Wednesday, September 28, 2011

Yuan for the money?

My latest read of the Economist had a particularly disturbing but compelling argument that it is only a matter of time before the Yuan will be the Worlds reserve currency. The article describes it as an overdue change, although I get the impression that it is not desirable, but inevitable and the alternatives eventually being virtually disastrous. I don't like it, but I realize now that it will probably happen, maybe before 2020. My preference is of course the Aussie dollar, but the chances are quite remote.

11 comments:

Dr Clam said...

To sound terribly old-fashioned, from this vantage point Bretton Woods looks pretty good. A fiat currency is a scary thing.

And... I'm still going for 2017 as the year the wheels fall off the RMP, so I don't think there's much chance of the yuan becoming the world's reserve currency by 2020.

Marco said...

I prefer the Mundell-Fleming model with floating exchange rates. This places less emphasis on a reserve currency, and less burden on a reserve currency as less countries insist on fixing their own currencies to the reserve (or gold)

Marco said...

If the world does decide to fix exchanges to gold again, SouthAfrica and Australia are well placed to be defacto reserve currencies due to our large reserves of gold.

Dr Clam said...

"In 2007 China (with 276 tonnes) overtook South Africa as the world's largest gold producer"

D'oh...

Dr Clam said...

The Mundell-Fleming model is a descriptive model, not a proscriptive framework ... unless I am missing something critical in my search engineering?

Marco said...

As far as gold goes, easy to exploit reserves are what counts, rather than production. Thus quantitative easing would be more difficult with the smaller, expensive to access RMP reserves than those of Aus or South Africa, regardless of production levels.

Marco said...

It is a descriptive model, but accepting it means that one does not need to proscribe value, excepting that which gives continuing confidence in a particular currency. Even with the current fiat system countries hold varying amounts of gold. This allows for an independent source of confidence and store of value.

Dr Clam said...

Hmm, I thought the problem with South African gold at present was that it was so expensive to mine?

I can't see what you are proposing when you say you prefer the Mundell-Fleming model. Do you mean we should just remove all restrictions on movements of capital and let a thousand hyperinflations bloom, let the last currency standing win?

Marco said...

More or less, although I don't know why you would think a thousand hyper inflations would bloom? Most countries have varying levels of gold reserves as backstops of some kind. Floating exchange rates and leaving it to the market works well for the countries that do that, notably Australia. Having floating convertible currencies should be the presumed best practice suggested by the IMF.

Monetary policy is generally tuned for a particular inflation setting. If instead of a bar of gold, you have a basket of commodities, whose sum of which you fix a currency to, it should give a more stable basis for any currency

Dr Clam said...

If instead of a bar of gold, you have a basket of commodities, whose sum of which you fix a currency to, it should give a more stable basis for any currency

I like that. We could *define* A$50 as the price of a carton of VB and a packet of Winfield Red, for instance.

Marco said...

Well.... Preferably something without so much arbitrary tax associated with it. I guess it is more about an inflation target adjusted for tax on the items. Perhaps a formalization of the Big Mac index.