Wednesday, July 01, 2009

Global Reserve Currency

More posturing from the Paper Dragon. Raise your hand if you think China can create the massive kind of domestic demand required with its nascent internal demographic drags and its net exporter of people status. Focus on their security actions as opposed to political and economic negotiations. These are tense times in historical terms...when politicians and rulers can no longer deliver on promises, blaming nefarious actors across the border is the easy play. As I have alluded to on previous occassions, this type of environment has its own angular momentum that seems to allow for disasterous concentrations of power. Central decision making during these times have the worst kind of unintended consequences, to say nothing of the intended consequences.

But enough pontification...

China's longstanding tacit agreement with the United States is in breach of (implied) contract...we are not buying their goods at the same rate but they still have a demand for dollar-denominated assets. The U.S. continues to dine on Chinese Foie Gras. Now how can China placate their citizens given lower monetary velocity, increased savings rates, and political intervention (protectionism) throughout the G20?

July 1 (Reuters) - China has asked to debate proposals for a new global reserve currency at next week's Group of Eight summit in Italy and the issue could be referred to briefly in the summit statement, G8 sources said on Wednesday.

One G8 source who was involved in the negotiations said China made the request during preparatory talks about a joint statement to be issued on the second day of the summit in L'Aquila by the G8 plus the G5 (Brazil, India, China, Mexico and South Africa) and also Egypt.

This forum, the so-called "G14", meets on July 9 to discuss the financial crisis, trade and climate change and for the first time a G8 summit will also produce a joint G14 statement.

A European source with knowledge of preparations for the summit also said China had raised the subject of a reserve currency debate and that it might be mentioned during the meeting, though the source added: "Any country at the meeting can raise issues they see fit."

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