Thursday, July 9, 2009

The New World Currencies: Trade in Local Currencies not USD

Brian Parkin in Berlin reports on the current world currencies discussions on Bloomberg today.

He says that world leaders have agreed to avoid devaluing their own currencies (in order to gain an advantage by making their exports cheaper). Such a move move trigger retaliatory moves and cause further chaos in the current currencies issues.

The root cause of the current currency issues is the US and other G7 countries' use of the printing presses to issue new debt, debt which I have opined will never be repaid.

"With officials from Brazil, India, China and Russia pushing consideration of alternatives to the dollar as the world’s dominant reserve currency, the draft called for a “stable” monetary system, according to a German official who read the language to reporters today. [...] They also agreed to “promote a stable and well-functioning international monetary system.”

The BRIC countries have been talking about a new world reserve currency to replace the dollar. However, they know that is avery long term proposition, and it won't happen overnight. Brazil’s President is advocating wants that the BRIC use their own currencies in settling trade accounts (as reported in trades with China earlier in the year).

This is only part of the problem, a really big problem. I believe the BRIC nations will eventually indeed stop using the USD as their main exchange currency because the risks on the USD are too big. The world clearly needs a stable currency exchange mechanism. Gold's global reserves are to small (see post). The US debt will cause a sudden devaluation of the USD (by the way, causing pain to all those holding or parking their money in money markets). Switching to other currencies is only logical. A "New USD" will be eventually born.

Remember that such stranger things have happened in recent months.

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