Mea culpa on the need for a new currency
A few days ago I wrote a post “Japanese defend dollar’s status while China tears it down” in which I defended the Japanese support of the dollar, saying it was in no one’s interest to see a change in the currency markets right now. I have to admit this was wrong-headed and short-sighted. In truth, the currency market, with the U.S. dollar as the principal reserve currency is in great need of an overhaul.
When I wrote the post last Friday I said: “it makes no sense to talk the dollar down here and now and risk a disorderly fall. It certainly is not in China’s best interest as all their U.S. dollar assets will lose value.” But, if we are to move to a more stable world financial system, when is the right time? There probably is no ‘right’ time. So, in retrospect, I would say the Chinese are probably taking the right approach by aiming to at a minimum discuss the currency issue here and now – something I had advocated in the past.
I see the U.S. dollar as a weak currency due to the excess consumption in the United States. Meanwhile, the Chinese currency, the Renminbi, is controlled by the State, leading to distortions in trade that most pundits believe create severe trade imbalances. While discussions about a new currency regime would probably not lead to any major changes in the short-term, making preparations now would lead to more stability in the medium-term.