RyanErwin.com

A bubble is when assets are screaming to new highs everyday, everyone is talking about them, and everyone owns them. Right now, virtually no one owns commodities. So for Mr. Roubini to talk about a bubble in commodities defies comprehension. It proves he does not understand markets.

I am flabbergasted at Mr. Roubini’s comment about bubbles because there is not a single market in the world making all-time highs except Gold, US Government Bonds, Cocoa, and the Sri Lankan stock market. That’s hardly reason to call for a bubble. So, I am most perplexed about this alleged bubble which is out there.

If an asset rises 100% in one year, that’s a great year, but not necessarily a bubble. Look at oil. It’s up huge off the bottom but nowhere near it’s old highs. Look at Citigroup. The stock is up 3 or so times off the bottom …

-Jim Rogers (2009, Wall Street Cheat Sheet)

ryan Economics （经济学）

Long term (40+ Years) I am an absolute bull on China. It’s a big country and it’s going to get bigger. If you can close your eyes and wait 40 years to look at your investments, don’t read this. Just buy China.

However, if you’re concerned about rate of return over the next 10 years or so, I would bet on the downtrodden USA market. When everyone already agrees on something (whether positive or negative), that is usually the time to ask if the traditional wisdom has finally gone too far and we’re ready for a correction.

When thinking about current asset valuations, remember that the “Rise of China” was the biggest online story of the DECADE, outpacing the number two story (Iraq War) by 400%. See the full list.

Burton Malkiel, professor of economics at Princeton did an interview on FOX Business TV called “Betting on China”. Malkiel is a leading proponent of the efficient market hypothesis. If this guy is bullish, that might be reason enough to short. Reasons for bullishness include:

Large Labor Force: With a population exceeding 1.3 billion people, China has plenty of labor available to expand GDP (Gross Domestic Product).

However, China’s had a big population for a long time, but it’s been poor for a long time. India has a large population (1100M) but per capita numbers are still low. Russia has 140M people and the workforce is highly educated, but they’re only exporting natural resources. Japan has around 130M with GDP per Capita of $33K. The USA has over 300M with a GDP per Capita over $47K., and Singapore slightly above the USA average with $51K, though only 4M people.

No Nonsense Government: An authoritarian government has its advantages. While pornography and unrest may be problems, infrastructure projects are not.

Thoreau first said that”The Government That Governs Least is the Government That Governs Best”. How did the Central Planers in the USSR perform? What happened to the magic of METI (Ministry of Economy Trade & Industry) in Japan? How would we expect central planners in a bureaucracy even larger to do a superior job?

Both Markets and Planners allocate resources. Do you trust the few or the many?

Education: Chinese culture values education. As a result, China is slowly moving away from its roots as the globe’s manufacturing and piracy capital. Intellectual property is appreciated more now that China is becoming a leader in emerging technology areas, such as solar power.

Most of the Profit in exports from China is derived from Design, Process Management, Quality Production Standards and Marketing managed by firms from developed nations. With the exception of a few State Owned Enterprises, purely Chinese products marketed to Chinese people are typically very poor quality and not ready for competition on international markets.

Trade Surplus & Currency Reserves: Must be nice to have trade surpluses and massive currency reserves (~$2.3 trillion). This is what happens when you are in a position to export more than you import.

Manageable Debt: China’s Debt/GDP ratio is less than 25%. You can compare that to the U.S. approaching 100% and Japan at over 200%. Disciplined fiscal management provides the Chinese government with more options in dealing with the global slowdown (e.g., stimulus).

This is the big hidden issue with China. The numbers we read are that there’s only 25% Debit/GDP ratio, but there is way too much infrastructure investment in glamourous conference centers, hotel high rises, vacant luxury apartments and bridges to nowhere for this number to be real. The real number is likely 75-150% of GDP.

Long Runway of Growth: China’s long runway of growth has allowed it, and should continue to allow it, to grow at above average growth rates – in the 3rd quarter of 2009 the Chinese economy grew at a very healthy +8.9% rate.

