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Submitted by Bo Peng

Making The Last Use Of Reserve Currency Status

I suspect many in the mainstream academia haven't realized what QE2 is.
It is the last use of the dollar's reserve currency status, intended or
otherwise.

In a fiat currency system, inflation should be the
only risk, because fighting deflation should be trivial -- just print
money. This is a fundamental advantage of a fiat system over the old
gold standard. Unfortunately for the US, the dollar's reserve status
means the geopolitical border is not the dam holding the water as in
other countries. As Fed pours in more water, it leaks right out to
lowlands (good investment destinations) all over the world. Given the
current economic prospects in the world, the result is that QE2 cannot
stoke inflation in the US, but causes very unwelcome interference in
exactly the other places in the world where inflation is a big concern.

It's small wonder all the growth EM economies are engaging in the low-grade currency war of capital control.
To them, this is a defensive war for survival against the invading army
of dollars. If the low-grade war proves insufficient, they would
escalate the defensive posture. They have to.

Another
consequence, intended or not, of QE2 + reserve status is that all growth
economies are under tremendous pressure of currency appreciation. Some
may be able to resist it and muddle through until an easier day; others
will have to cave in, therefore caught in the catch 22 of either raging
inflation or shrinking economy, or both. And, of all the growth
economies, China arguably has the most capacity and strongest political
will to resist appreciation. In such a scenario, if the intended target
of Fed's fury is China, as hinted not so subtly by Bernanke, "collateral damage" would once again be the main theme, as has been in all recent offensives launched by the US.

In
summary, Fed's dogged efforts in stoking inflation have caused and will
continue increasing the risk of bringing all growth EM economies to a
halt, significantly increasing policy risks in the rest of the world as
each country tries desperately to deal with the capital tsunami, and all
the while with huge doubt in whether it could reach its domestic goal
of stimulating employment and housing. In other words, Fed is screwing
the world for a slim chance of helping the US economy.

This is
emphatically NOT a moral criticism. But it does represent a significant
abandonment of the responsibilities on Fed's part as the issuer of world
reserve currency.

Let's go back a little in history. Right on
the heels of WWII victory, in 1944 US dictated Bretton Woods that
established the dollar as a proxy for gold in the free world. The
"proxy" part was only convenience, of course, as to be expected and
proven by Nixon in 1971. The arrangement made sense: the US would
provide security blanket, and the rest of free world would pay for it by
accepting and holding the green paper printed by the US. It's the same
idea as gangs collecting protection fee in NY, no cynicism intended.

Fast
forward to Berlin Wall collapse. Now the fundamental premises of the
dollar's reserve status were gone. Europeans quickly realized this
change and created the Euro; why should they continue paying for
protection when there's nothing to protect against? The US has made
numerous fantastic efforts in creating threats (by "creating" I don't
necessarily mean create; often times you just have to doze off for a
second and the enemy will help you out): perpetual terrorism, WMD in
Iraq, perpetual war in Iraq and Afghanistan/Pakistan, Iran, North Korea,
China, even Somali pirates (now it gets really pathetic). But none of
them could ever live up to the high expectations set by USSR.

After
10+ years of trying, it's become clear that this is futile. Nothing
works; none of those idiots could do it. But with the reserve currency
status comes its responsibilities. Win-win is BS-BS; there's no free lunch after all. The time has come to end Bretton Woods II.

Now Zoelick's surprise proposal of a new gold standard makes perfect sense.

With
QE2 the Fed is saying: Ah fuck it, you don't like USD as the reserve
currency? Well guess what? We don't like it, either. So let's drop it
and from now on it's every man on his own. Good luck.

Good luck everybody. We all need it.

America is filled with parks that are filthy, dangerous and badly maintained. The governments in charge plead: We can't help it. Our budgets have been slashed. We don't have enough money!

Bryant Park, in midtown Manhattan, was once such an unsavory place. But now it's nice. What changed? Dan Biederman essentially privatized the park.

With permission from frustrated officials who'd watch government repeatedly fail to clean up the park, Biederman raised private funds from "businesses around the park, real estate owners, concessions and events sponsorships. ... (S)ince 1996, we have not asked the city government for a single dollar."

Sounds good to me. But not to Shirley Kressel, a Boston journalist.

I asked her what's wrong with getting the money from private businesses, as Dan does.

"Because it goes into private pockets," she said.

So what?

"Because it's very good (for Dan) to use the public land for running a private business, a rent-a-park, where all year 'round there's commercial revenue from renting it out to businesses. He keeps all that money. People don't realize that."

So what? I don't care if they think the money is going to Mars. The park is nice, and people don't have to pay taxes to support it.

The park is certainly more "commercial" now. The day I videotaped, there were booths selling food and holiday gifts. The public seemed fine with that.

Biederman is not finished with his efforts to save public parks. He next wants to apply his skills to the Boston Common. The Common is America's oldest public park, and like many others, it's largely a barren field. Biederman doesn't want to seek business funding, as he did with Bryant Park, because the area is not as commercial. Instead, he would combine the Bryant Park and Central Park models. I know something about Central Park because I'm on the board of the charity that helps manage it. When government managed Central Park, it was a crime zone. Now it's wonderful. Those of us who live near it donated most of the money that renovated and now maintains Central Park. It's not a business arrangement.

Kressel says she'll fight Biederman's plan for Boston.

"(W)e don't need ... to teach our next generation of children that the only way they can get a public realm is as the charity ward of rich people and corporations," she said. "We can afford our public realm. We're entitled to it. We pay taxes, and that's the government's job."

The Central Park model "doesn't work for 98 percent of the country," she added.

I don't know what'll happen to the rest of the country, but it's working in Central Park. Why not try it in Boston? It's working for the public.

eric seiger do

Wednesday, December 1, 2010

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