The Dollar in the Doldrums

When currency strategist Eva Kvor at Deutsche Bank AG in London expressed her concern over the continued decline of the dollar two years ago, it coincided with the opinion of economists, journalists, businessmen, workers and housewives from different countries.

According to the specialist at the world’s main currency trading bank, it is already necessary to adopt a new global currency that reflects strong economies and has material support in gold. This position is supported by the governments of Russia, Great Britain, Germany, Brazil, Argentina, Cuba, Venezuela, Bolivia, Canada and others.

In an interview with British television station CNBS, Russian President Dmitri Medvedev recently spoke of “some kind of universal means of payment that would create the basis for the future international financial system.”*

His spokeswoman, Natalya Timakova, hinted that countries grouped in the so-called BRIC (Brazil, Russia, India and China) will discuss the proposal to create a world currency in their next meeting in November 2011.

Today, the BRIC countries represent the main centers of economic growth in the world; over half of the world’s population lives in the nations of this group. For now, Russia, China and Brazil have shown their enthusiasm for replacing the dollar as the unique global reserve currency, while India is discreetly contemplating it, according to observers.

Indeed, the lowered value of greenbacks is currently the talk of everyone who puts depreciated dollars, with little buying power in any international market, in their pockets. From Beijing, China to Santiago, Chile and Mexico, the talk is the same: How long will the price of the dollar keep falling when it traded at 0.67 euros on average in the main European markets during the third week of May this year?

But the opinion of these countries does not seem to be very understandable to the United States, where the president of the Federal Reserve Bank of San Francisco, Janet Yellen, said that the proposals of China, Brazil, Great Britain and others about the global currency reserve are far from a practical alternative.

There are only two ways to store wealth: in actual physical structures and in some form of money (currency, bonds, gold). Both involve risks for the holder.

Physical structures deteriorate unless they are used, which involves costs. Using them for income and as gains depends on the market, that is, the availability of buyers to purchase products. These are more or less tangible physical structures. Money, which is controlled by nominal figures, is merely a potential claim against them.

If money value varies slightly, almost no one notices, but if it changes significantly and often, its holders can gain or lose a great deal of wealth, sometimes quite quickly.

In economic terms, a reserve currency is thus the most reliable form of money; its value varies less. It is therefore the most secure place to store wealth that does not take the form of physical goods. Since at least 1945, the U.S. dollar has been the world reserve currency.

According to experts, the country issuing the reserve currency has a singular advantage over other nations; it is the only country that can legally print it whenever it is in that nation’s interest to do so.

All currencies have an exchange rate with the other currencies. Since the United States ended its fixed exchange rate with gold in 1973, the dollar has fluctuated in relation to other currencies, rising and falling.

When a nation’s currency falls in relation to others, it becomes easier to sell its exports because the buyer requires less of their own currency, but at the same time, importation becomes more expensive, because more dollars are required to pay for the imported goods.

According to economists, in the short term a weakening currency may increase employment within a country, but this is at best a short-term advantage.

Over the medium term, there are better advantages to having a currency that is considered strong. This means that the holder of the currency has more control over world wealth as measured in products and physical structures.

Over the long term, reserve currencies are strong and should remain so. The strength of a reserve currency is derived not only from its control over world wealth, but also from the political power that it draws from the global system. This is why the global reserve currency tends to be the hegemonic power in the world, even if it is a hegemonic power in decline.

In recent months, the Central Bank of the United States has been a little concerned — and with every reason, according to experts at the New York Stock Exchange. They noted that, in recent decades, the exchange rate of the U.S. dollar has fluctuated considerably, but overall it is going down slowly. One of the main factors has been the shockingly increasing global debt of the United States government.

There are two main ways in which the United States has been able to balance its books: printing money and selling U.S. treasury bonds, primarily to other governments, the so-called “sovereign wealth funds.”

Japan and South Korea, Saudi Arabia and Abu Dhabi, India and Norway have all acquired U.S. treasury bonds. It is no secret that, in recent years, the largest buyer has been China.

*Editor’s Note: This quote, though accurately translated, could not be verified.