7 ms·

Is it so important to have a single reserve currency? Couldn't these problems be largely offset with better diversification and less friction in currency tradin

by dkbrk 11y ago

Is it so important to have a single reserve currency? Couldn't these problems be largely offset with better diversification and less friction in currency trading. For example, lets say some banks got together and defined a meta-currency called Euro-Dollars, which is a mixture of 55% Euros and 45% USD. I could take out a loan in Euro-Dollars from a bank. I could buy and sell goods internationally in Euro-Dollars. I could hold my personal savings in Euro-Dollars. I could buy on Ebay, Amazon and Alibaba with Euro-Dollars because the sellers know that it's a good idea to diversify their currency holdings, they can buy other goods and services with Euro-Dollars and currency trading is relatively frictionless. Or, perhaps, we could go further and create a currency that's a mix of the top 10 most traded in some suitable ratio. Rather like an index fund, wouldn't this insulate from the relative fluctuations of the individual economies and help facilitate international trade? On another note, this would help insulate individuals from currency fluctuations in a global economy. I happen to be in Australia and my personal accounts are in AUD. Since 2011 AUD has dropped about 40% relative to USD. If I now want to buy something from a company in the US, I am 40% poorer. If my money had been split into a mix of major currencies, I would be in much the same position whether I now wanted to buy domestic or international goods. Some banks offer multi-currency accounts for personal use, but it's far from the norm. Wouldn't it make more sense if my bank automatically diversified my currency holdings to insulate me from international fluctuations?

