1

Published in FT March 12, 2013 11:47 am

Dollar is the only serious reserve layer
!y "ohn Plender
#tron$ mar%ets and recoverin$ $ro&th &ill ensure dominance
Predictions o' the decline o' the dollar as the &orld(s re)eminent reserve currency have
been t&o a enny since the onset o' the credit crunch in 2007*
They have been $iven amle headroom by dollar &ea%ness associated &ith theFederal
+eserve(s ,uantitative easin$ ro$ramme* The bi$ holders o' 'orei$n e-chan$e
reserves in .sia and the Middle /ast have, naturally enou$h, been deserate to
diversi'y a&ay 'rom the currency mar%et conse,uences o' 0# monetary easin$*
/ven a'ter $lobal caital 'lo&ed bac% into the dollar &hen &orries over the euro1one
soverei$n debt crisis&ere at their ea% last year, there &ere still lenty o' analysts
&illin$ to romote the cause o' the renminbi as a 'uture relacement 'or the dollar*
#ceticism is nonetheless in order* 2ote, 'irstly, that the short)term 'iscal roblems o'
the 0# are tendin$ to distract attention 'rom the economic 'undamentals* February(s
better than e-ected emloyment 'i$uresunderlined once a$ain the relative stren$th o'
the 0# cyclical osition* The tra3ectory o' the 'iscal de'icit is on a declinin$ trend in
relation to $ross domestic roduct* Mean&hile, the outcome o' the Fed(s latest ban%
stress tests is a reminder that the 0# ban%in$ system is in much better health than that
o' the euro1one* . li%ely $ro&th rate o' around 2 er cent or more this year is not bad
'or an economy that has been throu$h a balance sheet recession and still has a bi$
debt overhan$* 4omare and contrast &ith 1ero $ro&th or &orse 'or /uroe* 5t is a sa'e
bet, too, that the 0# &ill be the 'irst to retreat 'rom ,uantitative easin$ and see hi$her
real interest rates*
The structural side o' the economy is also in 'ar better shae than that o' /uroe or
"aan in terms o' the 'le-ibility o' mar%ets, caacity 'or innovation and the otential no&
'or ener$y indeendence* 5ndeed, the most stri%in$ 'eature o' the develoed &orld
economy is 3ust ho& e-traordinarily olarised it has become: 2orth .merica versus the
rest* That all surely oints in the direction o' dollar stren$th rather than &ea%ness*
.n e,ually comellin$ reason 'or sceticism about dollar naysayin$ is &hat is bein$ said
about the currency in 4hina* "in 6hon$-ia, head o' the +esearch 5nstitute at The
Peole(s !an% o' 4hina, ar$ues that the dollar(s $lobal dominance &ill continue,
re'lectin$ 0# economic, 'inancial and military o&er* 7ritin$ in the 8''icial Monetary
and Financial 5nstitutions !ulletin in a ersonal caacity he says that 'or the 'oreseeable
'uture the $lobal currency system &ill oerate in a 'rame&or% o' 91:4;, &ith the dollar as
the continuin$ suer reserve currency sulemented by 'our smaller reserve currencies:
2
the euro and the ound in /uroe, and the "aanese yen and the 4hinese renminbi in
.sia*
For Mr "in the debt crisis in the euro area has demonstrated the structural &ea%ness o'
the currency* Ta%in$ into account the euro(s artial reliance on the dollar(s ayments
in'rastructure 'or its cross)border transactions, he sees it as a lar$e re$ional reserve
currency that &ill continue to hold second lace to the dollar, &hile the ound &ill
remain an imortant layer on the bac% o' <ondon(s role in international 'inance*
Finally, he adds that &hile many believe "aan has been unsuccess'ul in romotin$ the
yen(s internationalisation, the yen remains .sia(s most international currency, not least
because yen settlement accounts 'or 30)40 er cent o' "aan(s total 'orei$n trade, a
level that 4hina &ill ta%e years to catch u* 5n 'act, most o' the 4hinese olicy ma%ers 5
