tv [untitled] June 11, 2012 3:30am-4:00am EDT
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following welcome to cross talk i'm peter lavelle deep aching of the dollar is the era of the greenback finally coming to an end with china and japan now trading with each other in their own currencies is the international monetary in financial order fundamentally changing and if this is the case who are the winners and losers. and you can. start. to cross out the fate of the dollar i'm joined by mark calabria in washington he's director of financial regulation studies at the cato institute and also in washington we have derek scissors he's a senior research fellow at the heritage foundation and in hong kong we crossed him martin hannett he is an associate director at the tight group all right gentlemen cross talk rules in effect that means you can jump in anytime you want martin if i go to you first in hong kong again welcome back to the program we have now japan and china trading in their own currencies is this the end of the beginning of the
end of the dollar said germany in the world. first of all i would like to emphasize you know even results of what was happening was a un and they're promoting the u.n. as an international reserve currency more and more in trying to trade directly and are and as a currencies even these are that the u.s. dollar and even the euro and sterling for that matter as they seem to be going in the direction of. in some form or by themselves and in this regard actually i would like to show one chart saying every investor. everybody generally should be having a look at what it has been quite a lot and that's a ratings projection a hypothetical ratings projection that the rating agency standard and poor's made in march two thousand and five for that's quite a while back and at that point they actually projected that all of the major western countries not just greece and i don't know why we always talk about greece of the time doesn't matter if greece for god's sake falls. of the of the side of
the earth i mean it's just a tiny tip of the iceberg but actually it's france the u.s. germany and the u.k. that standard and poor's already back in two thousand and five projected as a very possibly heading to junk status on default and now you're magine since two thousand and five year two thousand and eight financial crisis and the eurozone crisis and all of that if anything as everybody surely would agree it would only have substantially worse than the balance sheet of those major governments and if you carefully look at that chart you actually see that the u.s. already got the first downgrade now from standard imports five years ahead of their original projection and so on they are supposed to head to junk status and then we have a lot of warnings the former comptroller of the united states government basically they go already it's the books of the u.s. government saying about two years away from where greece was when it had it's. really. going to do i mean you know the it was widely reported
about how china and japan will start. rating and we have to remember japan's a very important ally of the united states what does this mean for the future of the dollar i mean is it slowly eroding people we've talked about for years about the end of the bretton woods agreement i mean you know where is the dollar going is that just slowly slipping away. i think that's a better characterization since we're supposed to be debating that than martins' slowly the trading doesn't really matter that much to me because the un is dead as a global currency it's since it's been undervalued we haven't seen that the want of course has potential as a global currency but lack of nerve in beijing is holding that back and the u.s. is doing its best to undermine the dollar but at the same time everybody else is currencies are so weak or stunted that we see any as again in the euro crisis money flowing into dollar holdings so american policy i think martin and i certainly agree on that is damaging to the dollar but i think the decline is very slow
because everything is relative it's not just your currency it's how your currency looks against other currencies and in that sense the dollar's doing ok and what do you think about that market is there none of the currencies are very attractive these days particularly the euro. i mean that's and that's an important point and i want to separate two points any one of course is the strength of our currency relative to another in terms of value and certainly the dollar continues to look good soley because everybody else looks so bad and then there's another aspect which is this simply the use of a currency which i think is you know it could be a strong currency could be a weak currency but some of that is determined by the use i would emphasize very much agreement on this is going to be a long process and i think we're talking you know fifteen to twenty years and maybe to put some you know some sort of comparison if you think about it the dollar is about sixty percent central banks global reserves today i envision about fifteen or twenty years that fall until about
a little bit more than around forty percent so it would still be probably the most important currency in the world but you would see potentially you know there would be any in the euro i mean my expectation is they're going to have lots of problems but i expect my expectation is in fifteen years we're still going to have a euro that the word of the dollar a share in the world stage in a bigger way than it is today but that is still predominantly the biggest currency the reason i think. the changes between china and japan are important is that so much trade in asia even between asian countries is denominated in dollars i mean for instance the vast majority of trade between korea and japan is denominated in trade in dollars and if you see a move away from that you're certainly going to see reduced demand for the dollar and so i think that's going to push interest rates up in the u.s. over the over the course i do think the question of the go back to my point about if we see the dollar slip to about forty percent of global reserves it's up to the united states domestic fiscal policies as whether we are forty percent or thirty
percent or twenty percent of global reserves and again global central bankers are central simply a proxy you know other uses of mean for instance you know sixty some percent of u.s. currency is how it outside the u.s. and whether that's going to continue to be the case whether for instance the dollar remains the drug dealers you know the currency of choice depends on whether we maintain the value of it all right before we laugh or uses in the locker room and let's look at the state of the dollar today. over seventy years downed and in the bin the recent decision by china and japan to conduct by less hold trade in their own clearances once again the role of the u.s. dollar in question to the three that you're starting june first is your direct exchange of the yen and the yuan will begin in both tokyo and shanghai markets market but disciplines can all swap japanese yen for chinese yuan without having to
