China Takes Giant Step Towards Making Yuan the World’s Reserve Currency

I think is probably correct, and it will reduce the flexibility we have for our own monetary policy.  But I think it’s being portrayed a little direly in many places as well.

The Big Picture

via China Takes Giant Step Towards Making Yuan the World’s Reserve Currency.


4 responses to “China Takes Giant Step Towards Making Yuan the World’s Reserve Currency

  1. This sounds significant..
    Even if I struggle to understand basic international finance and macro-economics.. and some other aspects regarding “money”.

    But this means that printing more money to pay debt won’t work anymore, right? And that more countries will start trading in their own currencies? Which again brings the national debt crises closer to another meltdown?

    Side-questions; Do we really need a “reserve currency” common for all countries? What would happen if everyone just choose means of payment pr. deal? And what function does a basket of currencies have? And also – where lies the politics in all of this?

    • “But this means that printing more money to pay debt won’t work anymore, right?”

      We would still would have control of our own monetary policy, and thus could monetize government debt. However, it could mean in effect that China is less inclined to support the value of our currency, and our monetizing our debt would be reflected in a falling dollar. Imports could become more expensive as a result as we monetize our debt and inflate our currency, and in effect our ability to live off imports from china would become harder. In fact though we’ve been unhappy about the flood of imports anyway, so there’s an upside in revival of some US manufacturing. Here’s a link on the same subject, and another.

      The historical parallel is the British Pound. The Pound was the reserve currency for a long time but generally isn’t now. Note that England is still there.

      I think unwillingness to purchase our debt by China would be a bigger concern that our currency no longer being a reserve currency.

      • Reserve Currencies are just a currency that a lot of international transactions are denominated in. It effectively removes exchange rate risk for the buyer and seller country as a concern if I’m in argentina selling grain to South Africa with a price denominated in dollars. The risk of rapid changes in the value of the dollar has been perceived to be less than that of other currencies. The dollars has a lot more competition for that role now, in the form of the Yuan and the Euro among others. The price of the deal could be priced in seller or buyers currency, but the exchange risk might be higher if those are unstable currencies. I think it does show we’re not as dominate as we used to be, but its not the end of the world.

  2. Ah, finally I got it. Thanks!
    Both the voluntary part of reserve currencies, and avoiding risk. It explains the alternatives of baskets and gold standards as well.

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