Senin, 14 Oktober 2013

T I N A

If there was, the dollar would be kaput. But there is really no alternative. So it has to be the dollar as the world's reserve currency.

It would be useful to go back to basics and understand what a currency really is.  A currency is really nothing more than a piece of paper backed by the promise of  a government. If you believe in the promise of the government , you hold that currency. If not, it is worthless. Remember the promise is only an act of faith - there is no backing of gold or a real asset behind the currency. Take out an Indian rupee note - any rupee note. It will say "I promise to pay the bearer the sum of xxx rupees" under the seal of the government of India. That's what it is - a promise.

Governments have the licence to print money. But if they simply keep printing on, it will lose its value. Beyond a point, the population will simply lose faith in that currency and resort to barter or to some other currency. That is precisely what happened in Zimbabwe sometime back - the Zim $ lost all value and the US $ became the de facto currency.

When it come to international trade and countries holding reserves, the only real currency of faith is the US dollar. Because the world had, and still has, the maximum faith in the US government above all. But that faith has been seriously eroded in the last two years thanks to antics in the US Congress. If there was an alternative, many would have fled the dollar. But there isn't. The Euro is on an even worse footing than the dollar - which country is the backer of the Euro ? Germany ? France ?  for there is no country called Europe. The Japanese Yen inspires very little confidence. The Chinese Yuan ?? - well the world has to go a long way before that happens - is everybody prepared to trust the Chinese government more than any other ?

China has called for a new global reserve currency. It has to, for after all, it is the largest lender to the world. Easy to say. But what will that reserve currency be ? And which government, or governments, will back it . And how can we trust that any more than the US dollar.

So there really is no alternative. But that should give those in the governance of the United States food for thought. The dollar retains its pre eminence only because the others are worse. Trust is hard to earn, but easy to lose. Those doing the antics  in the US for the last few weeks ( actually for the last four years) have done much to erode that trust. But the problem lies deeper. The US has been printing money like there was no tomorrow, for quite some time. It has come to the brink of default once before, and is now engaged in the same brinksmanship again. There is increasing evidence that sound economics is becoming a rare feature of the management of the US economy.

I am no economist and learned academicians ( are you there J !) have to design the future global reserve currency. But whatever that might be, it all boils down to trust. Alas, there is little to trust in today's world. Whose word can you trust when the only economy that is practiced is that with the truth.

The US dollar note says "In God we trust". I'm not sure if the irony strikes the governing class in that country.
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