Tuesday, April 14, 2009

World Reserve Currency. II.

In response to a question, the reason for these posts about a "World Reserve Currency" is the recent public suggestions by Red China and others that a new reserve currency replace the US dollar. In my thinking about the matter, the realization that those proposing such and the pundits discussing same had no understanding about what they were bloviating quickly become evident.

Yesterday the general criterion for a currency to be a "World Reserve Currency" were listed and the defects of gold and silver for such role were explained.

Today I elaborate on criterion I, viz. "The currency is held by central banks of many nations to provide a base of value for their local currencies."

The currency is, or will be, held by the central banks of many nations to provide a base of value for their local currencies. That's what being a "reserve currency" means, The Reserve Currency is the core monetary base of those nations, in addition to whatever small amounts of gold or silver they own. Let's call the Reserve Currency "RC" for neutrality of the discussion, and the various local currencies "LC". The money supply of those nations becomes inextricably tied to the amount of RC their central banks hold. If the nation expands LC too much compared to its RC, it will likely experience inflation and the perception by its people that the value of their LC is being diminished.

The nation will need RC for this international trade. If too much LC exists and creates more and more demand for imports (that must be paid in RC), that demand for RC to purchase those will slowly drive down the value of LC. Temporarily this demand for RC can be filled by loans. But the amount of loans is limited or default risk grows too large. Thus one can see that the nation must have some net inflows of RC - Reserve Currency - broadly over the long term to have an LC - local currency - that maintains its value.

One can see how and why the local currencies of nations like Argentina and Ukraine can collapse: they simply run out of dollars for international trade and debt service as too much local currency is printed compared to the amounts of reserve currencies they hold. And one can see that without the RC, the population of the nation will be unable to operate in international trade or to purchase anything not produced internally. That people will lose confidence of the local currency's value quite rapidly in any crisis or stress. Such a government can maintain the value of the LC internally only be restricting the freedom of the people at act in international trade, whihc means foregoing the enormous benefits of having a free economy with free people.

Tomorrow I address Criterion II. Over this week I plan to explore all the dimensions of this fascinating subject.

Goldman, Sachs

Hmmm ... GS wants to sell stock to be able to pay its employees more. Is that a reason to buy the stock ? I think not, without serious pay cuts over prior practice. Let them buy it themselves and go private.

Word of the Day

"Temerity" - noun [$10]; from the card file
Temerity means 1. rashness; 2. audacity, impudence.
Sentence: I suppose one could call it temerity for Red China to suggest a new world reserve currency is needed, but I call it simple stupidity on the part of leader of its Communist Party on what the economics of freedom are.

Le Mot du Jour

"Raillerie" - noun, feminine.
"Railleur, railleuse" - adjective and noun (M form)
"Railleusement" - adverb
Raillerie means mockery, scoffing.
Railleur means (adjective) mocking, derisive; (noun) scoffer, mocker.
Railleusement means mockingly, derisively, scoffingly.
La Phrase: L'homme du bunker est le railleur du dirigeant de Chine rouge aujourd'hui.
Sentence: Bunkerman is the mocker of the leader of Red China today.

30 comments:

Bud said...

RC.......yup that was my favorite drink when i was 7.........RC cola

Bud said...

temerity ??? is a $10 word ? are you kidding me



time to raise rates ben

Bud said...

does ching ming gook have the best sinker in the major leagues ??


i think so



LET'S GO YANKEES !!!!!



PS......are all yankee fans douchebags ??


i think so



LET's GO YANKEES !!!!!

Bud said...

great quarter by super-beefer GS......i love the fact that they gonna pay the TARP back


call barney frank on his bluff......." i am happy to accept the TARP money back "


if obama and barney want GS not to pay it back...........then go on the record and say so


the dems been playin a very dangerous 'wall street is evil' game.......ok.......take your money back ........good luck

Bud said...

uhhhh.........just checked the red sox score


jon lester..........pffffffffffffffft

Bunkerman said...

look, when I was 16, it was a $10 word for me. And not all my readers are at the lofty level of Iowa State scholars.