Interesting that consumption numbers for China are down. Sales of gasoline are down. People everywhere are spending significantly less money, and yet GDP will grow at 9%. Growth numbers during the Great Leap Forward looked great too! However, 2005-2009 will likely prove to be China’s Great Leap Backward.

Newsweek’s Why China Won’t Rule the World ended with the apt:

Of course, the Chinese are thrilled that everyone thinks they’re the biggest winner. The truth, however, is that they’re more like the least-bad losers—and they know it.

ryan Economics （经济学）

Definitely have a lot of sympathy for Jim Fallows fending off phone calls from angry Americans on a Tuesday morning.

C-SPAN Update after presidential visit, November 17, 2009

During the 2009 call in discussion, Fallows has to fight off many angry phone calls about lost jobs and a “Rising China”. Overall, the discussion is much more grim than during the 2007 presidential visit to China.

C-SPAN Update after presidential visit, October 21 2007

In 2007, there were some discussions about the size of China’s foreign currency reservers, some concerns about job losses, and questions about teaching english in China. Overall, the conversation was far more upbeat in 2007 than in 2009.

Interestingly, Fallows has a total of 55 C-SPAN appearances over the years. Take a look.

Fallows also has some books that are well worth reading. Personally can’t wait until Apple’s new mobile book device is released so that I can sign up for The Atlantic and The Economist directly in a mobile print edition. Would also be great to have mobile versions of Vogue and GQ for easy reading.

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ryan Economics （经济学）

Goldman Sachs Research just completed a visit to China where they’ve concluded that their bullish thesis on the country was justified, China commodity demand would drive prices higher and they feel increasingly confident about their current $94 crude oil price target.

More here.

Prices of oil will surely go up because their being measured in worthless currencies.
The China real-estate market has been in bubble mode since the credit bubble started in 2001.
Shanghai real-estate prices per sq ft are comparable with Los Angeles, yet these are 70-year land leases, not purchases.

Shouldn’t we know by now that if Goldman says to buy, it probably means that Goldman insiders are already selling.

ryan Economics （经济学）

• Why are there banks on every corner?
• What are the functions that banks provide that can’t be managed more efficiently online?
• Why do we have ATMs when “Cash Cards” (like the Hong Kong Octopus) work so well for small transactions and “Bank Cards” like Visa or Wall Mart’s own credit card processing system are so much more efficient than cash?
• Once we get rid of the paper (money) trail and make everything electronic, then we can also radically simplify and improve the efficiency of tax collection.

If we had let the archaic, over leveraged banking system fail the way it was designed to, there would have been more pain that we’re seeing now, but some truly innovative, highly efficient institutions would have emerged and banking could have had a renaissance.

Instead, special interests were allowed to take over…

Jim Rogers has a great interview that he did as part of a 2 hours special on CNBC:

“Banks have been going bankrupt for a few hundreds of years. The world has not come to an end. And Ross, the way the system is supposed to work is that when somebody fails, you let him fail. You let competent people take over the assets. Reorganize the assets and start over again. What we’re doing now is we’re taking the assets away from the competent people and giving them to the incompetent people and saying ‘now you can compete with the competent people with their money!’. This is just propping up the system. This is not going to solve the problem. Do you remember zombie banks from the 1990s in Japan? This is not going to solve our problems at all, we’re going to carry it over and over and over and over again. We’re going to be reporting on this for several more years.”

ryan Economics （经济学）

There are a lot of things going on right now.

• Chinese Gov’t driving in wrong direction. China Bubble is getting ready to Pop!
• Broadcast Media, Physical Media and Middle men are being creatively destroyed!
• Global labor force is doubling (China, India and Brazil) so labor supply far outstrips demand for labor.

First, I expect that the Chinese economy is now in full “bubble mode” and will be popping sometime soon.

