Monthly Archive for August, 2011

By Michael Blim, 3 Quarks Daily

Call them aftershocks: the sovereign debt crises and the return to zero growth and recession in developed countries, along with the current world stock market “correction.” Add in the wry spectacle of the flight to U.S. bonds as doubt that America will ever pay off its debts, and you have the rather sorry description of a world economy still reeling from the earthquake of 2008.

Different sets of players do their bits. Economists and the world financial elite keep trying to treat each crisis discreetly, finding a cause here, a remedy there, and hoping that the rest of the world economy will keep vamping as they fix each one. Financial market traders, selling on good news, and buying on bad, or the other way around if it suits them, put words to the numbers. “The markets are worried about Libya,” ‘the market is pricing in the impact of unemployment rates on overall demand,” and so on.  The “market” in this turn of phrase is like an open-source mind transforming words into numbers, which of course makes one wonder how those chatty traders have mind enough to change the numbers back into words again. Finally, nightly news reports put the two tracks, words and numbers, back together, and each of us tries to understand what just happened, and with more preoccupation what might happen tomorrow.

Each of the estates in their way is trying to handle the aftershocks of the crisis that began in the fall of 2008. The economists and financial elite are trying to end them, or contain their damage. The market players are betting on scenarios that will make them money. And the news media are trying to write the story as others tell it to them.

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Barry Eichengreen, Project Syndicate

BERKELEY – For more than a half-century, the US dollar has been not only America’s currency, but the world’s as well. It has been the dominant unit used in cross-border transactions and the principal asset held as reserves by central banks and governments.

But, already before the recent debt-ceiling imbroglio, the dollar had begun to lose its luster. Its share in the identified foreign-exchange reserves of central banks, for example, had fallen to just over 60%, from 70% a decade ago.

The explanation is simple: the United States no longer dominates the world economy to the extent that it did in the past. It makes sense that the international monetary system should follow the global economy in becoming more multipolar. Just as the US now has to share the world stage with other economies, the dollar will have to make room for other international currencies.

In my recent book Exorbitant Privilege: The Rise and Fall of the Dollar, I described a future in which the dollar and the euro would be the dominant global currencies. And, peering ten and more years down the road, I anticipated a potential international role for the Chinese renminbi.

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By Mark Blyth, Foreign Affairs

Last week’s EU agreement to refinance Greece’s debt seems to have calmed markets concerned with the possible default of Greece and subsequent contagion in the eurozone. But EU refinancing was not the only solution on offer: in June, an entirely different solution was hinted at from an unlikely source.

When Chinese Premier Wen Jiabao was on a tour of European capitals last month, he stressed two things at each stop: that a stable eurozone is vital to China and that China is Europe’s friend. Indeed, from Beijing’s perspective, when it comes to Europe, self-interest and altruism neatly coincide. If China were to buy only half of all outstanding Greek sovereign debt (a bargain at around $220 billion, a fraction of China’s dollar assets), it would not only resolve the eurozone crisis and add to Chinese prestige but it would help give Beijing the sort of reserve asset that it needs to diversify its holdings out of dollars. Currently, 70 percent of China’s reserves are in dollars, and China does not even make the list of the top 40 holders of Greek debt. But why would China not take such an opportunity?

For one, China probably has as little faith in the EU’s ability to solve its debt crisis over the long run as do the rest of the world’s financial markets, more bailouts notwithstanding. But another answer is possible — one that links the 2008 financial crisis and the 2011 European bond market crisis to a possible Chinese end run around the 2007 Foreign Investment and National Security Act. This U.S. law makes it hard for China to diversify out of its $3 trillion-plus holdings of U.S. dollars and buy sensitive U.S. assets such as aerospace, technology, and defense-related companies.

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