No Return to Gold Standard Coming But Dollar’s Importance Fading

[Vi-Jay 218]

No Return to Gold Standard Coming But Dollars Importance Fading, Peter Morici Says

By Aaron Task | Daily Ticker 1 hour 26 minutes ago

What was once unthinkable for mainstream economists has now become irresponsible to dismiss: The dollar's reserve status is in jeopardy, thanks to soaring U.S. deficits, political gridlock and the Fed's super-easy policies.

The lack of a suitable replacement is probably the best thing the dollar has going for it right now. Europe's debt crisis has revealed the euro's structural flaws and China's yuan remains immature and pegged to the greenback.

"The Chinese are as much a captive of their currency system as say the Germans and German banks are right now of the euro," says economist Peter Morici, a business professor at the University of Maryland. "They've created a wonderful export contraption of which we are both hostage."

Gold is most often cited as suitable alternative to the dollar, and its continued strength amid the dollar's recent rally vs. the euro has only reinforced its adherence.

Morici is bullish on gold "its downside risks are not large," he says but does not believe a return to the gold standard is likely or practical.

"The relative importance of the dollar will shrink [but] there's not enough gold in the world to mint coins to support commerce," he says. "A gold standard would require what we had in the late 19th century in the United States: chronic deflation and high unemployment that goes with it."

Rather than abandoning the dollar in favor of gold, Morici foresees a "bi-metallic standard" in which gold is viewed as something akin to a co-reserve currency for global transactions.

"Contracts will be written to some degree for payment of gold or gold will be a contingent payment," he says. Meanwhile, central banks are increasing their gold holdings rather than rely solely on Treasuries or other currencies backed by dollar.

"That's not because it's a good thing or a bad thing, it's simply what is happening," he says. "Unless the U.S. finds a way to lower unemployment to 6% and not experience significant inflation in the process, [the dollar] will diminish in importance and gold will be enhanced in importance."

_________________________________________________________________

I'm still pondering which direction currency evolution is heading but, one thing for sure..,

Edited May 26, 2011 by Vi-Jay

[scandal 951]

Here's a good read on this topic - http://www.imf.org/external/pubs/ft/fandd/2009/09/cohen.htm

It summarizes all the known flaws in EUR, JPY, and Renminbi as potential reserve currencies, then suggests IMF Special Drawing Rights (SDRs) although noting significant downsides to this too:

Most recently, debate has turned to the possibility of a new world reserve currency, most likely building on the already existing SDR. Stimulated in particular by comments from Chinese and Russian officials, the idea has been endorsed by a United Nations commission headed by former World Bank chief economist Joseph Stiglitz. Some see a start in the new bonds to be issued by the IMF, which China and Russia aim to use to diversify a portion of their reserves away from the dollar. But here too the obstacles are daunting. Even with the new $250 billion allocation of SDRs just implemented by the IMF, total SDRs in existence will amount to less than 5 percent of global reserves. Can enough be created to make a significant difference? Can supply be provided more flexibly? And most critically, who would have the authority to manage it? Without an effective government to back it, a world reserve currency of any kind—whether based on the SDR or invented de novo—would have difficulty attaining even a minimal level of credibility. The ambiguities of the euro area’s governance structure would seem trivial by comparison.

Central bank holdings do have large sway over where they put their foreign reserves. But I'll believe the greenback is dead if - and only if - the markets, not central banks, tell me so. When the spot and futures markets for WTI and Brent crude, for gold, for FX and eurodollar futures are no longer denominated or cash settled to USD, that will be the day to toll the bell for USD reserve currency, not before. I'm not seeing that day coming anytime soon.

[Vi-Jay 218]

Here's a good read on this topic - http://www.imf.org/external/pubs/ft/fandd/2009/09/cohen.htm

Thanks I will check it out.

Central bank holdings do have large sway over where they put their foreign reserves. But I'll believe the greenback is dead if - and only if - the markets, not central banks, tell me so. When the spot and futures markets for WTI and Brent crude, for gold, for FX and eurodollar futures are no longer denominated or cash settled to USD, that will be the day to toll the bell for USD reserve currency, not before. I'm not seeing that day coming anytime soon.

I read an article recently, predicted the Dollar would be replaced by the Chinese Yuan as soon as five years.

I will try to dig that up and post it later.