• Caijing Magazine, through government support has exposed some of the largest corruption cases in the country is going to stop covering corruption – so now who is watching?
• Urban China Real Estate prices have been increasing 20%/year for at least 5 years and even the new Shanghai World Financial Center is 70% empty.
• Wen Jiabao just went to the World Economic Forum summit in Dalian and announced that China’s GDP growth target “appears to be achievable“, which the US press will read as “9% AGAIN!” Perhaps they should read How China Cooks Its Books.
• Meanwhile, everywhere I go Taxi rides are down, the reported rail freight numbers for 2009 are 30% below last year, night clubs are empty, KTVs are closed. People are not consuming. Retail sales are down 12%.
• Factories in the south that closed have not yet reopened – perhaps 50,000,000 people are out of work, and the last 2 years worth of college graduates have been unable to find jobs.
• Yue Yuen, the Shoe Factory I visited here on my first trip to China has reported it’s biggest loss ever.
• The largest rail line in China reports freight loads down by 12%.
• Banks call my WOFE registered phone number on a regular basis explaining how it would be beneficial to take out a loan.
• When asking people “how’s the economy”, everyone says it’s doing great.

Second, What will happen next? I’ve set myself up to be a middle man, an intermediary between US producers and Chinese consumers. This is what I’ve been doing for movie cameras and this is what I can provide value doing long term. My value is largest for products that are more complicated (specialized technology products) since these are more difficult for local providers to support.

• MEDIA: Physical Media (Newspapers, Magazines, CDs, DVDs) and Broadcast Media (TV, Radio) is finally being “creatively destroyed” – being replaced by a more efficient (low distribution cost, large selection) medium – the Internet.
• DISTRIBUTION: Middle Men will become less and less relevant.
• POLITICS: The Internet makes voting extremely efficient. Not only can we reshape the way we elect our representatives, but we can reshape the purpose and power of our representatives, returning the power to the people.
• BANKING: We all bank online. We no longer need a bank branch on every corner. Banks can lease space in the Grocery Market and put their ATMs there. Remember, ATM is “Automated Teller Machine” – if the Teller can do it, we can surely make a machine that can do it.
• MOVIES: Movie Theatre (in terms of the box office) is a Retail Service (atmosphere, seating, timing, snacks) and not likely to be affected, however changing media consumption habits will impact the requirements for future feature films.
• RETAIL: The 25 and under generation downloads everything over the Internet. The iTunes Music Store is the largest Music Store on the planet (in annual revenue)
• MOBILE: The iPhone is the only smartphone that meets the definition of “a computer in your pocket”, but Apple is not going to be able to lock MSFT, DELL, etc out of this market. Google will try hard to get in too.
• COMPUTING: 10 years from now, the AVERAGE person will only use a desktop computer for the times that lots of research of lots of text input is required, but notebook/laptop computes will be like desktop computers. Laptop (R&D, Professional Content Creation, Finance & Accounting). Desktop (High End Media Creation. “Time Clock” office workers who shouldn’t bring devices home)

Third, in terms of creating products or services, be aware that long term the consumption market will not grow significantly, but the supply of labor for all forms of production markets will grow, driving labor prices down in nearly every sector. Going forward, anyone who is directly trading labor for income could find themselves in trouble, especially if their labor was at a premium due to their location.

ryan China (中国）, Economics （经济学）

Depending on your product or service, you’ll need to alter this list, but this can help you get started:

1. Create a Chinese Company name and Chinese names for your key Products/Product lines
   (in modern mainland China phonetic translations rather than translated meaning is optimal. In Taiwan and Hong Kong, better to simply use the English names. for example, Chinese people can’t pronounce “Nike” so they say “nàikè”. In Mainland China it’s typically an operating flaw to use english for anything important)
   