have tal%ed to over the ast year see reserve currency status 'or the renminbi as a very
lon$)term ro3ect*
The 0#, &ith all the advanta$es o' dee 'inancial mar%ets, stron$ roerty ri$hts and
incumbency, is thus set to remain to do$ in the reserve currency set)u* .nd the dollar
may be set 'or rene&ed stren$th* /verythin$ in currency mar%ets is, a'ter all, relative*
The euro1one crisis, &hile in abeyance, is unresolved, &hich leaves the euro loo%in$
sha%y a$ainst the dollar* 5n "aan, .benomics oints to continuin$ currency &ea%ness*
4urrencies o' countries that emer$ed &ell 'rom the 'inancial crisis such as 4anada and
.ustralia no& loo% vulnerable*
5' &e are headin$ 'or a eriod o' dollar stren$th, it &ill be a bi$ chan$e o' $ear 'or the
$lobal economy* The conse,uences 'or the emer$in$ mar%ets in articular could be
uncom'ortable* =eor$e Ma$nus, senior economic adviser at 0!#, oints out that a
stron$ dollar has historically been bad 'or <atin .merica and .sia and &ould ose a
threat to the commodities boom* The threat &ould coincide &ith 4hina(s $ro&th
becomin$ less commodity intensive as its economy rebalances a&ay 'rom investment
to&ards consumtion* #o the $reat shi't in economic o&er 'rom 7est to /ast may not
be ,uite as clear cut as currently assumed*
4omments
#orted by ne&est 'irst > #ort by oldest 'irst
1. +eort ?evin +ica > March 13 1:1@am > Permalin%
5n order to become a reserve currency Aas oosed to a mere transactions currency or
vehicle currency or currency o' denominationB you have to let 'orei$n central ban%s buy
your currency*
4hina does not &ant to sell reserves* 5t &ants to buy and accumulate reserves* 5nstead
o' runnin$ a current account surlus, it &ould have to run a current account de'icit to
suly reserves to the rest o' the &orld*
3
2eedless to say )) this &ould be a comlete 1C0D Ai' not a @40DB turn 'or the 4hinese
e-ort)$ro&th led strate$y* They Ali%e the French be'ore themB &ould envy the status o'
issuin$ a reserve currency )) but they &ould rather e-loit the e-trava$ant burden o' the
0#, not assume the burden*
2. +eort Matthe& 7 Eall > March 12 C:43m > Permalin%
5 didnFt reali1e that the shi't in economic o&er &as GassumedG* #ome have ar$ued so,
but &hat is this FassumtionF you are tal%in$ aboutH
3. +eort Michael McPhillis > March 12 C:2Im > Permalin%
#till doin$ 'ossil 'uels 'or $ro&th and roserity &ill be costly and deadly and &ith $as
'rac%in$ the li'e)san o' the lanet 'or humans has shortened considerably i' as
reorted, JK o' roduction emits to the atmoshere* Methane is around 2@ times more
otent than 482 and at that rate o' emission around 3 times &orse than coal* #ur'ace
meltin$ on the =reenland ice sheet seen by satellites covered J7K o' it a last summer*
5t is riddled &ith holes that ta%e the &ater to its base and those holes 'ree1e in &inter
and tha& in srin$* 7e %no& &hat ice tha&in$ does, don(t &eH 5t crac%s the holes &ider
in summer and the meltin$ continues under 24L7 sunshine* <i%e an ice cube 'loatin$
under the sur'ace in your drin%, you %no& it doesn(t have lon$ to $o be'ore it(s $one*
4. +eort Till #* > March 12 7:11m > Permalin%
M +abble rouser:
G7hy do you thin% the 0# has such military mi$htH The ans&er, as any reasonable
indeendent observer should be able to &or% out, is that it has such economic mi$ht*
Nou canFt have a o&er'ul military unless you have the o&er'ul economy to 'und it*G
5 thin% you mi$ht &ant to ta%e a loo% at htt:LL&&&*usdebtcloc%*or$L and 5 am sure you
&ill 'ind that the 0# does 28T have the economy to 'und her military e-enditure*
7hich is e-actly the oint* The 'act that the 0#D is the &orld reserve currency means
