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Well, from what I read in the FT article, they are actually implying a shift from US dollars to SDRs, which already exist and are well established. SDRs are ef

Well, from what I read in the FT article, they are actually implying a shift from US dollars to SDRs, which already exist and are well established. SDRs are effectively a currency in the ways that matter, at least at this (international finance) level. Since the SDR is defined in terms of the US dollar, the euro, and a couple of other currencies, the SDR is potentially more stable than either the dollar or the euro alone. Another thought: Changing from one reserve currency to another is kind of a big deal - you can't just go to some currency exchange window and say "hello, I'd like to exchange this $372.4 billion in USD into Euros please". Throws the markets out of whack. So perhaps another reason for choosing the SDR is that they are less likely to need to change it in the future. Say thirty years from now if conditions change, and the euro starts hyperinflating and the USD is solid again, the SDR value will be relatively stable. I'm at best an amateur in these matters, so I could be mistaken. Not to mention the fact that I did not read the original article (at http://www.pbc.gov.cn/english/detail.asp?col=6500&id=168 http://www.pbc.gov.cn/english/detail.asp?col=6500&id=168 - the page will not even render readably in any browser I have). Anyone who can read Chinese care to comment? Edit: I threw around a little jargon above... SDR stands for "Special Drawing Rights", and can be viewed as a kind of pseudo-currency used by the IMF. See http://en.wikipedia.org/wiki/Special_Drawing_Rights http://en.wikipedia.org/wiki/Special_Drawing_Rights

jodrellblank 18y ago
Throws the markets out of whack It's important that we adjust what we do so we don't break the system that models what we are doing. /nods sagely/
bokonist 18y ago
It's hard to see how that kind of basket would work. If you don't have fixed pegs between the currencies, then you have not increased the stability of the system. If you have fixed pegs, then each member country must cede complete control of its monetary policy to the international bank. Otherwise the temptation to inflate would be too great.
- dejb 18y ago
  I think it would work something like this 1 SDR = 1.3 USD + 1 EURO + 80 YEN + 0.5 GPB + etc It isn't perfectly stable but it isn't so dependant on any individual currency. Even if the USD halves in value then the total impact is less than 25% on the SDR. And presumably the other currencies would increase to offset much of the impact. As currencies changed in value over time you would probably need to re-balance the percentages. I'm not sure how this would happen. EDIT: This page actually has the current ratios http://www.imf.org/external/np/fin/data/rms_sdrv.aspx http://www.imf.org/external/np/fin/data/rms_sdrv.aspx
  - cturner 18y ago
    Do you think there are any benefits doing it against currencies rather than against a basket of resources? Money serves two purpose: store of value, mechanism of exchange. If inflation kicks in, people with government backed currencies that are easing will be caught with their pants down. I've been thinking about this on a small scale recently. Now there's no systematic reason you couldn't have your cash held by a bank in terms the GS commodities index (http://www2.goldmansachs.com/services/securities/products/sp-gsci-commodity-index/index.html http://www2.goldmansachs.com/services/securities/products/sp...) and then convert it to local currencies at the last minute - either when you're paying your bill or getting money from an ATM. They could manage the risk of moving it into and out of currencies (so that they have liquidity to service people at ATMs) as part of their service. I spent my first year in London operating like this against AUD - being paid into an Australian account and spending from it on Visa debit. (You're subject to foreign exchange risk, but actually that's just a perspective thing. You're subject to it when you've got pounds via opportunity cost, you just don't realise it.) China is doing a crude version of this at the moment - converting USD into commodities countries at a rapid rate. But if they want to get a new currency, why not peg it against tangibles rather than building a new castle on already shaky foundations?
    - dejb 18y ago
      It's an interesting idea. Seems better than just gold. However I don't necessarily think it would be more stable. Changes in supply and demand of resources could have numerous unintended consequences.
jwilliams 18y ago
I thought that China moved to a basket currency a few years ago?

jodrellblank 18y ago

Throws the markets out of whack It's important that we adjust what we do so we don't break the system that models what we are doing. /nods sagely/

bokonist 18y ago

It's hard to see how that kind of basket would work. If you don't have fixed pegs between the currencies, then you have not increased the stability of the system. If you have fixed pegs, then each member country must cede complete control of its monetary policy to the international bank. Otherwise the temptation to inflate would be too great.

dejb 18y ago
I think it would work something like this 1 SDR = 1.3 USD + 1 EURO + 80 YEN + 0.5 GPB + etc It isn't perfectly stable but it isn't so dependant on any individual currency. Even if the USD halves in value then the total impact is less than 25% on the SDR. And presumably the other currencies would increase to offset much of the impact. As currencies changed in value over time you would probably need to re-balance the percentages. I'm not sure how this would happen. EDIT: This page actually has the current ratios http://www.imf.org/external/np/fin/data/rms_sdrv.aspx http://www.imf.org/external/np/fin/data/rms_sdrv.aspx
- cturner 18y ago
  Do you think there are any benefits doing it against currencies rather than against a basket of resources? Money serves two purpose: store of value, mechanism of exchange. If inflation kicks in, people with government backed currencies that are easing will be caught with their pants down. I've been thinking about this on a small scale recently. Now there's no systematic reason you couldn't have your cash held by a bank in terms the GS commodities index (http://www2.goldmansachs.com/services/securities/products/sp-gsci-commodity-index/index.html http://www2.goldmansachs.com/services/securities/products/sp...) and then convert it to local currencies at the last minute - either when you're paying your bill or getting money from an ATM. They could manage the risk of moving it into and out of currencies (so that they have liquidity to service people at ATMs) as part of their service. I spent my first year in London operating like this against AUD - being paid into an Australian account and spending from it on Visa debit. (You're subject to foreign exchange risk, but actually that's just a perspective thing. You're subject to it when you've got pounds via opportunity cost, you just don't realise it.) China is doing a crude version of this at the moment - converting USD into commodities countries at a rapid rate. But if they want to get a new currency, why not peg it against tangibles rather than building a new castle on already shaky foundations?
  - dejb 18y ago
    It's an interesting idea. Seems better than just gold. However I don't necessarily think it would be more stable. Changes in supply and demand of resources could have numerous unintended consequences.

jwilliams 18y ago

I thought that China moved to a basket currency a few years ago?