2. Chinese Language operational/interaction instructions
3. For Business to Business products, Chinese can often accept USD pricing
4. EMAIL is not a good lead generation tool for Chinese clients – but it is a good way to transfer attachments. Instead:
   • Exchange Business cards at Trade Shows
   • Engage in online communities
     (However, beware most active online community members lack the ability to buy)
   • Establish your own promotional seminars
   • Chinese language website with: Address, Phone Number and MSN information
     (Chinese people want to stop by or talk to a human about it, now)
   • Create service center to handle Phone/MSN/Walk In inquiries. Operating hours vary by product category. Staying open later in China is typically more useful than opening earlier.
   • Learn how to quickly identify customers who have the financial ability to purchase your products,
5. China Customs is a very slow (typically delays shipments 3-5 days) so all efforts should be made to repair product in country
6. Import Tariffs are very high, so don’t let product diverted from Hong Kong (0% VAT, 0% Tariff) compete with your Mainland China sales (17% VAT, 10+% Tariffs) and distribution plans.
7. Be Careful: in Chinese culture “tricking” someone for your personal gain only proves that you are smarter than they are, and if a Chinese person has a good opportunity to make money that they don’t take (even if it is “wrong” in western eyes) then their friends and family would accuse them of being dumb.
8. Be Aware: that the more that someone speaks a language, the better they get at it, and the less they speak one, the worse they get at it. When you meet the Chinese guy that speaks really great english and claims to protect you and “unlock a market of 1.3 billion customers” for you, most likely this guy is not connected at all and only knows how to trick western people out of their money.
9. Legal system is unlikely to grant proper recourse, especially in native vs/ foreigner cases. You should always sign proper contracts, but if you are taking any risk on the part of your partner, YOU MUST REQUIRE A DEPOSIT (押金) in exchange for that risk. If the Chinese partner can save 1¢ by pretending the contract does not exist, then they will try it.
10. Chinese customers are EXTREMELY PRICE SENSITIVE, and are particularly unwilling to pay for services.
11. Long term, the Middle Men in China will be out of work, but in the short term, for most sales you are far better figuring out a way to with multiple resellers (avoid letting one crook control your destiny). Depending on volume and cash flow requirements, working with large stocking distributors is probably not the optimal way to operate because they have very fat margins, and with a fat margin it’s too easy for them to divert product back into your other markets. On the plus side, Agents can also keep you insulated from the darker side of Chinese business practices.
12. Keep costs down. If you operate like a traditional international company while in China, it could be very difficult to make a profit, but all of your suppliers will take profits.
13. Chinese customers want to hold the product in their hand and are particularly weary of Internet sales.

ryan China (中国）, Economics （经济学）

This was taken from a comment (not the original article) on seekingalpha, but I think that it is 100% on.

They [CHINA] cannot transition to a consumption driven economy any more easily than we [USA] can transition to an investment and export driven economy; there will be painful adjustments. Current tensions identified by the author are symptoms of these underlying stresses and China’s determination to be something more than a source of low cost labor to the western world and evolve into a super power in its own right.

What distinguishes the two countries is that China has an idea as to what direction it wants to move towards; the US bogged down in deleterious debates as to how to share an ever shrinking economic pie. China will eventually eclipse the economic power of the US, it’s only a matter of timing. Along the way, there will be natural frictions as China and the US rebalance their relationship.

[From Will Chimerica's Demise Take Down Global Economy? -- Seeking Alpha]

ryan China (中国）, Economics （经济学）

In 1873, Mark Twain wrote a book satirizing greed and political corruption in post-Civil War America. Instead of calling the book “Golden Age” the less worthy “Gilded Age” was chosen since it represents only a thin layer of gold coated over a base metal. Shortly after the publication of the book, the word “Gilded Age” because synonymous with graft, materialsim and corruption in public life.

Back in 1994, The Atlantic’s Yin Huangxiao came back to China after 10 years in the USA and wrote “China’s Gilded Age“.

