Triggered by the sanctions imposed on Russia’s central bank there is a lot of excited talk right now about the possibility of major holders of reserves diversifying away from the dollar. I’ve been a skeptic. My sense is that the main lesson from Russia’s experience is that there is nowhere else to go. If you diversify out of dollars the only large-scale bolt hole is Euros and as far as major international crises are concerned the chances of the US and Europe not moving together is slight. And even if European governments did not take action, European financial institutions by now know the cost of finding themselves on the wrong side of the US authorities.
i would think that as reserves are held for many reasons one of which is to protect the ability to import required commodities, part of reserve reallocation will go into commodity accumulation. so i would expect that over the next decade reserve managers will start maintaining commodty pools domestically which are not subject to being compromised by other governments.
SDRs, Special Drawing Rights, are Keynes' Bancor reincarnated: a synthetic currency whose value is derived from a basket of trading currencies and commodities as publicly traded on a daily basis.
Extremely stable. Politically neutral. Hard to influence. Every participating central bank will get a board seat at the table and a vote.
China made perfectly clear what it wanted in 2009, after the Global Financial Crisis, when Zhou Xiaochuan, Governor of the Peoples Bank of China, PBOC, announced,
The world needs an international reserve currency that is disconnected from individual nations and able to remain stable in the long run, removing the inherent deficiencies caused by using credit-based national currencies.”
Zhou proposed Special Drawing Rights, SDRs valued against a basket of trading currencies, and Nobelists C. Fred Bergsten, Robert Mundell, and Joseph Stieglitz agreed, “The creation of a global currency would restore a needed coherence to the international monetary system, give the IMF a function that would help it to promote stability and be a catalyst for international harmony".
What happened next:
2009: PBOC says, "We want SDRs"
2012: Beijing values the RMB in SDRs
2014: IMF makes its first SDR loan.
2016: World Bank makes its first SDR bond
2017: StanChart Bank issues its first commercial SDR note
2019: All central banks restate their reserves in SDRs
2022: Russia, the EUEU, and China will announce the new reserve currency Apr 1.
Expect a synthetic currency whose value derives from a global, publicly traded basket of currencies and commodities.
1) USD holdings fall to 58.81% despite the Q4 rally in USD;
2) CNY holdings rise again to 2.79%
3) BIG rise in CAD holdings from 2.21% to 2.38%
4) GBP holdings rise to 4.78%.
All numbers UNadjusted so we need to run val adjusted changes through this but the fact that USD holdings fell through a period of USD strength is a standout
Interestiny, but what happened in the last twenty years Is not necessarily representative of what will happen in the next.. The diversification happened so far aimed mainly at financial optimuzarion; the next round will be determined also by the desire to escape possibile sanctions, at least by a number (not so small) of central banks. A fragmentation of the monetary system seems to me the most likely outcome, with several central banks avoiding all western currencies
It is one thing to say that USD will decline as a percentage og global assets. Another thing that something will take its place as the worlds most important reserve currency. In a more geopolitically unstable world it seems hard to believe that the USD will be dethroned.
Although far from being an expert in this area, it seems intuitively correct that most of the dollars’ (even if distant) reserve currency competitors, as articulated in the final pull quote, share this characteristic: “It is no coincidence that every leading reserve-currency issuer in history has had a republican or democratic form of government, with checks on executive power.”
This “rule of law” condition separates the West from China, at least for the foreseeable future. Nothing is forever, though, but it will always depend on what those circumstances prove to be.
I would think that if/when the need to find an alternative to the USD really does emerge a solution will be created...mater artium necessitas. It seems to me that those arguing that the dollar will retain its privilege no matter what are thinking in terms of alternatives available right now, or in terms of marginal changes to the current system. If we think along such lines then we see nothing on the horizon. Such perspective is however deceiving, as abrupt breaks are more likely to bring about a change of the magnitude needed to pose a threat to the USD.
I guess since Japan, Australia, Europe, Canada, etc identify themselves closely with the United States, their central bankers have less reason to diversify. But it would be interesting to watch what the central bankers of non-Western countries (e.g., Saudi Arabia, UAE, India, Brazil, Nigeria, etc) do.
I personally do feel less trustful of the US dominated financial system. If I'm not alone, there is a demand for alternatives to the dollar, Euro, Yen, etc.
The increased role of C$, A$ and CYN since 2000 point to a big change, but as u note only the CYN is truly outside the American orbit. What would be interesting is to look at cross holdings between these three and the US. Although Aus-PRC relations have deteriorated hugely the past 3 years, it would have made sense for Aus to invoice more of its resources exports to Cn in CYN. Avoids the double jeopardy of x-currency movements. I’d be interested to see if that had happened 2000-2018. Doubt there would be any appetite now, but BHP, Rio and others have their own interests to pursue.