that the 0# can $o on ilin$ debt onto debt to 'inan1e &hatever the 0# $overnment
sees 'it ) in the case in ,uestion military and imerialism ) &ithout havin$ to &orry about
ayin$ it bac%* 7ould the 0#D lose the status as reserve currency, &ould money sto
to 'lo& into the 0#, the 0# &ould be bro%e tommoro&*
To be sure it is not a scenario 5 cherish or &ant to see* !ut 5 hoe that the &orld &ill
revisit ?eynesFs ideas 'rom the 1J40s soon* For the last 'ourty years have $iven us all
an a&'ul lot o' $rie'*
5. +eort .?: > March 12 I:@Cm > Permalin%
?obayashi,
5 have said that 5 a$ree &ith you and +abble rouser in the lon$ run*
5n the short run itFs di''erent in my vie&*
First, both 0# livin$ standards and 0# economy are lar$ely suorted by the 0#D
reserve currency status*
#econd, 5 thin% the 0# is in a 1u$1&an$ situation no&* 5 do a$ree it canFt a''ord
enormous military e-enditures ensuin$ 'rom its suero&er Aand corresondin$ly
reserve currencyB status*
Third, i' one &ants to chan$e the current reserve currency heLshe has to elaborate on
the military institutions bac%in$ a ne& reserve currency*
6. +eort Plato > March 12 I:@4m > Permalin%
7hy $old, uuh, &hy the Dollar is the only serious reserve layerO
=old is money* /verythin$ else is credit*; "P Mor$an in 1J12
4
GPaer money eventually returns to its intrinsic value )) 1ero*G Poltaire
2o&, these eole did %no& &hat they &ere tal%in$ about*****
7. +eort Manuel .latorre > March 12 I:@0m > Permalin%
=iven the 'act that currencies are still mired in a unso%en race to the bottom, the status
o' re)eminent reserve currency is not an enviable one at the moment*
7hen the need 'or 'urther olicy easin$ ends then that status &ill become a boon, ri$ht
no& itQs a hindrance rather*
8. +eort ?obayashi > March 12 I:3@m > Permalin%
.?:,
Nes, 5 read it* 5 am no idealist and nor do &e live in a benevolent &orld*
Eo&ever, my &orld is li%ely to be closer to the real &orld than one &here o&er solely
comes out o' the barrel o' a $un &hich aears to be yours*
Eistory is relete &ith military Fsuer o&ersF &ho lost out to economic Fsuer o&ersF*
For &hat it is &orth, 5 do see some value in military stren$th but .merica clearly
oversends and overinvests in a rather unroductive area o' their economy* . lot more
in'rastructure and less F22s &ouldnFt $o amiss 5 susect*
9. +eort 'ae > March 12 I:20m > Permalin%
0#DH #D+R
10. +eort .?: > March 12 I:1Cm > Permalin%
?obayashi,
Did you read my sentenceH
SS First, i' you canFt 'orce your &ill uon the &orld your economic stren$th is useless
here*
Nou are tal%in$ li%e an idealist &ho lives in the benevolent &orld*
11. +eort .?: > March 12 I:17m > Permalin%
+abble rouser,
From the historical ersective, yes 5 a$ree*
2o& itFs a di''erent story* 5t $oes this &ay: military mi$ht )S 0#D reserve status )S
economic mi$ht )S military mi$ht*
The oint is that the military mi$ht si$ni'icance revails at this moment* This is &hy the
Middle /astern oil is traded in dollars* .nd this is &hat lar$ely suorts the 0#D reserve
status*
12. +eort +abble rouser > March 12 @:2Im > Permalin%
M.?:
7hy do you thin% the 0# has such military mi$htH The ans&er, as any reasonable
indeendent observer should be able to &or% out, is that it has such economic mi$ht*
Nou canFt have a o&er'ul military unless you have the o&er'ul economy to 'und it*
13. +eort ?obayashi > March 12 @:2@m > Permalin%
Till #, .?: and +abble rouser,
5 believe the ar$ument is more comlicated than that*
Till, +abble +ouser is correct, the 4hinese are 'ree to sto buyin$ 0#D &henever they
lease* They are also 'ree to sto e$$in$ their currency to the 0#D i' its such a heart