A distant cousin who was a high school teacher until 1986 told me modestly that he had made “a little money” by opening a factory that produces bristle brushes for export to America. He drove me to his new summer house in his new Mercedes-Benz 500SEL, one of his three luxury cars. “This is China’s Gilded Age,” a former colleague of mine commented sarcastically. “These Chinese Carnegies and Rockefellers are more successful than their American counterparts — they made more money within a shorter time.”

More recently, in 2007, David Baskin from CBC news wrote that “China’s Gilded Age of Capitalism“.

It is true that China is still governed by the Communist Party, but I have never been in a more capitalistic environment in my life. Ruthless competition is taken for granted; that economic success should be rewarded with wealth is a given; and that upward mobility is possible for those who are smart and hard working is widely believed – the Chinese equivalent of the American dream.

Baskin does write that:

… and that upward mobility is possible for those who are smart and hard working is widely believed – the Chinese equivalent of the American dream.

This last comment doesn’t seem to accurately represent local folks. The local sentiment seems to be that if you are well-connected, then you’ll be fine. However, there isn’t much hope for the average person to be successful. The key difference between the “gilded age” in China now, and the “gilded age” in America 150 years ago, is that Carnegie, Rockefeller and Vanderbilt were all born poor, and managed to work their way up. In China, the sentiment seems to be the strength of your connection to the government determines how much you can earn.

ryan China (中国）, Economics （经济学）, USA （美利坚合众国）

To ease global liquidity, the International Monetary Fund’s executive board hasbacked the allocation of US$ 250 billion worth of special drawing rights (SDRs) to member countries, the IMF said in a statement on July 20.

China, with its current IMF share quota, will receive US$ 9.4 billion worth of SDRs, pending the approval of the Fund’s Board of Governors.

The allocation is part of a US$ 1.1 trillion relief measure to fight the global economic crisis, as agreed to by G20 member states at a London summit in April. From wires.

Source: http://english.caijing.com.cn/2009-07-22/110201717.html

This is a brilliant move move by the PRC! By opening the door to getting foreign US dollar debt converted into SDR debt (converting those dollars to a basket of euros, pounds, yen and dollars) the PRC can begin pressuring the USA to stop devaluing the dollar. Eventually the USA could be forced to issue debt denominated in SDRs, which would immediately end (or bankrupt?) the USA.

If the chess game of international relations, the guys in Zhongnanhai are saying “Check!” right about now.

ryan Economics （经济学）

You should read this… Export Credits are back.

[From Exporters get sops to fight crisis]

ryan Economics （经济学）

Interesting. Perhaps the real cause of the trade barriers in 1929 were more Political than Economic. On the eve of the Great Depression, the USA had large trade surpluses and was attempting to maintain those surpluses going into the depression, effectively driving up unemployment across the rest of the world. Trade Barriers around the world were erected to level the playing field – and prevent America from exporting it’s unemployment problem.

In 2009, we could be seeing the same thing, but this time China may be the one exporting the unemployment problem. All I can say is: I hope we don’t see the return of protectionism!

See James Fallows of the Atlantic’s take on this: This does not bode well

ryan Economics （经济学）

Money is a Medium of Exchange (交易媒介), a Unit of Account (赊账标准), and a Store of Value (价值储存). The USD has been doing an excellent job as a medium of exchange (dollars are without a doubt the most widely accepted currency on the planet). The liquidity (流动性) of the dollar is absolutely unmatched by ANYTHING else on earth today. Not by gold. Not by silver.

Liquidity of the USD is guaranteed because of OPEC agreement in 1971 that all oil sold must be sold in USD. Every economy requires oil to survive. Even if you wanted to store all of your assets in Euros, Yen or CYN, you’d have to trade them for dollars every time you another oil tanker shows up at the port. During some periods, currencies have been pegged to gold or silver. Since 1971, the USD has been backed in oil. Prior to American occupation, Iraq started selling oil in Euros. In Dec 2007, Iran stopped selling oil in USD. The only strong ally of the US in Iraq was the UK, who is not a member of the Euro.

