本文发表在 rolia.net 枫下论坛The Future of U.S. Dollar: Quo Vadis?
All of the major questions regarding the future of the global economic balance of power seem to intersect in a singular issue of the role of the U.S. dollar as the world’s reserve currency. The purpose of this article is to outline the most important factors that will determine the role, stability, and the exchange rate of the dollar in the next two years, as well as in the longer term of five to 10 years and beyond.
Alternatives to U.S. Dollar as the World’s Reserve Currency
Recent comments by high Chinese officials about replacing U.S. dollar as the reserve currency have fueled a frenzied debate among economists, policy makers, as well as the public. However, creating a new reserve medium takes a lot more than uttering a few remarks. The most important ingredients include a large market in low-risk and highly liquid securities, well-established financial markets and reasonable fiscal discipline.
Even after all the dramatic events of the last two years, there is no currency suitable to serve as the global reserve better than the U.S. dollar. While the euro has certainly established itself as a well-managed currency, the market in euro-denominated securities remains fragmented, with limited liquidity. While Japanese yen-denominated securities market is large, it is not as liquid as the market for U.S. treasuries. The Yen’s suitability is also limited by the fact that the Japanese public debt exceeds 100% of GDP for a number of years. Some commentators point to Chinese Renminbi (RMB) as a potential reserve currency of the future. However, the limitations of Chinese financial markets and the exchange rate policy will not make RMB eligible anytime soon. None of the synthetic currencies, such as the IMF’s SDR, are ripe to function as a reserve currency, either. In other words, despite all of its recent shortcomings, the U.S. dollar is still the only currency acceptable globally. There simply are no viable alternatives that could replace dollar within the next one or two decades.
Monetary policy and the carry trade
The Fed’s policy of near-zero short-term interest rates has been contributing to dollar’s weakness since last year. The Fed chairman Ben Bernanke has indicated a commitment to maintaining the low-interest environment in the foreseeable future. This policy has resulted in a serious U.S. unintended consequence. The cheap dollar borrowing has been fueling a massive carry trade in commodities and financial assets, which contributed to a dramatic rise in global asset prices throughout this year. The evidence of stockpiling commodities and equities is abundant. Figure 1 below shows weekly U.S. crude oil stocks. It is clear that the stock is higher in 2009 than it was in 2008, and it is also higher than the long run average of 326 million barrels
Figure 1 U.S. Crude Oil Stock Weekly, end of period, millions of barrels, excluding strategic petroleum reserve
Source: U.S. Energy Information Administration
The speed and synchronicity of this broad based rapid rise in prices of commodities and equities around the world leads to a fundamental question: what part of this run-up in prices can be attributed to the solid recovery in the global economy, and what part represents a brand new global asset bubble? If Figure 1 is any indication, the hoarding of assets does not seem to fuel the recovery; instead, it represents speculative demand financed by the dollar carry trade. If this is in fact a bubble, it is only a question of months, or possibly a year or two, before it bursts. While this may not bring down the entire global economy, it is guaranteed to leave thousands of speculators scrambling to close their short dollar positions. And that can only result in the appreciation of dollar and a fall in commodity and equity prices.
Does China’s Currency Stance Threaten the U.S. Dollar?
The Chinese government owns roughly $2 trillion of U.S. treasuries. Numerous commentators have voiced their concern about the vulnerability of the U.S. financial system that results from such a massive concentration of the U.S. government debt in foreign hands. The threat is based on a premise that the Chinese government could rapidly sell off the U.S. treasuries and induce crash of the U.S. dollar. We see two major reasons why such a scenario is highly unlikely. First, any selloff by the Chinese government would inevitably result in a depreciation of dollar, accompanied by a simultaneous appreciation of RMB relative to dollar, as well as to other major currencies. Paradoxically, this is exactly what many economists and policy makers have been trying to convince the Chinese government to do, and what the Chinese government has been so eager to avoid in order to preserve competitiveness of its exports.
The second reason why the Chinese holdings of U.S. Treasuries are unlikely to bring down the dollar is the vested interest of the European Union and Japan. Even if the Chinese government initiated the selloff, the Japanese and European governments would be quick to mop up the excess dollar-denominated securities to prevent the appreciation of their currencies against the dollar. To sum it up, there would be no upside for the Chinese government from the selloff.