ache 'or them* They &ill also have to deal &ith the areciation o' their currency, 'all in
5
trade surlus and li%ely shar rise in unemloyment*
.?: T Till #* The Fstren$thF o' the 0#D comes 'rom the si1e o' economy, ran$e o' $oods
and services that can be bou$ht &ith it and li,uidity* The 0#D rovides this and other
currencies do not* 8' course, &e have had a rise in billateral trade deals but it is very
unli%ely that these &ill relace 0#D anytime soon*
.lready &e have had comlainin$ about Fcurrency &arsF* 5t is very unli%ely the /uro1one
&ould be &illin$ to let 4hina en$a$e in such maiulation 'or any eriod o' time li%e the
the .mericans do* 5 am not sure that this is such a Frivlled$eF 'or the .mericans*
+abble +ouser, 5 &ould modi'y your statement* They buy 0#Ts as they have vast trade
surlus to recycle* 0#Ts are robably the easiest and Fsa'estF &ay to do this* Eo&ever,
the 4hinese, by e$$in$ their currency, have destroyed a $reat deal o' value in
e-chan$e 'or more emloyment* The value has already been destroyed and the 0#Ts
&ill at some oint re'lect this*
#her$ar, you con'use money &ith credit and assets* They are not the same*
14. +eort .?: > March 12 4:@2m > Permalin%
+abble rouser,
0# dollar dominance is rimarily bac%ed by the 0# military mi$ht* .nd 0# economic
mi$ht is layin$ the secondary role here*
First, i' you canFt 'orce your &ill uon the &orld your economic stren$th is useless here*
#econd, the 0# economic stren$th comes Ain bi$ e-tentB 'rom the reserve currency
status o' 0#D, &hich in turn comes 'rom the 0# military mi$ht Aand not the other &ay
aroundB*
5 thou$ht itFs obvious to any reasonable indeendent observer*
15. +eort +abble rouser > March 12 4:3Cm > Permalin%
M Till #*
5' the 4hinese and the rest o' the &orld are sic% and tired o' the 0#D, &hy do they %ee
buyin$ 0# $overnment bondsH TheyFre 'ree to invest instead in 2i$erian, #outh .'rican
or !ra1ilian $overnment bonds* The reason they donFt is that they still consider 0#
$overnment debt to be the sa'est and most li,uid tye o' security they can $et their
hands on* 5 donFt ,uite see ho& imerialism comes into it*
16. +eort Till #* > March 12 4:2Jm > Permalin%
M +abble rouser
GThe other oint is that there is little evidence the 4hinese actually &ant the renminbi to
become a reserve currency*G
The alternative to the dollar is 28T havin$ another countryFs aer currency as reserve
currency but creatin$ an indeendent, international, arti'icial i' you &ant currency* .s
su$$ested by ?eynes and #chumacher in the 1J40s* .nd a$ain and a$ain by many
actors durin$ the last 40 years since the 0# $ave u on the $old standard* The &hole
&orld ) not 3ust the 4hinese ) is sic% and tired o' the dominant role o' the 0#D* #ic% and
tired o' ayin$ 'or .merican imerialism* #ic% and tired o' loosin$ their labourFs &orth on
.merican in'lation*
17. +eort +abble rouser > March 12 4:1Cm > Permalin%
=reat article* The other oint is that there is little evidence the 4hinese actually &ant the
renminbi to become a reserve currency*
6
4hinese o''icials %no& 'ull &ell that creatin$ a reserve currency &ould entail them
oenin$ u the countryFs caital account and allo&in$ 'orei$n ort'olio investors to enter
and e-it at &ill* .ll the comments 'rom 4hinese olicy)ma%ers hint that is not $oin$ to
haen any time soon* 0ntil it does, the dollar &ill be %in$*
18. +eort 'rancobollo > March 12 4:04m > Permalin%
4an anyone e-lain &hat the ound has $ot to do &ith <ondonFs role in international
'inanceH 5 thou$ht that ar$ument &as e-tin$uished in the 1J70s*
19. +eort .?: > March 12 3:@@m > Permalin%
There are more interestin$ theoretical ideas considered to relace dollar as the reserve