use the u.s. dollar as an intermediary curan see it is believed to benefit the two asia's largest economies due to more convenience in the business and considerable reduction off risks caused by fixation on the dollar as exchange rates on the world market they sung by not having to go through a third country's currency and by reducing transaction costs and lower settlement risks between financial institutions the decision will bring benefits because i believe this will enhance the convenience of both currencies and revitalize tokyo markets moreover the train will save the two countries some three billion dollars in transaction fees annually used to be paid to the u.s. central bank the move marks china as a mission to challenge the rain bags dominants japan is hoping to make the yen and more widely accepted currency in global trade and investment it may not be the end of the dollar hegemony established by the bretton woods agreement in nine hundred
forty four and which contributed to the united states decides if role in shaping global markets rules and institutions but even despite the fact that over sixty percent of global foreign reserves is in the u.s. dollars aborts in the dollar definitely damages its value influence and power and this is as many argue and others sign that the u.s. dollar as the world's reserve currency will slowly lose its attractiveness that original four cross-talk r.t. . ok mark i'd like to go back to you in hong kong or. where is this in china's playbook here i mean do they want to the their currency to be is just as important as the dollar at some point is it challenging the dollar or is it just want to be part of the game just a bigger part of a bigger part of the proportion of currency that is being used in the world. yeah of course they want to increase the influence of the name be. clear because vis
a vis the currency influence also comes political influence to go together and of course the u.s. has been using the willingness of other countries to accept the dollar. as a way of living beyond their means just by printed money so if other countries accept your currency as a reserve currency then for for some time you can just print and don't have to work that hard so that's a great advantage to any country to have but what was mentioned us before it's also true that you always have to look at relatively rich currency globally it's better you know the chinese renminbi has a way to go probably to increase investor interest in it and tracked in this because china like russia if you look and most of the western media you always hear negative stories of the reputation isn't really is that gold and one of the race china recently by the way seems to be doing there is way increasing their gold reserves i don't know where it probably is that all the time but if you're looking
at the force for months of these years imports of goods through hong kong and those have actually been rising seven hundred eighty two percent that's from quite weak numbers though the year before but it's still a huge number so that's probably one way they're trying to push this and by the way the drug dealer's choice of currency is also gold not just the u.s. dollar you know it's increasingly obvious award for some time so that's what i. do agree to end up with. you how much of this is a vote of confidence in the dollar and we see the chinese and the japanese do this i mean there is a certain sense of inevitability because you know the u.s. is can keep printing money in its debt situation is quite disastrous it hasn't been resolved. right i mean what's going on around the world is an acknowledgement that there is no replacement for the dollar now there won't be in two years it won't be in five years and so on but the u.s. is heading down a direction where everybody has to hedge you know this is like
a you have a strong stock and you're not going to sell the stock or you really don't have an alternative it's a great stock but you're not really happy about where the stocks are going you need to find something else to support your position that's what the world is doing they're not leaving the dollar they're looking nervously at american policy and one of the big questions here is the chinese are currently afraid of making their opening their capital count and making the run to be a truly convertible currency so which fear is bigger the fear of american irresponsibility which i think all of us here agree is a is a problem or their fear of instability in their own financial markets that's going to be a big question that needs to be answered and it's not going to happen next year or whatever but when we talk about the future of the dollar in twenty years a lot of this is how much nerve china has ok how it will well in the second half of the program we'll talk about just how much nerve china has after a short break we'll continue our discussion on the dollar stay with.
a time when people would lie down in their forces in the wild west and pick up the future day it's important to be here for the prosecution don't look like the female old people. when they go out there he's got a weapon. and you have to hope that nothing. we're chasing killers if you gotta keep that in mind it was a to me a dollar bill because the rest. were not superheroes we can be killed to you know they should be in the head i'm going to die. and. once you've hunted minute i'll never go back to hunt anything else. and. welcome back to cross talk i'm curious about your mind you were talking about the
dollars roll in a changing work. ok mark i'd like to ask you you know as is the dollar coins relatively well i think everybody agrees on the word relative here you know how do financial institutions around the world change how does the i.m.f. change how does the world bank change. well you're certainly going to see differences in what these institutions decide to hold i think you're also going to see changes in terms of trying to hedge as we move to a world to which financial institutions have to worry about more than one currency i mean and clearly have to do that today you know they're hedging strategy their financial management strategies are going to change in to some extent the. klein in the dollar is also going to help the financial markets and one of the things that drives a global currency is the strength of your financial markets and so the extent that hong kong in the extent that shanghai become even more important financial centers i think that that's going to hurt the dollar now to the extent that the i.m.f.