;)

Spin-em said...

Chien-Ming Wang..era 28...well done sir

mern said...

after 37 yrs harry kalas finally got to calling a winning world series for the phils (he wasnt allowed to broadcast in 80).

RIP HARRY!!!!!!!

watched the rays/yankees last night. giradi was brilliant to bring swisher, in the 8th. ive got him penciled in, starting next tuesday.

RC cola...........LOL. i thought that was stictly limited to da valley, right spinny?

Bunkerman said...

they sold RC in my hometown in Ohio.

Along with YooHoo, Frosty root beer etc.

mern said...

can anyone get a borrow on C? just curious.

with a 24 billion $ market cap, that seems real expensive, since they r worth absolutely nothing.

Spin-em said...

yep...RC plant was right here..as punks..you could go up and get a cup on the house....pretty cool...gone

Spin-em said...

Mission Accomplished..where's your flight suit??

Bud said...

hmmmm..........sounds like mern is trading again


'just curious'


lmaoooooooooooooooooooo



PS......ask bob for some trades.....i heard he good with the QID

mfl59 said...

atta boy mern....get stuck in baby....lots of profits out there waiting for you...

Bud did you buy the new high-tech golf umbrella? should knock a stroke off your score....

mern said...

remember to cement my job at bear/jpm i had to give my trading capital to a 3rd party.

its still all in triple aaa, munis, which have bounced back nicely.

down 7% in 13%, but if u included the dividends, im down 4%.

i was just thinking about the tank. so its been hot in there, recently?

Spin-em said...

PS......ask bob for some trades.....i heard he good with the QID

it was old "joke" yesterday.... so why do you think it would work today?

Spin-em said...

Bud did you buy the new high-tech golf umbrella?


LMAOOOOOOOOOOOOOOOOOOOOOOOOO

"good one mike"

Bud said...

are all yankee fans douchebags ??

i think so


LET'S GO YANKEES !!!!!



oh wait.......twice in the same day......was that joke funny the second time too ??


i think so



tete de noeud indeed

Spin-em said...

ohhh..I hurt the boyz feelings..he lashes out..."Im sorry"

Bud said...

lmaooooooooooooooooooooooo




i may have swung too hard there

mfl59 said...

"GS with a great quarter"

wake up son....wake the fkkk up....

Bunkerman said...

I believe there's some arb play against the convert preferred taht is sucking up all the C borrows.

Spin-em said...

Bud_2 they have zilch domestic buying power

"jim" thinks Im a smarty pants when I plagiarize.....

Bud said...

mern you would do yourself a big favor by following the tank




' L'aquarium de requin est un feu !!!!! '

Bunkerman said...

jeez, Bud ... is "Jim" giving you a cut for recuiting ?

lĂȘche-cul

;)

mfl59 said...

I hear jim offering free monthly trials....


Yes the tank must be on fire indeed....

Bunkerman said...

every once in awhile I get some Spam from "Jim" .. I just delete them without opening.

Maybe I'm missing the opportunity of the century.

hahahahahahahahahahahah

;)

Bud said...

l'homme de bunker est le railleur l'aquarium de requin

i think that works



PS............i have no clue what leche-cul means

Bunkerman said...

"l'homme de bunker est le railleur l'aquarium de requin"

very good ... close, but not quite.

the "du" in my sentence is "de le". Your l'aquarium is a mandatory contraction of "le + aquarium". When both the "de le" and the contraction are present, the contraction dominates.

So you mean to say,

l'homme de bunker est le railleur de l'aquarium de requin.

Oui, je raille l'aquarium de requin.

"Yes, I scoff at the Shark Tank"

;)

[I make those mistakes all the even afer months of work]

Bunkerman said...

hmmm I posted lĂȘche-cul once.

:))