Ahead of the G20 meetings all sorts of ideas have been floated. One such idea came from the Chinese. They now question the reserve currency status of the dollar. More specifically Chinese administration is voicing concerns about lending too much to the US.
At the heart of the problem is the “unfair advantage” reserve currency country enjoys devoid of balance of payments concerns. However, there is much confusion about the nature of money. Money has 2 main roles: 1) medium of exchange 2) Store of value.
These two roles are not only different but also in conflict at times. What makes a currency an acceptable medium of exchange may hinder its store of value status. This distinction is very critical to grasp in fragile times like this.
There is no doubt that the dollar’s position as a medium of exchange has been working well. Dollar is still the most quoted currency in international trade, even when it seemed to be on a free fall against most currencies in the world. Despite much noise from producers we never saw oil prices, for example, quoted in Euros.
On the store of value front countries have all the right to complain about having too much dollar in their reserve. However, this is more to do with those countries trying to manage their currencies against the USD, often driven by their mercantilist policies. They can simply change their monetary policy orientation and rebalance their reserves. This simply does not need G20 level attention. Global financial system has enough issues for the time being and can do without yet another curve ball thrown at it. especially given the fact that the aforementioned two roles of a currency is not properly understood.
I am surprised the Chinese have brought this up in the run up to the G20 meetings. However, I am even more surprised that Tim Geithner entertained the notion, leading to a fall in dollar the last week. As far as the currency markets are concerned it is “ugly parade” out there. All countries are trying to have weak currencies to compensate for the fall in their respective domestic demands with exports. G20 needs to concentrate on getting countries supporting their domestic demands by any policy means possible. Early indications are that there will not be a coordinated fiscal policy response. On the monetary front central banks have been very active and will continue to do so. The only concrete result I expect from the heads of states is to strengthen the hand of the IMF. Heavy handed regulation for the financial sector can prove counter productive in the short term but looks inevitable.
At the heart of the problem is the “unfair advantage” reserve currency country enjoys devoid of balance of payments concerns. However, there is much confusion about the nature of money. Money has 2 main roles: 1) medium of exchange 2) Store of value.
These two roles are not only different but also in conflict at times. What makes a currency an acceptable medium of exchange may hinder its store of value status. This distinction is very critical to grasp in fragile times like this.
There is no doubt that the dollar’s position as a medium of exchange has been working well. Dollar is still the most quoted currency in international trade, even when it seemed to be on a free fall against most currencies in the world. Despite much noise from producers we never saw oil prices, for example, quoted in Euros.
On the store of value front countries have all the right to complain about having too much dollar in their reserve. However, this is more to do with those countries trying to manage their currencies against the USD, often driven by their mercantilist policies. They can simply change their monetary policy orientation and rebalance their reserves. This simply does not need G20 level attention. Global financial system has enough issues for the time being and can do without yet another curve ball thrown at it. especially given the fact that the aforementioned two roles of a currency is not properly understood.
I am surprised the Chinese have brought this up in the run up to the G20 meetings. However, I am even more surprised that Tim Geithner entertained the notion, leading to a fall in dollar the last week. As far as the currency markets are concerned it is “ugly parade” out there. All countries are trying to have weak currencies to compensate for the fall in their respective domestic demands with exports. G20 needs to concentrate on getting countries supporting their domestic demands by any policy means possible. Early indications are that there will not be a coordinated fiscal policy response. On the monetary front central banks have been very active and will continue to do so. The only concrete result I expect from the heads of states is to strengthen the hand of the IMF. Heavy handed regulation for the financial sector can prove counter productive in the short term but looks inevitable.
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