and others try to change the composition of the reserves i think you're ultimately you know obviously going to see moves away from the dollar and i do want to emphasize an important point which is the dollar plays an outsized role relative to the size of its economy but if you look at currencies around the world one of the primary determinants of the use of that currency is the size of its economy and so if china continues to grow in asia it continues to grow in the dollar i mean in the u.s. as a size of the world economy declines relative to others that is in itself is going to drag down the dollar but again it's a question of whether people decide to continue to take the dollar for its role be besides simply economic transactions and martin if i can ask you i mean it's very interesting when we heard from washington from mark here i mean how do you think it will change the internet international financial institutions because if you have the biggest economy it should have it least one of the most important currencies and we're not even close there though china by recognition is the second largest i
mean what's what's in between between you know being an important currency and the size of the economy. it's very tricky to say and i think at this point in time really it's again as i mentioned before it's some it's about much more than just the chinese yuan and the slow progress of getting there but really you're talking about an impending collapse of the eurozone first of all and that can easily take down the u.s. i mean the other guests are saying might take some time for for the u.s. to fall over for that when i was on the show a year ago or you're buying somebody was saying you're buying greek island and it's going to take five to ten years but how does the financial situation have to look for you to have and very soon maybe like the u.s. has had to school get above two hundred trillion us dollars or something there will have to happen probably quite fast from from the perspective of the best and counties and then what what's what will be next who knows maybe it's a gold first as a reserve currency but the i.m.f. there certainly don't have the money to bail out anybody and zero zero in germany
doesn't have maybe it's chaos so it's quite tough to say but long term clearly yes we think that china and other asian countries will have a much more significant role saw from an investor's perspective you think is a good time to shift assets in those. rising future currencies and maybe times of. need we will be holding the eurozone assets now break up us to be in and they're there because when go to you i mean if it seems to me that you know is the chinese currency gets more and more important. it want more say it's institutions like the i.m.f. but the i.m.f. you know in the in their a lot of arguments a lot of people like it a lot of people dislike the i.m.f. because of its conditionality the chinese are not really interested in that kind of thing they're interested in getting a return on their investment so what i'm asking is an institution like the i.m.f. if the chinese can't have a huge play to do you think they'll just walk away from it and maybe start their own. no i mean they you're right they don't want to be leading in the i.m.f.
we have a couple very stark examples of the chinese saying no no no we are still a developing country don't be asking us for lots of money so i think you're right there but i do think they want to be involved in all these international organizations essentially you know they want in some ways the best of both worlds they want to be consulted they want to have veto rights they want to have approval rights and they don't want to be out front they don't want to be the leader but they want to they want to be number two behind they're saying no we're not doing this and yes we are doing that they want the power without the responsibility this is not a criticism of china we all like that so i don't think they're going to leave the leave the i.m.f. and start their own independent organization they do a lot of lending on their own now through china development bank and others but i do think you're right they don't want to leave the i.m.f. and i don't want to talk too long but that's an important issue if the us weakens faster if martin is right and i disagree with him but if the u.s. were to weaken faster than we think who is going to take its place and the answer is no one that's
a real issue one reason people will hold on to the dollars because the alternative is we break into blocks we don't have a truly global economy and nobody wants that ok maybe we should have blocks if i go back to you mark i mean i think this is where a lot of people say the world is going on very multi-polar world and you have different currencies zones and things like that and i think it's very likely we could go into that direction if martin is right and he may be right but we such see such a dramatic decline in the eurozone and the dollar's own. i think that that's absolutely a very real distinct possibility and i should echo something in words because i think it's incredibly important which is you know the options or commodities of unions is one of the reasons you're seen increased demand for gold and so over another another precious metals and those are going to be some of the growing alternatives but i do think that particularly since we started talking about the china japanese relationship you know that doesn't look like it's the case now but if there's potentially turned into something like an asian monetary union i think that that really changes the dynamic in the world because there's so much trade
