Category Archives: International Capital

Views on the dollar’s decline

An apt summary from Free Exchange:

The usual dynamics of any public discussion on a falling dollar are pretty well established. Lots of market watchers and pundits wring their hands over a poorly defined set of concerns, ranging from hyperinflation to wounded American pride. A number of economists respond that actually, the dollar is looking overvalued against a number of currencies at the moment, and an orderly depreciation of the dollar would go a long way toward improving America’s internal and external economic balances. And then some public official acknowledges that the economists are making sense, only to be chastised into a retraction of the statement by the market watchers and pundits. End scene.

And Martin Wolf points out that the crisis has made a subsequent fall almost inevitable:

We should start with what is not happening. In the recent panic, the children ran to their mother even though her mistakes did so much to cause the crisis. The dollar’s value rose. As confidence has returned, this has reversed. The dollar jumped 20 per cent between July 2008 and March of this year. Since then it has lost much of its gains. Thus, the dollar’s fall is a symptom of success, not of failure.

The desirability of such a decline is debated (follow the links), but the Free Exchange post accurately describes the conventional wisdom amongst economists.

Congressional representatives who don't understand international economics

Congresswoman Michelle Bachmann is clueless about the dollar’s role as the world’s reserve currency. In fact, it seems she’s clueless about what a reserve currency is. That’s why, in reaction to China’s SDR proposal, she’s introducing legislation to “bar the dollar from being replaced by any foreign currency.” And apparently a lot of people are similarly confused and need a quick explanation of the difference between legal tender and currency reserves.

If Rep. Bachmann’s office needs some assistance with international economics, I’d be happy to provide some advice over the phone at a reasonable price.

China attacks the dollar's reserve-currency status


China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.

In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said the goal would be to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies”.

Analysts said the proposal was an indication of Beijing’s fears that actions being taken to save the domestic US economy would have a negative impact on China.


For decades, the dollar has been a convenient medium of exchange for everyone from a central bank seeking to buy U.S. Treasury bonds to a business exporting commodities from Latin America to Asia.

To jump-start a new global reserve currency, economists say, would require someone effectively subsidizing the cost of bringing buyers and sellers together for the time it takes the currency to gain traction.

Large, deep, and highly traded markets involving a particular currency “don’t spring up spontaneously just because the Chinese central bank governor suggests this would be a good idea,” says Barry Eichengreen, an economist at the University of California at Berkeley…

In his essay, China’s Mr. Zhou proposed expanding the role of “Special Drawing Rights,” or SDRs… The SDR is “basically the Esperanto, at best, of international currencies,” says Jeffrey Frankel, an economist at Harvard University, referring to the ill-fated attempt to create a common language. “It’s not at all used.”

Negative assessments of the US dollar

Francisco Rodriguez:

Everyone is investing in the dollar because they believe it will hold its value. As investors flee to the dollar, the US can print more greenbacks and maintain its value precisely because of this belief. Effectively, it is paying off previous investors (who see their trust in the currency’s stability confirmed) through the willingness of new investors to buy in. This is eerily reminiscent of what Mr. Charles Ponzi did in 1903, and ever since he first tried it, it has never turned out well.

US external debt credibility

Tyler Cowen:

Many on the left are boasting that the U.S. government could borrow lots more (look at the current T-Bill rate), forgetting they used to warn us that international capital flows, as amplified through noise traders and speculators, mean that crises can arrive in a single, whiplash moment, bringing countries from riches to rags virtually overnight.  Somehow those old narratives are being forgotten, I wonder why.

Willem Buiter has a longer explanation.

Vox's Global Crisis Debate

Vox has launched a Global Crisis Debate forum in coordination with the UK government to let economists across the globe debate what should be done. The debate on international trade and open markets is moderated by Richard Baldwin, and the debate on development and the crisis is moderated by Dani Rodrik. Some snippets:

Simon Evenett is skeptical that a new surveillance mechanism or a declared standstill on protectionist measures would have any bite.

Marc Auboin surveys how quickly trade financing is drying up and what governments might do to intervene effectively – fows of trade finance to developing countries seem to have fallen by some 6% or more year-on-year.

Dani Rodrik says that the crisis is also an opportunity for developing countries, as they have a chance to gain “a much bigger say in the institutions that govern economic globalisation.” He’s pushing for counter-cyclical capital-account management, cracking down on tax evasion, a Tobin tax, and WTO guarantees for “policy space.”

As usual, Rodrik has drawn a number of replies. Nancy Birdsall says developing countries haven’t put themselves in the position to make such reforms. Yung Chul Park and José Antonio Ocampo largely agree with Rodrik. I am sure that those who disagree will make their appearance soon, however.

Finally, AEI’s Philip Levy outlines political reasons to be unhappy about “Buy American” provisions in the stimulus package – he thinks that it’ll provoke a backlash that starts a procurement war, which will only hurt the US.

Where the IMF dare not tread

Apparently the Chinese will not be offended by the IMF’s managing director telling the world’s most prestigious newspaper that the renminbi “needs to move,” but they would be rather upset by a formal labelling of their currency as “fundamentally misaligned.” So much so that the IMF’s executive board has not discussed the Chinese economy since 2006, contrary to its obligation to review member economies.