Unfortunately, the USD as a Store of Value (保值) is becoming more of a problem. More nations aren’t terribly concerned because their dollar holdings are just held in the treasury and not actively managed to maximize return.

The People’s Bank of China (中国人民银行 AKA 中行 AKA PBC) is more active in asett management and is the single largest holder of USD. When the Financial Crisis hit last year, the PBC increased it’s speed in using some of those dollars to acquire mineral reserves and other basic commodities around the world. Most notable deals have been in Australia, Africa and South America.

Short term, nothing will change. China has raised Export Rebates 7 times in 2007 attempting to re-ignite export growth with the US.

The Euro had a shot to become the global reserve currency, but the American showdown against Euro oil trading in Iraq helped prevent it, and now the Euro is showing signs of weakness. The needs of the member countries are diverging and it won’t get the boost anticipated boost belonging to the world reserve currency. The Yen doesn’t have a shot because Japan’s already got it’s own problems. However, the CYN is positioned to become the next global reserve currency.

Eventually, central banks will choose between using an oil backed currency backed a deeply indebted economy, or a commodity backed currency backed by a economy with large currency reserves.

If you owe the bank $1MM the bank owns you, but if you owe the bank $100T, you own the bank. This is also true of the US/China relationship. Short term movement away from the status quo would destroy both China and the US’s economies.

Short term, China will continue to be the land of tax avoidance, fake bookkeeping, and financial lies that may even make the USA look good by the time that they come to the surface. Short term, you’d have to be crazy to invest your central banks assets into the Black Box of China – which can only favorably compare with places like Russia – because we have no idea how good or bad the real numbers are. At the same time, you’ve have to be crazy to invest your central banks assets in dollars, because we do know how bad the numbers are.

Medium term, since China is working to re-ignite export led growth, and the US is printing dollars like they are going out of style, so nothing will change.

But one morning a few years from now Central Bankers are going to wake up in the morning and say, do I really want to store my money in rapidly devaluing oil backed paper, or in relatively stable commodity backed paper?

ryan Economics （经济学）

The Yen carry trade is over for now, but there’s a new carry trade in town. For those (like me) not terribly familiar with a carry trade, it’s:

Strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate.

Basically, it’s a type of arbitrage where you borrow one asset, and use it to buy another asset assuming that exchange rates WILL NOT CHANGE. When the Bank of Japan set interest rates near 0%, speculators would borrow Yen, trade them for dollars, and then buy dollar denominated assets. The new carry trade is: USD -> RMB -> Commodities.

2009 US federal budget deficit will be $1.75 TRILLION or more.
Not even Bank of China can lend this money, it has to be borrowed.

US dollar bear leads to commodities bull.
People and nations will hoard physical goods to preserve wealth, hence generate demands higher than immediate needs and higher than available supplies.
China is on a big natural resources shopping spree around the world lately, in order to divest its huge foreign currency reserves.

Both events are occurring as people have noticed: Capital is escaping American soil; and China is on a global shopping spree of raw materials.
But people who notice these two things explain it as simply market behavior driven by speculative forces.
They fail to see a more direct, conscious and deliberate reason behind what’s going on, because no one noticed one quiet fact…

That is because for the past one year, trading between USD and CNY is equivalent to exchange one dollar into four quarters, nothing is gained or lost.

[From China, Shipping and the Great Commodity Carry Trade -- Seeking Alpha]

But the interesting part is that: As the flood of US dollars flows in, China merely cranks up its own money printing press to print more RMB Yuan to exchange for the US dollars. It then uses some of the dollars to buy US Treasury bonds and prop up the value of the dollar, maintaining a constant USD/Yuan exchange rate. But China’s real goal is not to support the dollar in long term, but to buy time to allow it to divest the huge dollar assets it is holding, in exchange of physical assets: natural resources, raw commodities, foreign mining companies and other physical assets. It costs China nothing to print more Yuans to buy more US dollars and then use the dollars to buy up the whole world.