there now of course china is struggling to mention with the sort of one of the best of both worlds as do we it's very hard practically impossible basically to be a world reserve currency and also have an export driven growth strategy because being a reserve currency increases the demand for your currency and pushes up the value which of course makes your exports uncompetitive so i think you're paying rather china has really got to make that decision of do we continue to moderate the migration from the rural parts of the economy into the urban areas and we continue to create industrial jobs by a relatively weak currency although to factors i think there's currency started to try to trade a closer to a fair value but that said you cannot have the best of both worlds and of course china is going to turn back to its domestic concerns ultimately if it comes to be a choice of do we manage domestic on the rest or do we do or do we manage what is a bigger issue in terms of being a reserve currency i'll say as an aside one of the things that is going to be an currencies as always they're jumping ahead yes i mean just on asia think
it's not just china you know if you want to have a reserve currency i mean why is there a world trading system in the world train system because the u.s. has been willing to run five hundred billion dollar current account deficits for decades the equivalent of an equivalent dollar terms this is a complete change orientation and mark is totally right about china i'm just extending it's point asia you set up a monetary zone in asia are the asian countries willing to run large current account deficits. not even close let me. take a question because i think we're all interested in this here martin i mean considering what's going on in the euro the euro zone do you think asian countries are interested in a monetary union i mean i think we all learned you need to school you know here for a two hour i was involved with. making a joke and i think china is watching germany very closely and china is maybe one of the strongest industrial nation are now in asia so they don't want to be like germany basically paying for everybody else and bankrupting themselves in the
process and so i think maybe some time off is that monetary union but i do think that china realizes at some point they have got to let the dollar i mean with all their reserves and dollar and euro it is somewhat of a problem for them that we have got to let some of that fall write it off and focus more and more on that a mistake economies and the remnant of the rise of exports more difficult but that will come anyway as the best and countries relatively low dollar and so they're focused more on their domestic economy and then some sacrifices will be made by yet no common currency so far maybe that's not going to happen ok derek if i go back to you martin brought up something that i'm beginning to hear now that you know maybe a year ago two years ago that the chinese would never write off american debt but now you know they have so many reserves and they are seeing the future of the future doesn't look good you know now you start writing it off and then that changes the whole calculus doesn't it well it's really a lot harder than that first of all as i think everybody on the program knows
china's foreign reserve holdings are a big political issue at home it's the blood sweat and tears of the chinese people what happened to its value what do you mean you wrote it off and second again as everybody knows if you were writing poor art of part of china's debt off you would start with the part that's in europe you wouldn't start with a part that's in dollars so you know this is. a u.s. the u.s. fiscal situation. according to morgan stanley. greets that of greece. ok i'm not even talking about you know all of the other better countries so that the u.s. is better than the eurozone i would very much doubt that and i guess it's the rest of the reason i think it is to do strangled money off the bat because the u.s. is bankrupt right ok. you know i mean u.s. fiscal policy may be worse than greece but the u.s. has a wealth backing its debt is completely out of order compared to even proportionally to what greece has backing its debt so when you're buying a dollar you're not just betting on u.s. fiscal policy you're betting on the capacity behind the currency and in that
respect you know europe is not even integrated market the u.s. is much stronger position than europe even though i agree with martin completely that u.s. fiscal policy is terrible ok mark you want to jump in there. but i was going to add also that it's worth noting that a very large share of chinese in asian holiness of u.s. assets are in securities fannie and freddie's and certainly while they've got some problems with those agencies there's also really mortgages and housing and housing back in those debt in the way that there's some real collateral behind it that's not to mean that china is going to come here and start foreclosing on american homes but it does mean that there's a payment stream there where is it's a promise there is nothing beyond it and so what i would certainly share more of. the u.s. risk ok martin you want to jump in the u.s. debt is the euro the u.s. so there i mean is it all of the. base a yes go ahead you are going to repeat that us over and days i would suggest the problem is nothing as by the promise so that's that's why though you're kind of
right the chinese are looking to invest in some other things with some form of banking with hollow this industry so in europe actually they're buying up like needing german companies now all over the place looking at physical industry i think they have for quite enough folks over in bonds but within the u.s. and europe and again that have to write it off rather than throwing good money after bad so we do you realize we're twenty seconds and then we're going to go right. ahead. i even though you know the story here is going to take a long time chinese investment in physical assets actually was flat last year it was going up for years it was flat last year they couldn't find things to buy you've got to have an alternative to the dollar for the dollar to decline even when u.s. fiscal policy is bad all right gentlemen to jump in would run out of time and we'll see what that alternative is maybe in a few years many thanks my guest today in hong kong and in washington and thanks to our viewers for watching as you see you next time and remember i was talking.