“The dollar is in the process of losing its reserve currency status and the
pace of this process and which currency or currencies gain as a result
will be infl uenced substantially, though not exclusively, by politics”
THE CULPRIT IS US TAXES Better to bash the foreigners, though. ageing Europeans or Chinese ran the
Th ere are many problems with the idea Th e dollar is in the process of losing its world currency and preserved it as a
that the present situation in the US is due reserve currency status and the pace of low-infl ation zone. Better still if we had a
to China. First, the assumption held by this process and which currency or shared reserve currency so that the
most US manufacturers is that fi xing an currencies gain as a result will be benefi ts were more widespread, but
exchange rate is tantamount to a dirty, infl uenced substantially, though not politics will determine whether and when
evil, communist plot. Fixed exchange exclusively, by politics. Gaining reserve that happens and whether and when you
rates are as legitimate as fl oating ones – currency status is heaven as you write should sell the dollar.
indeed, it is the fl oating ones that are cheques that nobody ever cashes. But
most open to manipulative depreciations. losing reserve currency status is hell as
Th e Chinese held their currency fi xed on holders of all those cheques you and your
PROFILE – FACT BOX
the same rate for 10 years – hardly predecessors ever wrote, present them to
manipulation – and reserve in-fl ows did be paid. America will use its political and
lead to a build up of demand-pull military might to delay this process as
infl ation that would have appreciated the long as possible. Oddly enough, it is
real exchange rate, which is how countries probably in America’s interest to promote
with fi xed rates adjust. a new shared reserve currency now rather
China’s trade surplus was large as a than to wait until China is ready to take
percentage of Chinese GDP, but in dollar over the mantle of issuer of the world’s
terms it was dwarfed by the US defi cit. reserve currency.
Th e smaller surplus could not have
‘caused’ the far larger defi cit. Th e biggest THE POLITICS OF INFLATION
rise in surpluses up to the decision to One of the problems for the dollar is that
revalue the renminbi occurred in the oil the US is not cut out to be the guardian
exporting countries. Th irdly, outside of of the world’s reserve currency. It would
America, everyone knows that the US be far better if Switzerland, the ECB or
defi cit was caused by the US saving too China ran the world’s reserve currency,
little and spending too much and this was because they have the demographics for
entirely consistent with their over-easy it. What drags down a reserve currency is
Avinash Persaud
monetary and fi scal policy. If nothing else the temptation to engage in excessive
Career highlights:
changed, a revaluation of the renminbi of spending that will ultimately be
Avinash Persaud is chairman of
the kind promoted by US manufacturers infl ationary once it has undermined
Intelligence Capital, Emeritus Professor
would not have changed the US current- confi dence in the currency. Old retired
of Gresham College, chairman of the
account defi cit appreciably, because it populations living off fi xed-interest
Warwick Commission and member of the
would not have changed the savings- investments would rather see defl ation
UN Commission of Experts into Financial
investment imbalance. However, it would than infl ation – that is why the Japanese Reform. He is also a member of the
have plunged China into recession and were such reluctant ‘refl aters’ in the Gerson Lehrman Group expert network.
undermined the fi nancing of the US 1990s. Young populations with large The Gerson Lehrman Group (GLG) helps
defi cit. Th is may yet happen. Th e right mortgages would rather have a bit of leading companies and investment fi rms
policy way to solve global imbalances infl ation to push up the value of their learn more about current business issues
would have been tighter fi scal policy in homes. Relatively speaking, the US has a
by arranging interactions with members
the US – higher taxes or lower spending. younger more indebted population than
of the GLG Councils, a network of more
Th is would have narrowed the savings- in Europe or even in China and will
than 200,000 academics, scientists,
investment imbalance, lowered the twin therefore take more risks with infl ation
industry practitioners, and other
defi cits and capped infl ationary pressures. than others. Better for the world if the
professionals worldwide.
38 SUMMER 2009
36-3836-38 political markets.indd 38political markets.indd 38 1/6/091/6/09 11:58:4811:58:48Professional Investor Summer 09.40 40 4/6/09 15:41:00
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