There are a few conditions that are important to point out and make changing the current status quo (exchange rate) very difficult in the next 12-36 months.

• Speculators are dumping USD because of financial policy that is not helping to preserve wealth, but those dollars could be used to buy assets anywhere – so why in China?
• Speculators are dumping dollars and buying CYN due to the long term positive fundamentals in the Chinese economy (large inexpensive labor force, good infrastructure, large trade surpluses)
• 4 years ago, exchange rates were 8.3:1, for the last 12 months it’s been 6.84:1 (that’s a 17% rise)
• This 17% rise is partially responsible for the closure of many export oriented businesses here in China — many were already struggling to survive before softening demand in western markets destroyed them.
• The population in China Mainland is not nearly as productive or as well educated as the populations in Taiwan or Hong Kong, where wages are approximately 2x higher but trade barriers (import tariffs) are lower/non existent.
• China Mainland Gov’t has raised Export Rebates (to manufacturers) 7 times in 2009 — making the official policy clear – the current export oriented growth is to be salvaged and preserved for the foreseeable future (rather than moving to fill domestic demand)

There are also very practical considerations though. If you own raw materials all over the planet, you must have a way to maintain peaceful seas to ensure delivery of those materials.

Basically, the US economy and the CYN economy are locked together for the foreseeable future – a pair of codependents, but the relationship has the impact of long term strengthening the CYN at the expense of the USD, migrating intellectual property, skilled labor, entrepreneurs, and assets from the US to China. The breakup will be rough, but when the dysfunctional couple is finally ready for a divorce, China is walking away with much more than 50%.

ryan China (中国）, Economics （经济学）, USA （美利坚合众国）

Interesting article about the dollar’s reserve currency status:

1. There’s not enough gold to replace China’s dollars
2. Investors are taking on more risk
   
3. Borrowing dollars is still expensive
   
4. We can’t change the reserve currency overnight
   

Perhaps the most interesting is when going on to talk about SDRs:

Doing the shopping in SDRs

But is there another way? Part of the speculation about the dollar’s future came after Zhou Xiaochuan, the governor of the People’s Bank of China, published a paper arguing for an end to the dollar standard.

He argues that any system in which a reserve currency is also a national currency is flawed. Instead we should use a super-sovereign reserve currency managed by a global institution. In particular, he suggests Special Drawing Rights (SDRs), which are essentially an internal unit of account at the International Monetary Fund (IMF) and a handful of other international institutions.

Most economists rejected this idea outright. Now, it’s fair to say that economists don’t have a great track record when it comes to spotting how major shifts in the financial system will play out. Take the 1970s, by when decades of growth in crossborder capital flows had made it impossible to sustain the Bretton Woods system, in which the dollar was pegged to gold and other currencies were pegged to the dollar.

It seems that most analysts thought that switching to floating rates would reduce cross-currency flows – a conclusion that seems hopelessly misguided given our hyperactive modern foreign exchange markets. According to economic historian Charles Kindleberger in Manias, Panics, and Crashes:

“Most economists had thought that the adoption of floating exchange rates would kill the movement of interest-sensitive capital and that once currencies were floating central banks would be able to follow independent monetary policies without untoward external effects. Economists differed about whether speculative capital movements would be stabilizing or occasionally seriously destabilizing; the general view was that fear of exchange losses would deter capital flows. That view proved mistaken; many banks regarded currencies as a new asset class to be traded for a profit.”

Still, it certainly looks like there would be a lot of issues with adopting something like the SDR as a reserve currency. The issues with the renminbi apply on an even larger scale. There are no assets priced or traded in SDRs; not even bank accounts in SDRs. While we can never be certain about these things, the prospect of SDRs – or anything else – replacing the dollar in the next few years look very remote.

[From The Dollar Is Safe for Now -- Seeking Alpha]

ryan Economics （经济学）