currency*
7ill they be reali1edH )) Perhas ***
20. +eort Till #* > March 12 3:32m > Permalin%
M c22aa
The unemloyment in /uroe is the result o' misallocation o' resources bein$ corrected*
. tra$edy on the ersonal level but not necessarily bad 'or the economy as a &hole*
0nemloyment brin$s &a$es do&n and it accelerates the seed o' structural
ad3ustment*
=as is cheaer in the 0#* Nou are ri$ht* 2ot sure ho& this statement o' yours en$a$es
&ith my ar$uments* <eavin$ aside the 'act that natural $as is no& so chea in the 0#
that some o' it is sold belo& roduction costs and ho& can that be sustainable, leavin$
all that aside 5 ,uestion that chea ener$y is bene'icial in the lon$ run* /ner$y)intensive
industry is yesterdayFs industry* 7astin$ ener$y is yesterdayFs li'estyle*
21. +eort c22aa > March 12 3:13m > Permalin%
7a%e u, are you 'rom /uroeH =ermany aside unemloyment across /uroe is 12)
2@K and 'or eole bet&een the a$es o' 2@)3@ it is more li%e 2@)3@K across /uroe***
8h and your 'rac%in$ ar$ument* 2at =as is 33K the cost in the 0# vs /uroe***
0# has its roblems, but at least be realistic about /uroes****
+eort Till #* > March 12 1:4Cm > Permalin%
> 8tions
GThe structural side o' the economy is also in 'ar better shae than that o' /uroe or
"aan in terms o' the 'le-ibility o' mar%ets, caacity 'or innovation and the otential no&
'or ener$y indeendence* 5ndeed, the most stri%in$ 'eature o' the develoed &orld
economy is 3ust ho& e-traordinarily olarised it has become: 2orth .merica versus the
rest*G
5 doubt .merican in'rastructure and education can comete &ith /uroe* .s 'or ener$y
indeendence: /uroeans can 'rac% as &ell i' they &ant to* The $as &ill still be there in
the 'uture, should they decide to &ait a little until the industry and technolo$y has
matured* !esides: ener$y)intensive industries that ro'it 'rom chea ener$y are not
7
e-actly innovative, are theyH 7hat is innovative is buildin$ ener$y)e''icient machines
and houses* "aan and /uroe by 'ar outclass the 0# in these 'ields*
The 0# dollar &ill remain to be the number one reserve currency 'or some time* !ut not
because the 0# is in better shae than /uroe or "aan* !ut because o' the uncertainty
around the 'uture o' the /uro and the debt crisis in #outhern /uroe* Eo&ever, the
resonses to this uncertainty and crisis are stren$thenin$ /uroe*
22. +eort F Primo > March 12 3:10m > Permalin%
G ris% on hases no lon$er recludin$ stron$er UG*** belo&, that is
23. +eort milas > March 12 3:02m > Permalin%
8n the sub3ect o' U stren$th: 7hat Mr* Plender may not be 'actorin$ in is that declinin$
accumulation o' +eserves by .sia, &3hile the 0# &ill still be runnin$ hi$h Aalbeit
declinin$B bud$et de'icits, &ill mean more U rintin$ by the 0#*
4omin$ on to o' 'ears o' that monetary over)e-ansion aroos the V/s et al, is
buildin$ u in in'lation bias in the 0# 'or the 'uture, this could in itsel' &ea%en the U,
&hich tends to ush u 4ommodity rices****&hich could 'urther ush the U do&n in
turn***unless the much)heralded onset o' ener$y sel')su''iciency is a near)term reality*
24. +eort F Primo > March 12 2:27m > Permalin%
.dmittedly this &hole ne& sta$e o' 'iat currency and monetary olicy house o' cards is
held by the U, but 'or that very same reason this article thesis is very remature in time*
7ill it hold once &hatever e-it 'rom unorthodo- is deloyed H +esults on this toic are
anythin$ but certain and redictable*
8' more interest erhas is the 'act o' ho& the currency has evolved 'rom ris%
correlated to ro cyclical* 8ne could ar$ue that ris% on hases no lon$er recludin$
&ea%er U has eroded its absolute heaven status thou$h*
