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Posted at 2:56 PM ET, 01/11/2011

So, Dr. Eichengreen, what kind of currency do we have?

By Ezra Klein

The world's reserve currency -- if you can keep it:

The one thing that could jeopardise the dollar’s dominance would be significant economic mismanagement in the US. And significant economic mismanagement is not something that can be ruled out. The Congress and Administration have shown no willingness to take the hard decisions needed to close the budget gap. The Republicans have made themselves the party of no new taxes and mythical spending cuts. The Democrats are unable to articulate an alternative. 2011 will see another $1 trillion deficit. It is hard to imagine that 2012, an election year, will be any different. And the situation only deteriorates after that as the baby boomers retire and health care and pension costs explode. We know just how these kind of fiscal crises play out. ... Previously sanguine investors wake up one morning to the fact that holding dollars is risky. They fear that the US government, unable to square the budgetary circle, will impose a withholding tax on treasury bond interest – on treasury bond interest to foreigners in particular. Bond spreads will shoot up. The dollar will tank with the rush out of the greenback.

The impact on the international system would not be pretty.

By Ezra Klein  | January 11, 2011; 2:56 PM ET
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It's not necessarily that the Democrats lack an alternative; it's that the Democrats lack the 60-votes to enact whatever alternative that they can produce, because it would involve raising taxes.

Posted by: ctown_woody | January 11, 2011 3:02 PM | Report abuse

John Quiggin on the dollar as reserve currency (and war) in 2003:

"Before going on to look at the implications of the war for the dollar, it is worth asking ‘does it matter if the dollar is the world’s reserve currency?’ After all, the pound sterling was an important reserve currency until the late 60s, and this did not seem to do much for the British economy.

The US directly benefits from the ‘reserve currency’ status of the dollar through international seignorage, that is, the fact that the US government can print dollar notes for which foreigners, notably in Eastern Europe, are willing to exchange real goods and services. A shift towards the euro would reduce or eliminate this benefit. However, as Lawrence H. Meyer of the US Federal Reserve Board of Governors, has observed, the total benefit of international seignorage is about $US15 billion per year – not much of a motive for a war that has already cost about $US50 billion and is likely to cost much more."

I'm no economist but I think it doesn't matter if the world keeps their reserves in Grape Nuts or Gold outside of the financial services industry. The then head of the Federal Reserve kinda sorta agrees with me too, and not people who look for a global crisis in every damn thing.

Not having potable water is a crisis. Not having the dollar as global reserve currency is a third grade math problem. You convert X ducats to Y semolians and go about your day. It's nothing to soil your drawers over.

Posted by: jamusco | January 11, 2011 3:12 PM | Report abuse

Everyone knows Obama is to blame.

The basic truth is the DEMOCRATS are not mature enough to handle a black President.

The FALSE CHARGES OF RACISM have been flying, unrestrained, for three years now.

Obama appeared to make little effort to adhere to his campaign promises - that did little to help the situation.

Obama thinks that he has a "pass" because he had 60 votes. However, the American Peopld don't see it that way. The American People believe Obama made the commitment to be bipartisan to THEM, not to the Republicans.

The conduct of the Republicans (which is disputed) has NO BEARING on Obama's commitment to be bipartisan and compromise - a commitment MADE TO THE AMERICAN PEOPLE.

Obama is to BLAME.

If Obama was a real man, he would RESIGN.

The best thing Obama can do for the nation right now is to RESIGN - and let the nation begin to heal.

The truth is that Obama's own conduct has damaged the political atmosphere in this country. There is little he can do to fix this - other than apologize and leave office.

MOST IMPORTANTLY - the country did NOT elect Obama to be a hostile, divisive force and that is EXACTLY what Obama has done in office.

Obama's conduct has PURPOSELY BEEN DIVISIVE.

And the conduct coming from the democrats - in defense of Obama - has been shameful and disgraceful.


