A Skeptical Survivalist

Here’s an description of currency devaluation that doesn’t blame it all on Quantitative Easing.  As with anything complicated, there are numerous contributing factors. Thanks to Eric G for passing on the link.

Dr. Eichengreen is the George C. Pardee and Helen N. Pardee professor of economics and political science at the University of California, Berkeley. His new book is “Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System.” Full story on WSJ

The greenback, in other words, is not just America’s currency. It’s the world’s.

But as astonishing as that is, what may be even more astonishing is this: The dollar’s reign is coming to an end.

I believe that over the next 10 years, we’re going to see a profound shift toward a world in which several currencies compete for dominance.

The impact of such a shift will be equally profound, with implications for, among other things, the stability of exchange rates, the stability of financial markets, the ease with which the U.S. will be able to finance budget and current-account deficits, and whether the Fed can follow a policy of benign neglect toward the dollar.

In this new monetary world, moreover, the U.S. government will not be able to finance its budget deficits so cheaply, since there will no longer be as big an appetite for U.S. Treasury securities on the part of foreign central banks.

Nor will the U.S. be able to run such large trade and current-account deficits, since financing them will become more expensive. Narrowing the current-account deficit will require exporting more, which will mean making U.S. goods more competitive on foreign markets. That in turn means that the dollar will have to fall on foreign-exchange markets—helping U.S. exporters and hurting those companies that export to the U.S.

My calculations suggest that the dollar will have to fall by roughly 20%. Because the prices of imported goods will rise in the U.S., living standards will be reduced by about 1.5% of GDP—$225 billion in today’s dollars. That is the equivalent to a half-year of normal economic growth. While this is not an economic disaster, Americans will definitely feel it in the wallet.

On the other hand, the next time the U.S. has a real-estate bubble, we won’t have the Chinese helping us blow it.

Since the global financial crisis, major economies including China and Russia have called for less dependence on the US dollar in international trade and investment, and accelerated steps to promote their own currencies on a global basis.

French President Nicolas Sarkozy came up with an ambitious agenda to reform the de facto US dollar-dominated global monetary regime and wanted to put the Chinese yuan into the basket of global reserve currencies.

However, there was no progress at the two-day conference on the yuan internationalization roadmap though the international community are encouraging the world’s second-largest economy to take quicker steps.

BEIJING (Dow Jones)—Selling U.S. Treasury bonds is a “natural move” for China to control risks, the China Daily on Thursday quoted Zhang Monan, a researcher at a state-run think tank, as saying.

A loose U.S. monetary policy will dilute the value of the dollar and China’s dollar assets in the long term, the report cited Zhang, a researcher at the State Information Center, a think tank under the National Development and Reform Commission, as saying.

China should exchange some of its Treasury bond holdings for shares in infrastructure construction programs in the U.S., the report cited Zhang as saying. China could also use its foreign exchange reserves to support the overseas expansion of Chinese enterprises or supplement domestic pension programs, he said.

Pan American Silver Corp., the world’s fourth-largest silver producer, said it’s shifting its currency holdings into Canadian dollars, betting the U.S. dollar may fall further.

The world’s reserve currencies are struggling to maintain their value amid “ridiculous” debt levels, Chief Executive Officer Geoffrey Burns said today on a conference call with analysts. Gold and silver look “extremely appealing” as alternative long-term investments, he said.

“We diversified some of our currency holdings into Canadian dollars away from U.S. dollars to provide more stability in the event we do see continued weakness in the U.S. dollar,” Burns said. “It’s not just the U.S. dollar — the euro, the Japanese yen are going to have extreme difficulty hanging onto their long-term values as a commodity of trade.”