Money Blues

Greenback As Reserve Currency
Here's a cool column about money.

The all-pervasive US dollar is essentially the world's pricing marker for all leading goods, commodities and trade.

Given that, it can be argued that the world's currencies in effect derive their pricing by and large from the US dollar.

They are "de-facto derivatives" of the US dollar.

In this light, it is difficult to see how any of these currencies can usurp the underlying US dollar reserve in the foreseeable future, if at all.

Interestingly, none of the proponents are offering any notion of "sound" money as an alternative, but rather a redistribution of the current currency pie.

In effect the same game but a different split of the spoils.

But herein lies the dilemma: all the fiat currencies rest on essentially the same operating model.

An argument that the US dollar is doomed is an argument that the fiat currency model is doomed.

Instead, these non-reserve currencies are likely to face collapse first. The US dollar will be the last to go; a US dollar collapse would drag all into the abyss.

Maybe the real argument being presented by the pundits is whether imminent doom is awaiting the fiat currency system.

On this question, history is not very kind. It teaches us that all fiat currencies eventually reach their intrinsic value, zero. Some sooner than others, but the same fate awaits all.

So perhaps it is time to actually question and debate the nature of the money we currently use. One thing is for sure, the debate will eventually occur.

Yes. But it seems everybody who says fiat money is bad wants to tie currencies to something - most often gold - that you get the feeling that it's gold pundits wanting their assets to inflate in value in some proportion to the scarcity of gold.

Of course in the mean time, the Chinese are selling of US bonds.

CHINA sold $US34 billion ($38 billion) worth of US government bonds in December, raising fears that Beijing is using its financial muscle to signal that it has lost confidence in American economic policy.

Figures from December show that, following the sale, China is no longer the largest overseas holder of US treasury bonds. Beijing ended the year with $US755.4 billion worth of US government debt, compared to Japan's $US768.8 billion.

Since the subprime crisis that began in the US grew to engulf the global economy, China's leaders have repeatedly expressed concerns about US policy. December's $US34 billion sell-off made only a tiny dent in Beijing's total holdings of US assets, which amount to well in excess of $US1 trillion when stakes in American companies, as well as treasury bills, are taken into account.

But the news intensified concerns about China's appetite for bankrolling ever-widening American deficits. The Premier, Wen Jiabao, told reporters last year: ''We have made a huge amount of loans to the United States. Of course we are concerned about the safety of our assets. To be honest, I'm a little bit worried.''

When Timothy Geithner, the US treasury secretary, visited China last June, he sought to reassure his hosts. ''The US is committed to a strong and stable international financial system,'' he told them. The Obama administration fully recognises that the US has a special responsibility to play in this regard, and we fully appreciate that exercising this special responsibility begins at home.''

But Allan Meltzer, an economics professor at Carnegie Mellon University in Pittsburgh, said China's bond sales should be a wake-up call for Washington. ''The Chinese are worried that we have unsustainable debt levels, and we do not have a policy for dealing with it,'' he said.

China's sales contributed to a record drop in foreign holdings of short-term debt in December. Net overseas holdings of short-term bills fell by $US53 billion.

So doesn't this mean that China is actually not a believer in the Greenback? It's been said fr years that the day the Japanese sold their US bonds was the day a lot of this system was going to unravel. Japan for its part has held on to their US Bonds essentially to keep the whole mess going, even when it's put a big hole in its own economy to do so. The smart thing would have been to sell those bonds in the early 1990s. That would have burst quite a few bubbles around the planet along the way. By not doing so, Japan really played nice and is paying the price now.

You can see why China would want to sell out while it could... but what are they going to hold instead?