More Whining About the Dollar

Another country has been heard from on the subject of dollar dominance. India has joined Russia and China in pressing for reforms to the world’s financial system.

From Bloomberg:

Suresh Tendulkar, an economic adviser to Indian Prime Minister Manmohan Singh, said he is urging the government to diversify its $264.6 billion foreign-exchange reserves and hold fewer dollars.

“The major part of Indian reserves is in dollars — that is something that’s a problem for us,” Tendulkar, chairman of the Prime Minister’s Economic Advisory Council, said in an interview yesterday in Aix-en-Provence, France, where he was attending an economic conference.

Singh is preparing to join leaders from the Group of Eight industrialized nations — the U.S., Japan, Germany, Britain, France, Italy, Canada and Russia — at a summit in Italy next week which is due to tackle the global economy. China and Brazil will also send representative to the summit.

As the talks have neared, China and Russia have stepped up calls for a rethink of how global currency reserves are composed and managed, underlining a power shift to emerging markets from the developed nations that spawned the financial crisis.

“There should be a system to maintain the stability of the major reserve currencies,” Former Chinese Vice Premier Zeng Peiyan said in a speech in Beijing yesterday, highlighting China’s concerns about a global financial system dominated by the dollar.

Fiscal and current-account deficits must be supervised as “your currency is likely to become my problem,” said Zeng, who is now the head of a research center under the government’s top economic planning agency. The People’s Bank of China said June 26 that the International Monetary Fund should manage more of members’ reserves.

Frankly, this is all beginning to sound like so much hot air. You know as well as I that there the alternatives are few and far between for any country holding dollars. The idea that the U.S. or any other country is going to allow some supra-national body to monitor its fiscal and current account deficits is a pipe dream.

No matter what store of value a country chooses to put its foreign reserves into, there is going to be some risk of adverse events. Any system that works towards lessening the risk to the holder of excess reserves has to at the same time work to the detriment of the supplier of the reserves. The supplier of the reserves has little incentive to voluntarily sacrifice to better the lot of the holder of the reserves since the asset it provides is in demand. Effectively, the supplier of the reserves holds the high cards.

No one is holding a gun to the heads of the BRICs. They can diversify whenever they wish. Selling their vast holdings of dollars quickly would of course work against their own currencies via-a-vis their exchange rate with the dollar. Since most of them tend to manage their currencies in a manner that undervalues them this isn’t an outcome that’s desirable from their viewpoint. So they find themselves caught in a paradox. Their solution at this time seems to be for greater external control of U.S. economic policy. That’s never going to fly so they need to figure out some other alternative or resign themselves to blowing more hot air.

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About Tom Lindmark 401 Articles

I’m not sure that credentials mean much when it comes to writing about things but people seem to want to see them, so briefly here are mine. I have an undergraduate degree in economics from an undistinguished Midwestern university and masters in international business from an equally undistinguished Southwestern University. I spent a number of years working for large banks lending to lots of different industries. For the past few years, I’ve been engaged in real estate finance – primarily for commercial projects. Like a lot of other finance guys, I’m looking for a job at this point in time.

Given all of that, I suggest that you take what I write with the appropriate grain of salt. I try and figure out what’s behind the news but suspect that I’m often delusional. Nevertheless, I keep throwing things out there and occasionally it sticks. I do read the comments that readers leave and to the extent I can reply to them. I also reply to all emails so feel free to contact me if you want to discuss something at more length. Oh, I also have a very thick skin, so if you disagree feel free to say so.

Enjoy what I write and let me know when I’m off base – I probably won’t agree with you but don’t be shy.

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1 Comment on More Whining About the Dollar

  1. Agreements to trade in national currencies, balance clearing mechanisms etc. Bonds related to the the price of gold(a re commodification of the monetary form of value). Changes to the IMF’s SDR’s to pay interest and to increase accessibility. There is obviously a large market for financial instruments that preserve value by either avoiding the dollar or are weighted constructs including other currencies. The operations of international markets supported the dollars rise and are bringing about its decline. Perhaps it is impolite for other nationals to gloat but isn’t this Social Darwinism at its best. The dollar is a weakened beast that will be torn down by impersonal forces. Why aren’t you cheering.

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