The nation does not want to listen to anything they have to say anymore.

The liberals have LIED time and time again - no one will believe their LIES at election time again - only to be caught a few months later when they ACT differently from what was promised during the election.


Obama should resign and let the country start healing - and allow the Economy to start to recover.


Posted by: RainForestRising | January 11, 2011 3:17 PM | Report abuse

Thanks RainForestRising, that rant was very helpful, you've given all of us quite a bit to think about. I'm sure Obama will resign shortly. You're a true patriot.

I think it's unfair to say Democrats don't have an alternative. A Democratic president has previously put together a budget that balanced the deficit, and the only thing preventing that from happening again is, as a previous commentator notes, the filibuster.

I think you could have easily gotten 50 Democrats in the Senate and 50% of the House to agree on tax increases on the wealthy, military cuts, some social security cut of some kind, and the health care bill, all of which together go a long way to reduce the deficit.

Posted by: CarlosXL | January 11, 2011 3:29 PM | Report abuse

Clinton took record deficits and created record surpluses. Then Bush and the Republicans had their shot.

Rainforest wouldn't let some silly facts get in the way...

But we don't have to wait until 2012. Wait until they threaten to default the country.

Posted by: AZProgressive | January 11, 2011 4:13 PM | Report abuse

"Previously sanguine investors wake up one morning to the fact that holding dollars is risky. They fear that the US government, unable to square the budgetary circle, will impose a withholding tax on treasury bond interest – on treasury bond interest to foreigners in particular. Bond spreads will shoot up. The dollar will tank with the rush out of the greenback."

I think it's your old professor Eichengreen who has just awakened!

Remember how you used to say that he was the country's foremost expert on the Euro?

I guess flogging a new book has made him an expert on the dollar too right now, especially since the Euro is living in it's own little hell these days.

In an effort to be "controversial" I guess he is predicting things that have already happened and will continue such as rising spreads and the (sometimes) falling dollar.

I understand his next book will warn of a possible Republican takeover of the House, and falling real estate prices.

Posted by: 54465446 | January 11, 2011 4:24 PM | Report abuse

Do any of these people have realistic suggestions on what currency has any shot at replacing the dollar as the world's reserve currency?

The Euro, with its political problems? The yuan, pegged to the dollar? Rupees? Chickens? I don't think any of these sound particularly realistic.

Posted by: mutterc | January 11, 2011 5:05 PM | Report abuse



Posted by: grat_is | January 11, 2011 5:22 PM | Report abuse

Gold is a curious question. There are those who see it in some measure serving as a sort of psuedo currency this decade because of all the dangers ahead for fiat currencies like the dollar and the euro. Others believe it has already reached the end of it's run.

I think the whole concept of a reserve currency may be a 20th century relic, since information and trading go so quickly now that reflexive defensive rules no longer apply. If anything I think commodities futures have in some way become the safe haven.

Regarding gold, I'm no knee-jerk investor, but if it gets down to around $1300-$1325, that's a buy signal for me. You have to keep buying dollars, until we get a handle on how Europe will play out it's continuing drama over debt. As always, short longer-term Treasuries on any singnificant dip in yields.

Sorry, the library is closing, got to move my shopping cart!

Posted by: 54465446 | January 11, 2011 6:19 PM | Report abuse

The mostly likely replacement for the dollar is a currency basket (yen, dollar, euro, pound, a yuan, and 3 smaller currencies, probably aus and canadian dollars, maybe the real).

Posted by: staticvars | January 12, 2011 10:46 AM | Report abuse

Regarding Gold.

The question is for a reserve currency, not a circulating one.
It would be beyond problematic for silver and gold to become circulating currencies. But, as a reserve currency, I believe it has its place. Problem is, it might have to be valued at $10,000 an ounce in fiat money to cover all the US fiat dollars in the world.

Posted by: grat_is | January 12, 2011 6:04 PM | Report abuse

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