The Dollar Is Safe for Now — Seeking Alpha

Interesting article about the dollar’s reserve currency status:

  1. There’s not enough gold to replace China’s dollars
  2. Investors are taking on more risk
  3. Borrowing dollars is still expensive
  4. We can’t change the reserve currency overnight

Perhaps the most interesting is when going on to talk about SDRs:

Doing the shopping in SDRs

But is there another way? Part of the speculation about the dollar’s future came after Zhou Xiaochuan, the governor of the People’s Bank of China, published a paper arguing for an end to the dollar standard.

He argues that any system in which a reserve currency is also a national currency is flawed. Instead we should use a super-sovereign reserve currency managed by a global institution. In particular, he suggests Special Drawing Rights (SDRs), which are essentially an internal unit of account at the International Monetary Fund (IMF) and a handful of other international institutions.

Most economists rejected this idea outright. Now, it’s fair to say that economists don’t have a great track record when it comes to spotting how major shifts in the financial system will play out. Take the 1970s, by when decades of growth in crossborder capital flows had made it impossible to sustain the Bretton Woods system, in which the dollar was pegged to gold and other currencies were pegged to the dollar.

It seems that most analysts thought that switching to floating rates would reduce cross-currency flows – a conclusion that seems hopelessly misguided given our hyperactive modern foreign exchange markets. According to economic historian Charles Kindleberger in Manias, Panics, and Crashes:

“Most economists had thought that the adoption of floating exchange rates would kill the movement of interest-sensitive capital and that once currencies were floating central banks would be able to follow independent monetary policies without untoward external effects. Economists differed about whether speculative capital movements would be stabilizing or occasionally seriously destabilizing; the general view was that fear of exchange losses would deter capital flows. That view proved mistaken; many banks regarded currencies as a new asset class to be traded for a profit.”

Still, it certainly looks like there would be a lot of issues with adopting something like the SDR as a reserve currency. The issues with the renminbi apply on an even larger scale. There are no assets priced or traded in SDRs; not even bank accounts in SDRs. While we can never be certain about these things, the prospect of SDRs – or anything else – replacing the dollar in the next few years look very remote.

[From The Dollar Is Safe for Now — Seeking Alpha]

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