A Skeptical Survivalist

I would think this would bode well for the dollar as the reserve currency if the Euro folded. However, I can’t help but think that the crushing debt and defaults  that would result as Greece, Spain, and Italy fell would throw us ALL into turmoil as a result. 

Italian Prime Minister Mario Monti -  ”And it is very, very important that we all take this with great attention in order to avoid that something that was meant to be the culminating point of the European construction — namely, the single currency — turns out to be, through psychological negative effects, a factor of disintegration of Europe.” 

Europe may not disintegrate tomorrow — and the Euro could some how squeak by in a two-speed European deal, but the deep divisions between those citizens who are now choking under the prospects of long-term, imposed debt burdens and the loss of sovereignty to German bankers and financiers could have the impact of a 21st century Versailles Treaty that dissolves the ties that have bound together the once fractious region.

The trouble with debt — if you don’t pay it off, it doesn’t go away. And some governments and households and companies in the euro zone in countries like Portugal, Ireland, Greece and Spain borrowed so heavily during the boom that there’s now serious doubt they’ll be able to repay the money. That raises some very uncomfortable choices. Governments can default, or they can be bailed out by tax payers in richer countries, or they can ask for debts to be written off, which puts the banks which lent the money in jeopardy. So some very difficult choices Europe is grappling with right now.

HOBSON: And Stephen why could this such a problem on this side of the Atlantic?

BEARD: Well, if this crisis deepens it could definitely harm the U.S. in a number of ways, but perhaps the most significant according to Simon Tillford at the Center for European Reform, would be the affect on the U.S. dollar.

SIMON TILLFORD: One thing you probably would see if the euro zone went into a period of renewed debt crisis would be a steep fall in the value the Euro and a corresponding rise of the dollar.

A more expensive dollar would make American goods and services more expensive for foreigners to buy, and that would make it more difficult for the U.S. to export its way out of trouble — a major part of Obama’s plan for economic recovery.

A good article evaluating the Chinese investments in US currency and why they can’t just “pull out”. Worth the full reading…

There is far more Chinese money in the U.S. than widely understood. Yet no disaster has occurred. This is because of the depth of American financial markets but also because the PRC cannot disinvest under conditions it clings tightly to – huge external surpluses and rigid balance of payments rules. The actual lesson of $1.6 trillion in June 2010, and counting, is no Chinese financial influence over America.

Mistaken impressions are caused in part by the incomplete picture. Further, when conditions finally change, Chinese funds will need to be monitored better than is done now. Most important, the PRC is not just pegged to the dollar, it is dependent. Addressing that dependence will yield a more open China.

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.”

Chinese Presiden Hu Jintao stated in mid January that the US dollar should not act as the world’s reserve currency of choice, and that China would work to replace the dollar with the renminbi.   His words adhere to a long standing Chinese policy of reforming the international monetary system, and echo a demand made by President Sarkozy of France.

In the near term, though, short of war or catastrophe the renminbi will struggle to replace the dollar. The greenback will stay preeminent in international money, not least thanks to the most powerful forces in the world of finance: habit and inertia.

Adding the renminbi won’t be easy anyway. For the SDR to be usable, the currencies in the basket have to be widely traded and freely convertible – and the renminbi is neither of those things. “Increasing the role of the SDR would clearly require a major leap in international policy coordination,” Strauss-Kahn said, according to a prepared text of his speech. “For this reason, I expect the global reserve asset system to evolve only gradually, and along with changes in the global economy.” An IMF paper released alongside Strauss-Kahn’s speech said the US dollar’s safe-haven role had been confirmed during the recent financial crisis and would remain the most important global reserve currency “for the foreseeable future”, Reuters said.