement it was going to buy Treasuries:

Theoretically they didn't enter the market until the following week, so the moves the week before could have been just funds reacting to the news. As you know, the bond market is not my forte.

But in the currency markets, part of the movement there was just Bernanke putting his foot in his mouth. When Russia/China first came out with their position, Bernanke said it should be considered - and the dollar tanked. He clarified his statement, and the dollar "corrected".

But I would totally agree that Clinton probably cut a deal with China, and the Fed has been manipulating the in markets on a scale "wholly unprecedented." We believe they've been meddling in the equity markets too. Too many times in recent months the market (either Dow or S&P 500) has closed just above an important level - and I mean just above. The most recent was on March 19, when the Dow managed to close at 7400.80 after a really volatile day.

...but as to your point about the Fed buying Treasuries with new money - we'd agree with that one too.

post #13 of 14

I knew this was published last month and didn't bookmark it so couldn't find it. But here it is - the Fed buying Treasuries: they bought $2.9B and are going to purchase $300B

Fed buys $2.9B in Treasuries

post #14 of 14
Thread Starter 
Cozy little deal the Fed and the Treasury have got going there.
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