Sven7 11y ago
They could and then its value will fluctuate tomorrow wrt to apples or gold or facebookcoin or whatever and you are back to square one.
- eru 11y ago
  It would fluctuate less wrt to global apples, I'd say. That's far from square one. (I say global apples, because Apple prices in Australia are probably pretty stable in AUD.)
  - ulfw 11y ago
    Apple prices are all but stable outside of the US actually.
jahnu 11y ago
This is called a basket currency https://en.m.wikipedia.org/wiki/Currency_basket https://en.m.wikipedia.org/wiki/Currency_basket
venomsnake 11y ago
> Is it so important to have a single reserve currency? Couldn't these problems be largely offset with better diversification and less friction in currency trading. Trade between countries otherwise degrades into complicated barters, which is the problem currencies tried to resolve on tribe/state level.
- eru 11y ago
  Read the rest of the comment..
  - venomsnake 11y ago
    I did it - too complicated.
vegabook 11y ago
For many years the Russian Ruble was pegged against a basket of 55% USD and 45% EUR. So at the time you could have had your wish by buying RUB. Until it devalued. In the 90s the Polish zloty was pegged against a basket of 4 or 5 currencies, I forget, which included marks, dollars, yen, and swiss francs if I recall. Today, the Singapore Dollar has one of the lowest aggregate volatilities, precisely because it is tightly controlled against a basket of global currencies. The motivation is exactly what you point out: reducing exposure to a single currency's fluctuations, and trying to match a country's balance of payments more accurately. Often, unfortunately, because baskets go together with pegs (crawling or not, with bands or not), they encourage speculative attack at some stage or another. You mention your consumption basket in AUD has become more expensive. Your country is highly exposed to commodities which have dropped about 37% in the past 3 years, as measured by the CRB. Thus your nation's income is declining, and you're unfortunately unavoidably exposed to that if you don't hedge your foreign consumption currency basket, because recognizing Australia's commodity links, the market has depreciated the AUD against the dollar by 28%, and by 15% against the EUR in the same 3 year period. That, by the way, keeps commodity prices denominated in AUD, more stable, and dampens the blow to the Australian economy. But it makes foreign goods more expensive (as it is supposed to given Australia's economic circumstances). You could have hedged yourself quite well by simply going to a broker and selling an AUDUSD futures contract for example, and these contracts are available in "retail" size, or even smaller if you're prepared to get into the index betting sites. Essentially the option is open to you at very reasonable cost, to create your own exposure basket, and that basket, by the way, could also include commodities themselves. Indeed I would argue that currently, as we move towards higher risks of political/policy upheaval globally, hedging is more important than ever. But not putting all your eggs in one basket has always been good advice, as you point out ;-) My point is that you can do that with your liabilities as well as your assets, quite easily.
- redcalx 11y ago
  > For many years the Russian Ruble was pegged against a basket of 55% USD and 45% EUR Minor point: Pegging is not equivalent to being backed by 55% EUR + 45% USD, and nothing else. The RUB had risks associated with it independent of those other currencies, whereas a true basket currency would not (or at least not to the same extent).
mamon 11y ago
The system you described would be beneficial for all but USA :) The last two people that wanted to challenge US dollar dominance in the world financial markets were Saddam Hussein (wanted to trade oil for Euros instead of USD) and Muammar Kadafi (wanted to trade oil for gold). We all know how that ended for both of them - their countries were invaded in under 6 months after they announced their plans. Now, the only country powerful enough to force switch from USD to currency basket is China, and their recent initiatives, like creating AIIB bank, or devaluating juan are aimed at exactly that.
- cheriot 11y ago
  I've not been able to figure out the benefits. Stability by increasing the stakeholders in the value of the dollar? It gives people more reason to buy dollars => raises the value of dollars => and makes US exports less competitive => makes the US poorer.
  - vetinari 11y ago
    Compare the sizes of real economy vs financing in US. There's your answer.
    - ArkyBeagle 11y ago
      Is that an answer? What's the optimal ratio? On what does change in that ratio depend?
  - nopinsight 11y ago
    Effects of strong dollar and its global reserve status: --> Americans can buy stuff / take international vacations more cheaply --> Better lifestyle --> American corporations can use their stocks valued in dollars to takeover foreign companies/assets and expand more cheaply. --> Power to punish enemies with financial sanctions/manipulations. --> QE over and over again with near perfect impunity. Ability to rescue itself from certain kinds of financial crises.
    - 11y ago
forgetsusername 11y ago
>* Wouldn't it make more sense if my bank automatically diversified my currency holdings to insulate me from international fluctuations?* Sure. You can do this. But why would you rely on or expect your bank to do so, unless you wanted to pay for the service? >that's a mix of the top 10 most traded in some suitable ratio. The problem is there is no "suitable ratio". You're always speculating on the future value of currencies in the basket. Sure, the diversification will likely dampen the fluctuations, but you're equally likely to miss out on upside as downside. But again, countries are free to do this right now if they want to. In discussions like this, there's always some implication that the US is asserting some authority to force countries to use the dollar, and if they could somehow just get off it, everything would be grand. In reality, it's a conscious economic decision to use or peg to the US dollar. Sometimes it's great, other times (like now, with the EMs hurting and the US economy relatively strong) it isn't.
hammock 11y ago
That already exists. It's called SDRs, or Special Drawing Rights, and is a basket of currencies. SDRs are the reserve currency of the IMF.

by dkbrk 11y ago

Sven7 11y ago

They could and then its value will fluctuate tomorrow wrt to apples or gold or facebookcoin or whatever and you are back to square one.

eru 11y ago
It would fluctuate less wrt to global apples, I'd say. That's far from square one. (I say global apples, because Apple prices in Australia are probably pretty stable in AUD.)
- ulfw 11y ago
  Apple prices are all but stable outside of the US actually.

jahnu 11y ago

This is called a basket currency https://en.m.wikipedia.org/wiki/Currency_basket https://en.m.wikipedia.org/wiki/Currency_basket

venomsnake 11y ago

> Is it so important to have a single reserve currency? Couldn't these problems be largely offset with better diversification and less friction in currency trading. Trade between countries otherwise degrades into complicated barters, which is the problem currencies tried to resolve on tribe/state level.

eru 11y ago
Read the rest of the comment..
- venomsnake 11y ago
  I did it - too complicated.

