So much discussion - mostly blather - has bubbled about in the past few weeks by the usual mindless pundits that a reprise of my 2009 series on the nature and purpose of a world reserve currency, and an examination of candidates therefor, must be posted. This series first appeared the week of April 13, 2009 in five parts.
World Reserve Currency. I
This is the first in a short series about the necessary and sufficient conditions for a currency to be a reserve currency for the world.
First, what is a world reserve currency ?
A world reserve currency is a currency that has three characteristics. The currency is (I) held by central banks of many nations to provide a base of value for their local currencies; (II) the currency must be widely used in international trade; and (III) the currency must have a widely accepted value (even if such value fluctuates moderately). The second condition relates to the practical aspects of money. Money is used to trade goods and services. The third condition is required for nations and people to be willing to hold it for long periods of time - they must be satisfied they can buy something with it eventually.
This second characteristic is where gold and silver fail. There is simply not enough gold & silver in the world and it is bulky and heavy. I know that first hand. The gold bugs say the value of gold & silver should rise to the level needed to supply enough money to be useful. Unfortunately, that level is so far above their intrinsic value as jewelry or for industrial purposes that the third condition is violated. [By the way, I include silver as it was widely used before paper currencies to provide small change - viz., ready money.]
Now, let's deal with condition I. What is obvious about that condition ? tick ... tick ... tick ... the music is running out.
A world reserve currency MUST ... and I mean that MUST ... be exported to those other central banks. How else can it be their reserves ? Any nation that proposes to have its currency become a world reserve currency MUST run a large current account deficit. That eliminates the euro for now. Major European nations like Germany want to have export driven economies. Euros just won't flow overseas until European behavior changes. And the same applies to the yen. And the same applies to the Swiss franc. And even the Chinese yuan. The British pound could once have qualified - it once was a world reserve currency before the two world wars.
Only the dollar is left standing ... for now. Other nations' behavior may change in the future, however. I'll write more on this subject this week.
Word of the Day
"Facticity" - noun [$100]
Facticity means the condition or quality of being a fact; factuality.
Sentence: Pundits blathering about the dollar as the world reserve currency simply don't think at all about the nature of its facticity. But I suppose the assumption that pundits think at all is wrong: they just blather or blab or bloviate.