One argument that I heard, in addition to the diversification one which is the topic of #106, is that there could be a move by CB to target lower levels of reserves and be prepared to use capital controls instead when needed. What do you think?
i would think that as reserves are held for many reasons one of which is to protect the ability to import required commodities, part of reserve reallocation will go into commodity accumulation. so i would expect that over the next decade reserve managers will start maintaining commodty pools domestically which are not subject to being compromised by other governments.
SDRs, Special Drawing Rights, are Keynes' Bancor reincarnated: a synthetic currency whose value is derived from a basket of trading currencies and commodities as publicly traded on a daily basis.
Extremely stable. Politically neutral. Hard to influence. Every participating central bank will get a board seat at the table and a vote.
China made perfectly clear what it wanted in 2009, after the Global Financial Crisis, when Zhou Xiaochuan, Governor of the Peoples Bank of China, PBOC, announced,
The world needs an international reserve currency that is disconnected from individual nations and able to remain stable in the long run, removing the inherent deficiencies caused by using credit-based national currencies.”
Zhou proposed Special Drawing Rights, SDRs valued against a basket of trading currencies, and Nobelists C. Fred Bergsten, Robert Mundell, and Joseph Stieglitz agreed, “The creation of a global currency would restore a needed coherence to the international monetary system, give the IMF a function that would help it to promote stability and be a catalyst for international harmony".
What happened next:
2009: PBOC says, "We want SDRs"
2012: Beijing values the RMB in SDRs
2014: IMF makes its first SDR loan.
2016: World Bank makes its first SDR bond
2017: StanChart Bank issues its first commercial SDR note
2019: All central banks restate their reserves in SDRs
2022: Russia, the EUEU, and China will announce the new reserve currency Apr 1.
Expect a synthetic currency whose value derives from a global, publicly traded basket of currencies and commodities.
Is it renminbi or "the" renminbi, as in sterling vs "the" sterling (which is not correct)?
IMF Q4 COFER Data just released. Key highlights:
1) USD holdings fall to 58.81% despite the Q4 rally in USD;
2) CNY holdings rise again to 2.79%
3) BIG rise in CAD holdings from 2.21% to 2.38%
4) GBP holdings rise to 4.78%.
All numbers UNadjusted so we need to run val adjusted changes through this but the fact that USD holdings fell through a period of USD strength is a standout
Interestiny, but what happened in the last twenty years Is not necessarily representative of what will happen in the next.. The diversification happened so far aimed mainly at financial optimuzarion; the next round will be determined also by the desire to escape possibile sanctions, at least by a number (not so small) of central banks. A fragmentation of the monetary system seems to me the most likely outcome, with several central banks avoiding all western currencies
It is one thing to say that USD will decline as a percentage og global assets. Another thing that something will take its place as the worlds most important reserve currency. In a more geopolitically unstable world it seems hard to believe that the USD will be dethroned.
Although far from being an expert in this area, it seems intuitively correct that most of the dollars’ (even if distant) reserve currency competitors, as articulated in the final pull quote, share this characteristic: “It is no coincidence that every leading reserve-currency issuer in history has had a republican or democratic form of government, with checks on executive power.”
This “rule of law” condition separates the West from China, at least for the foreseeable future. Nothing is forever, though, but it will always depend on what those circumstances prove to be.
I would think that if/when the need to find an alternative to the USD really does emerge a solution will be created...mater artium necessitas. It seems to me that those arguing that the dollar will retain its privilege no matter what are thinking in terms of alternatives available right now, or in terms of marginal changes to the current system. If we think along such lines then we see nothing on the horizon. Such perspective is however deceiving, as abrupt breaks are more likely to bring about a change of the magnitude needed to pose a threat to the USD.
I guess since Japan, Australia, Europe, Canada, etc identify themselves closely with the United States, their central bankers have less reason to diversify. But it would be interesting to watch what the central bankers of non-Western countries (e.g., Saudi Arabia, UAE, India, Brazil, Nigeria, etc) do.
I personally do feel less trustful of the US dominated financial system. If I'm not alone, there is a demand for alternatives to the dollar, Euro, Yen, etc.
The increased role of C$, A$ and CYN since 2000 point to a big change, but as u note only the CYN is truly outside the American orbit. What would be interesting is to look at cross holdings between these three and the US. Although Aus-PRC relations have deteriorated hugely the past 3 years, it would have made sense for Aus to invoice more of its resources exports to Cn in CYN. Avoids the double jeopardy of x-currency movements. I’d be interested to see if that had happened 2000-2018. Doubt there would be any appetite now, but BHP, Rio and others have their own interests to pursue.
"If it came to the crunch in a confrontation with Russia or China who would doubt which side they would be on?"
Perhaps a third side? "You are either with us or against us" is a rhetorical device rather than an accepted truth, and will become increasingly difficult for America to enforce. https://en.wikipedia.org/wiki/You_are_either_with_us,_or_against_us
One argument that I heard, in addition to the diversification one which is the topic of #106, is that there could be a move by CB to target lower levels of reserves and be prepared to use capital controls instead when needed. What do you think?
What role, if any, does gold play in a broader constellation of reserve “currencies”?