The almighty dollar: Despite the greatest economic crisis since
the Great
Depression and most aggressive quantitative easing in U.S. and
perhaps
world history, it remains the global currency of choice.
Why the
Dollar is and Will Remain the Key Global Reserve Currency (Handelsblatt,
Germany)
"In spite
of all the gloomy predictions, we should consider the fact that the United
States still weighs in with roughly one quarter of the global economy. Furthermore, the U.S. economy is robust and innovative. It responds
flexibly to external shock and it operates within the world's largest single
market - even if Europe has more to offer when measured by economic output. ... What
currency in the foreseeable future could replace the dollar as the reserve
currency? The euro, the yen, and the yuan, at least,
don't come into consideration, nor does any other currency."
Can the dollar be replaced by the euro, the Chinese yuan or the Japanese yen as the world's reserve currency? Not by a long shot, argues former banker Herbert Walter.
As the key global reserve
currency, the dollar has no substitute, despite any uneasiness over the policy
of monetary and fiscal doping in the U.S. economy. The euro, in any case, is
not an option as a successor.
Since the outbreak of the
financial crisis, one question has been of particular interest to economists: Should
we be concerned about the U.S. dollar? Recently, even America lawmakers have
asked the question, such as those in the state of Virginia, who were defending
a bill for a new state currency. With their initiative, they were hoping to
prevent Virginia from being pulled into the abyss by the unsound monetary and
fiscal policies of the federal government.
It is true, after years of crisis, the clean-up in the United
States differs significantly from that in Europe. The U.S. Federal Reserve has
fired up its printing presses and is financing, to an almost unlimited degree,
the liquidity needs of the financial system, and at interest rates of nearly
zero percent. In addition, the government is increasingly involved with
providing direct financial support to the states. Last year, for example, the
federal government had more than $1.7 trillion in federal bonds on its books,
the majority of which have terms of maturity of ten to thirty years.
U.S. President Barack Obama is negotiating the "fiscal
cliff" like a professional mountaineer. The "fiscal cliff"
refers to a law that mandates automatic budget cuts according to the lawnmower
principle - if lawmakers are unable to find other ways and means of reducing
the budget hole. And at the moment, that isn't working. Obama is opposed to
spending cuts, and Republicans are opposed to tax increases.
These shenanigans have been going on for a good number of
months, and on March 1st, the law took hold: $1.2 trillion in expenditures must
be cut by 2021, and $85 billion of those cuts - or eight percent of the budget
- must be made this year.
These are huge sums, but they have little to do with any significant
fiscal consolidation. As it stands, despite this budget hatchet, the U.S. federal
deficit will remain at more than five percent this year; and even in the mid-term,
a moderately-balanced budget isn't one of Obama's objectives.
Specifically, this means that the United States will
continue to live on borrowed money, doping its economy with credit-financed
demand and obtaining the money to do so almost entirely from abroad. It is this
outlook that motivated Virginia lawmakers to consider a state currency; and it
is this that has economists puzzling over how long the U.S. dollar will be able
to continue to fulfill its role as the key global reserve currency.
Which currency could
replace the dollar?
One could surely endlessly theorize on this subject, and one
could even approach the issue pragmatically. Could the dollar play its dominant
role if Americans, like we Germans, saved their money and consistently imported
more goods than they export? That is hard to imagine, since in the event, U.S.
dollars would be in demand and rather than being put into savings, they would
be immediately spent again on U.S. goods.
In spite of all the gloomy predictions, we should consider
the fact that the United States still weighs in with roughly one quarter of the
global economy. Furthermore, the U.S. economy is robust and innovative. It responds
flexibly to external shock and it operates within the world's largest single
market - even if Europe has more to offer when measured by economic output. But
the single European market doesn't function as well as that in the U.S. - not by
a long shot.
Posted By Worldmeets.US
And furthermore: What currency in the foreseeable future could
replace the dollar as the reserve currency? The euro, the yen, and the yuan, at least, don't come into consideration, nor does any
other currency.
The euro has indeed become the world's second global
currency, but as long as this "artificial" currency lacks the
political underpinnings of a functioning European fiscal union, the euro will
never be able to replace the dollar.
The yen and yuan are traditional
national currencies of export-dependent countries with high domestic savings rates
that cover the financial needs of the state. This automatically prevents other
states from "stashing" adequate amounts of these currencies in
reserve. That means from the outset, from a global perspective, these
currencies cannot have liquidity that approaches that of the dollar. And this
applies equally to every other currency on the globe.
For me, all of this leads to one conclusion: The dollar is -
as our chancellor would say - without alternative. It will continue to be global
reserve currency number one for some time to come.
*Herbert Walter, 58,
was head of the Dresdner Bank from 2003 to 2009. Prior to that, he was
responsible for private and commercial clients around the globe. Today Walter
is an independent consultant and entrepreneur with the financial portal
WhoFinance.de.