vegabook 11y ago

For many years the Russian Ruble was pegged against a basket of 55% USD and 45% EUR. So at the time you could have had your wish by buying RUB. Until it devalued. In the 90s the Polish zloty was pegged against a basket of 4 or 5 currencies, I forget, which included marks, dollars, yen, and swiss francs if I recall. Today, the Singapore Dollar has one of the lowest aggregate volatilities, precisely because it is tightly controlled against a basket of global currencies. The motivation is exactly what you point out: reducing exposure to a single currency's fluctuations, and trying to match a country's balance of payments more accurately. Often, unfortunately, because baskets go together with pegs (crawling or not, with bands or not), they encourage speculative attack at some stage or another. You mention your consumption basket in AUD has become more expensive. Your country is highly exposed to commodities which have dropped about 37% in the past 3 years, as measured by the CRB. Thus your nation's income is declining, and you're unfortunately unavoidably exposed to that if you don't hedge your foreign consumption currency basket, because recognizing Australia's commodity links, the market has depreciated the AUD against the dollar by 28%, and by 15% against the EUR in the same 3 year period. That, by the way, keeps commodity prices denominated in AUD, more stable, and dampens the blow to the Australian economy. But it makes foreign goods more expensive (as it is supposed to given Australia's economic circumstances). You could have hedged yourself quite well by simply going to a broker and selling an AUDUSD futures contract for example, and these contracts are available in "retail" size, or even smaller if you're prepared to get into the index betting sites. Essentially the option is open to you at very reasonable cost, to create your own exposure basket, and that basket, by the way, could also include commodities themselves. Indeed I would argue that currently, as we move towards higher risks of political/policy upheaval globally, hedging is more important than ever. But not putting all your eggs in one basket has always been good advice, as you point out ;-) My point is that you can do that with your liabilities as well as your assets, quite easily.

redcalx 11y ago
> For many years the Russian Ruble was pegged against a basket of 55% USD and 45% EUR Minor point: Pegging is not equivalent to being backed by 55% EUR + 45% USD, and nothing else. The RUB had risks associated with it independent of those other currencies, whereas a true basket currency would not (or at least not to the same extent).

mamon 11y ago

The system you described would be beneficial for all but USA :) The last two people that wanted to challenge US dollar dominance in the world financial markets were Saddam Hussein (wanted to trade oil for Euros instead of USD) and Muammar Kadafi (wanted to trade oil for gold). We all know how that ended for both of them - their countries were invaded in under 6 months after they announced their plans. Now, the only country powerful enough to force switch from USD to currency basket is China, and their recent initiatives, like creating AIIB bank, or devaluating juan are aimed at exactly that.

cheriot 11y ago
I've not been able to figure out the benefits. Stability by increasing the stakeholders in the value of the dollar? It gives people more reason to buy dollars => raises the value of dollars => and makes US exports less competitive => makes the US poorer.
- vetinari 11y ago
  Compare the sizes of real economy vs financing in US. There's your answer.
  - ArkyBeagle 11y ago
    Is that an answer? What's the optimal ratio? On what does change in that ratio depend?
- nopinsight 11y ago
  Effects of strong dollar and its global reserve status: --> Americans can buy stuff / take international vacations more cheaply --> Better lifestyle --> American corporations can use their stocks valued in dollars to takeover foreign companies/assets and expand more cheaply. --> Power to punish enemies with financial sanctions/manipulations. --> QE over and over again with near perfect impunity. Ability to rescue itself from certain kinds of financial crises.
  - 11y ago

forgetsusername 11y ago

>* Wouldn't it make more sense if my bank automatically diversified my currency holdings to insulate me from international fluctuations?* Sure. You can do this. But why would you rely on or expect your bank to do so, unless you wanted to pay for the service? >that's a mix of the top 10 most traded in some suitable ratio. The problem is there is no "suitable ratio". You're always speculating on the future value of currencies in the basket. Sure, the diversification will likely dampen the fluctuations, but you're equally likely to miss out on upside as downside. But again, countries are free to do this right now if they want to. In discussions like this, there's always some implication that the US is asserting some authority to force countries to use the dollar, and if they could somehow just get off it, everything would be grand. In reality, it's a conscious economic decision to use or peg to the US dollar. Sometimes it's great, other times (like now, with the EMs hurting and the US economy relatively strong) it isn't.

hammock 11y ago

That already exists. It's called SDRs, or Special Drawing Rights, and is a basket of currencies. SDRs are the reserve currency of the IMF.