Rebalancing the U.S. Trade and the “Transfer Problem”
The financial crisis of 2008 showed that the massive U.S. trade deficits are not sustainable in the long run. Over the period of the next ten to twenty years we will witness the return of the U.S. trade back to balance and possibly even a surplus.. This process will have profound long-run macroeconomic consequences, known in trade economics as the “transfer problem”. U.S., the deficit country, will gradually reduce the portion of its national income used for consumption; we have already seen the private saving skyrocket since the beginning of the Great Recession two years ago. Conversely, consumption in surplus countries will gradually increase. Given the home bias in domestic consumption, total demand (domestic and foreign) for U.S. goods and services will decrease, while total demand for foreign goods and services will increase. This re-aligning of global demand can be resolved in three ways: foreign inflation, U.S. deflation, or dollar depreciation. Assuming other countries successfully fend of inflationary pressures and U.S. avoids deflation, gradual depreciation of the U.S. dollar in the long run seems to be the most likely byproduct of the unwinding of the U.S. external debt.
Key Takeaway
Given the lack of viable alternatives to U.S. dollar as a global reserve currency, the massive divesting of dollar-denominated assets by countries with large trade surpluses is highly unlikely. Rather than crashing in a currency crisis, the U.S. dollar is much more likely to gradually and relatively slowly depreciate against major currencies, pressed by large twin deficits and low interest rates in the short run, and by the transfer resulting from trade rebalancing in the long run. In fact, a sudden appreciation of dollar, resulting from a burst of the current global asset bubble, is more likely in the near term than a sudden precipitous decline. Presently, world’s major economies have no choice but to continue absorbing large amounts of U.S. debt, if they do not want to risk appreciation of their currencies against dollar, and loss of competitiveness of their exports. Rebalancing the world trade will take many years, easily one or two decades, because Japan, Germany, China, and other large emerging economies will have to develop an alternative to their current export-driven model of economic growth, while the U.S. will have to reduce consumption relative to other countries and reallocate resources from the non-tradable sector to the production of exports.更多精彩文章及讨论，请光临枫下论坛 rolia.net
All of the major questions regarding the future of the global economic balance of power seem to intersect in a singular issue of the role of the U.S. dollar as the world’s reserve currency. The purpose of this article is to outline the most important factors that will determine the role, stability, and the exchange rate of the dollar in the next two years, as well as in the longer term of five to 10 years and beyond.
Alternatives to U.S. Dollar as the World’s Reserve Currency
Recent comments by high Chinese officials about replacing U.S. dollar as the reserve currency have fueled a frenzied debate among economists, policy makers, as well as the public. However, creating a new reserve medium takes a lot more than uttering a few remarks. The most important ingredients include a large market in low-risk and highly liquid securities, well-established financial markets and reasonable fiscal discipline.
Even after all the dramatic events of the last two years, there is no currency suitable to serve as the global reserve better than the U.S. dollar. While the euro has certainly established itself as a well-managed currency, the market in euro-denominated securities remains fragmented, with limited liquidity. While Japanese yen-denominated securities market is large, it is not as liquid as the market for U.S. treasuries. The Yen’s suitability is also limited by the fact that the Japanese public debt exceeds 100% of GDP for a number of years. Some commentators point to Chinese Renminbi (RMB) as a potential reserve currency of the future. However, the limitations of Chinese financial markets and the exchange rate policy will not make RMB eligible anytime soon. None of the synthetic currencies, such as the IMF’s SDR, are ripe to function as a reserve currency, either. In other words, despite all of its recent shortcomings, the U.S. dollar is still the only currency acceptable globally. There simply are no viable alternatives that could replace dollar within the next one or two decades.
