| Central banks lose faith in the dollar | 2005-01-27 23:06 9 comments |
 by Flemming FunchThe world's central banks have begun, slowly and carefully, to switch away from the dollar, to more stable currencies. See Financial Times. That is no small matter. It is a long story, but, in brief, most countries keep large amounts of dollars in reserve. Dollars that nothing gets bought for, but that are kept, well, as reserves, and because some important commodies, like oil, are sold almost exclusively in dollars. And, ok, it is not that those dollars aren't used, but there's continuously a very large amount of them that are not. Which is what allows the U.S economy to run with a huge deficit, in a way that no other economy can. Normally a country has to have an approximate balance in what it exports and imports. But the fact that lots of countries keep US dollars that they've paid for, but which they aren't getting goods for, allows the US to import way way more than it exports, and to a large degree to get it simply by the act of printing money, or, rather, moving some numbers around in computers. If the dollar wasn't used in such a manner, the US economy would be unsustainable, and might have to crash. Anyway, the global system is so tied together that none of those other central banks would really want that. But they also want their reserves to be stable, so they slowly change things. And mostly they speak very diplomatically about it. Maybe a little less so the Chinese guy in Davos this week: "The U.S. dollar is no longer -- in our opinion is no longer -- (seen) as a stable currency, and is devaluating all the time, and that's putting troubles all the time... So the real issue is how to change the regime from a U.S. dollar pegging ... to a more manageable ... reference ... say Euros, yen, dollars -- those kind of more diversified systems ... If you do this, in the beginning you have some kind of initial shock. You have to deal with some devaluation pressures." Now, even though I'd find a certain enjoyment in looking forward to being able to blame a crashing US economy on the suicidal fiscal policies of Bush's regime, I also get paid most of the time in dollars. Which are worth crap right now. So it is not entirely a good thing that it will get worse. Actually it is worse for anybody who uses dollars outside the U.S. than inside, where, I'm sure, things seem pretty normal. |