25. +eort .$e 8lav Mariussen > March 12 2:1@m > Permalin%
The 'ollo&in$ t&o a enny ar$ument is rovided 'ree o' char$e: The dollar has been
sa'eheaven 'or a &hile* 7hat do you do &hen real $ro&th recoverH Nou leave the
sa'ehaven and set sail 'or ris% assets* 7hat haens then to the sa'eheavenH 2ot so
attractive anymore, maybeH Till #, is ri$ht that the dollar can still remain stable 'or a
&hile, because real $ro&th has not come bac% to /uroe yet*
26. +eort Till #* > March 12 1:4Cm > Permalin%
GThe structural side o' the economy is also in 'ar better shae than that o' /uroe or
"aan in terms o' the 'le-ibility o' mar%ets, caacity 'or innovation and the otential no&
'or ener$y indeendence* 5ndeed, the most stri%in$ 'eature o' the develoed &orld
economy is 3ust ho& e-traordinarily olarised it has become: 2orth .merica versus the
rest*G
5 doubt .merican in'rastructure and education can comete &ith /uroe* .s 'or ener$y
indeendence: /uroeans can 'rac% as &ell i' they &ant to* The $as &ill still be there in
the 'uture, should they decide to &ait a little until the industry and technolo$y has
matured* !esides: ener$y)intensive industries that ro'it 'rom chea ener$y are not
e-actly innovative, are theyH 7hat is innovative is buildin$ ener$y)e''icient machines
and houses* "aan and /uroe by 'ar outclass the 0# in these 'ields*
8
The 0# dollar &ill remain to be the number one reserve currency 'or some time* !ut not
because the 0# is in better shae than /uroe or "aan* !ut because o' the uncertainty
around the 'uture o' the /uro and the debt crisis in #outhern /uroe* Eo&ever, the
resonses to this uncertainty and crisis are stren$thenin$ /uroe*
27. +eort uncleie > March 12 1:3@m > Permalin%
5t too% J4 years 'or the 0# Federal +eserveFs balance sheet to reach U1 Trillion* 2o&,
Pro'essor !ernan%eFs urchases o' $overnment and mort$a$e debt securities are
addin$ U1 Trillion to the FedFs balance sheet each and every yearR
The 0# stoc% mar%et avera$es are no& about bac% to &here they &ere in 1JJJ or
2000***in nominal dollars* Eo&ever the 0# dollar has lost about one third o' its value
over the eriod &hen measured a$ainst the currencies o' 'iscally sounder countries, li%e
.ustralia, 4anada, 2or&ay, or #&it1erland* 8r even a$ainst the belea$uered euro* #o
there is little 'or investors in 0# assets to celebrate* 5t is di''icult to see ho& the value o'
the 0# dollar could rise 'or very lon$ versus currencies &hich are not bein$ debased as
raidly, or a$ainst $old, the suly o' &hich rises scarcely 2KLyear*
There does not aear to be any &ay the Fed can Ge-itG 'rom its V/ ro$rams, as there
is no urchaser on the lanet 'or the trillions o' dollars o' securities they hold* .nd it &ill
ta%e at least a decade 'or the securities to Grun o''G*
/-erts tell us that the dollars the Fed is rintin$ to ay 'or its bond urchases &ill not
create in'lation, because they donFt count in some &ay* 7e are told that these dollars
are not art o' the Gmoney sulyG* These stories come &ith disclaimers su$$estin$ that
this is a GcomlicatedG issue, and erhas beyond the comrehension o' ordinary
eole* #mo%e and mirrorsH
Published reorts tell us that 2or&ayFs #overei$n 7ealth 'und, the lar$est in the &orld,
is e-itin$ those currencies &hich are bein$ debased the most ,uic%ly* 5nvestors
&orld&ide should ta%e heed*
The 0# dollar remains the /meror 'or no&, but it is the /meror 7ho Eas 2o 4lothes*
.nother metahor: Gin the land o' the blind, the one eyed man is %in$G*
28. +eort #her$ar > March 12 1:22m > Permalin%
There are C trillion dollars outside the 0#*
29. +eort 5ce cold > March 12 12:@Im > Permalin%
&ish'ul thin%in$R