Monetary policy and the carry trade
The Fed’s policy of near-zero short-term interest rates has been contributing to dollar’s weakness since last year. The Fed chairman Ben Bernanke has indicated a commitment to maintaining the low-interest environment in the foreseeable future. This policy has resulted in a serious U.S. unintended consequence. The cheap dollar borrowing has been fueling a massive carry trade in commodities and financial assets, which contributed to a dramatic rise in global asset prices throughout this year. The evidence of stockpiling commodities and equities is abundant. Figure 1 below shows weekly U.S. crude oil stocks. It is clear that the stock is higher in 2009 than it was in 2008, and it is also higher than the long run average of 326 million barrels
Figure 1 U.S. Crude Oil Stock Weekly, end of period, millions of barrels, excluding strategic petroleum reserve
Source: U.S. Energy Information Administration
The speed and synchronicity of this broad based rapid rise in prices of commodities and equities around the world leads to a fundamental question: what part of this run-up in prices can be attributed to the solid recovery in the global economy, and what part represents a brand new global asset bubble? If Figure 1 is any indication, the hoarding of assets does not seem to fuel the recovery; instead, it represents speculative demand financed by the dollar carry trade. If this is in fact a bubble, it is only a question of months, or possibly a year or two, before it bursts. While this may not bring down the entire global economy, it is guaranteed to leave thousands of speculators scrambling to close their short dollar positions. And that can only result in the appreciation of dollar and a fall in commodity and equity prices.
Does China’s Currency Stance Threaten the U.S. Dollar?
The Chinese government owns roughly $2 trillion of U.S. treasuries. Numerous commentators have voiced their concern about the vulnerability of the U.S. financial system that results from such a massive concentration of the U.S. government debt in foreign hands. The threat is based on a premise that the Chinese government could rapidly sell off the U.S. treasuries and induce crash of the U.S. dollar. We see two major reasons why such a scenario is highly unlikely. First, any selloff by the Chinese government would inevitably result in a depreciation of dollar, accompanied by a simultaneous appreciation of RMB relative to dollar, as well as to other major currencies. Paradoxically, this is exactly what many economists and policy makers have been trying to convince the Chinese government to do, and what the Chinese government has been so eager to avoid in order to preserve competitiveness of its exports.
The second reason why the Chinese holdings of U.S. Treasuries are unlikely to bring down the dollar is the vested interest of the European Union and Japan. Even if the Chinese government initiated the selloff, the Japanese and European governments would be quick to mop up the excess dollar-denominated securities to prevent the appreciation of their currencies against the dollar. To sum it up, there would be no upside for the Chinese government from the selloff.
Rebalancing the U.S. Trade and the “Transfer Problem”
The financial crisis of 2008 showed that the massive U.S. trade deficits are not sustainable in the long run. Over the period of the next ten to twenty years we will witness the return of the U.S. trade back to balance and possibly even a surplus.. This process will have profound long-run macroeconomic consequences, known in trade economics as the “transfer problem”. U.S., the deficit country, will gradually reduce the portion of its national income used for consumption; we have already seen the private saving skyrocket since the beginning of the Great Recession two years ago. Conversely, consumption in surplus countries will gradually increase. Given the home bias in domestic consumption, total demand (domestic and foreign) for U.S. goods and services will decrease, while total demand for foreign goods and services will increase. This re-aligning of global demand can be resolved in three ways: foreign inflation, U.S. deflation, or dollar depreciation. Assuming other countries successfully fend of inflationary pressures and U.S. avoids deflation, gradual depreciation of the U.S. dollar in the long run seems to be the most likely byproduct of the unwinding of the U.S. external debt.
Key Takeaway
Given the lack of viable alternatives to U.S. dollar as a global reserve currency, the massive divesting of dollar-denominated assets by countries with large trade surpluses is highly unlikely. Rather than crashing in a currency crisis, the U.S. dollar is much more likely to gradually and relatively slowly depreciate against major currencies, pressed by large twin deficits and low interest rates in the short run, and by the transfer resulting from trade rebalancing in the long run. In fact, a sudden appreciation of dollar, resulting from a burst of the current global asset bubble, is more likely in the near term than a sudden precipitous decline. Presently, world’s major economies have no choice but to continue absorbing large amounts of U.S. debt, if they do not want to risk appreciation of their currencies against dollar, and loss of competitiveness of their exports. Rebalancing the world trade will take many years, easily one or two decades, because Japan, Germany, China, and other large emerging economies will have to develop an alternative to their current export-driven model of economic growth, while the U.S. will have to reduce consumption relative to other countries and reallocate resources from the non-tradable sector to the production of exports.更多精彩文章及讨论，请光临枫下论坛 rolia.net