Speculation: New world reserve currency (Part I)

This article is under speculation, because this is what it is at best, at the moment.

There is growing concern that we might be seeing a new world currency being developed at the moment. Continued euro financial crisis could inevitably put the global finance sector into a tail spin. And why would we say that?

And this is why. There are 23 countries in the European Union, and almost all of them are in a financial crisis of some sort; Greece, Italy, Spain, Finland, Ireland, Portugal are the bigger economies to bear the burden of the crisis so far. Imagine this, the 10-year treasury notes from the Government of Italy have a yield of 7.30% (as of today), and Greece with a whopping 30.71%.  Compare this to an individual in Canada, who can get loans at prime + 2% (5.5%) at the major banks without much problem. What does this mean? This means that an individual in Canada is more capable of running their own finances, and is more able to pay back the loan taken, as compared to a government that can raise taxes, and implement different policies to increase its revenues and decrease deficits. In the end, this is just absurd. As mentioned in our earlier posts (here and here), CAPM is dead, and this is the proof that no government is safe from such a systematic failure and a run on their banks.

So what is next in the play?

I suspect that such a run on the banks may be possible, and will be inevitable given the chicken-show in DC, that may essentially bring chaos to the U.S financial system once more. And that is when things get ugly.

The reason for USD to being the world reserve currency is due to its inherent stability and the trust of various nations (not all, Iraq went off greenback in 2000 – do you know what happened to the country after?), in the ability of the Government of U.S to pay off its debts. As they say it, reputation is like fine china, it takes one mistake to break it into a thousand pieces. And one more mistake by the U.S could mean that the USD may lose its status.

It has already been mentioned by the ex-chief of IMF, Dominique Strauss-Kahn here that a new reserve currency will greatly benefit the world, and many top tier countries have been investing more in the SDRs. The UN conference on Trade and Development (UNCTAD) was the first multinational report to suggest replacing the dollar, even though other countries such as China (WSJ), Russia and France have suggested it, some more blatantly as others.

But why do we care about it? It matters to everyone that resides in North America, or is effected by the USD in one way or another. It will weaken the USD as the world’s biggest commodity (oil) will not be traded in USD anymore, thus decreasing the demand, and overcrowding the market with USD with the trillions in dollars that have been printed under QE I and QE II and the not-so-apparent QEIII (which we discussed here).

There is much to discuss here, and it is postponed for another post.




UN wants new global currency to replace dollar (The Telegraph)

China takes aim at dollar (WSJ)

World bank makes case for a new reserve currency (The Globe and Mail)

Foreign exchange – Saddam turns his back on greenbacks (NY Time)

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