[NYTr] Trade dollars for an even more imaginary currency -- just please don't spend them!

[All the News That Doesn't Fit]

Gold Anti-Trust Action Committee - Dec 10, 2007
http://www.gata.org


Trade dollars for an even more imaginary currency -- 
just please don't spend them!

What may be a trial balloon was floated today in the Financial Times
via an essay by a former U.S. Treasury Department official, Fred
Bergsten, headlined "How to Solve the Problem of the Dollar," which
is appended here.

Bergsten proposes allowing sovereign holders of huge dollar surpluses
to exchange them for Special Drawing Rights in an account at the
International Monetary Fund. "The account would invest the dollar
deposits in US securities," Bergsten writes. "If additional backing
were deemed necessary, the fund's gold holdings of $80 billion would
more than suffice."

Why any country that has done work and produced things of actual
value for its dollar surpluses would exchange them for an even more
imaginary currency is hard to understand -- especially since, as
Bergsten writes, the dollar surpluses deposited with the IMF would
be invested in "US securities," which is only how so much of those
dollar surpluses are being held now, in U.S. government debt
instruments that can never be repaid.

But Bergsten's reference to the IMF's gold as potential "additional
backing" for the extra Special Drawing Rights is interesting. Does
he mean that sovereign dollar surplus holders should be allowed to
exchange their dollars for gold in something other than free-market
circumstances, so that the central bank suppression of the gold
price might continue more easily?

In any case Bergsten seems to be saying that the solution to the
dollar problem is not to spend all those extra dollars on anything
-- to ensure that those extra dollars flooding the world never can
be spent, to take them out of circulation before they are returned
to their issuer as payment for anything real. But of course that
"solution" is only the problem itself now. If you can't spend dollars
except for some other instrument you can't spend either, you're
never going to get paid, only cheated.

Couldn't those surplus dollar holders at least be allowed to buy,
in addition to pretty new SDRs, a few more collateralized debt
obligations?

CHRIS POWELL, Secretary/Treasurer 
Gold Anti-Trust Action Committee Inc.

* * *

How to Solve the Problem of the Dollar

By Fred Bergsten 

Financial Times, London - December 10, 2007
http://www.ft.com/cms/s/0/75cb5f2e-a729-11dc-a25a-0000779fd2ac.html

The world economy faces an acute policy dilemma that, if mishandled,
could bring on the mother of all monetary crises.

Many dollar holders, including central banks and sovereign wealth
funds as well as private investors, clearly want to diversify into
other currencies. Since foreign dollar holdings total at least
$20,000 billion, even a modest realisation of these desires could
produce a free fall of the US currency and huge disruptions to
markets and the world economy. Fears of such an outcome have risen
sharply in both official circles and the markets.

However, none of the countries into whose currencies the diversification
would take place want to receive these inflows. The eurozone, the
UK, Canada, and Australia among others believe that their exchange
rates are already substantially overvalued. But China and most of
the other Asian countries continue to intervene heavily to keep
their currencies from rising significantly. Hence, further large
shifts out of the dollar could indeed push the floating currencies
far above their equilibrium levels, generating new imbalances and
a possibly severe slowdown in global growth.

There is only one solution to this dilemma that would satisfy all
parties: creation of a substitution account at the International
Monetary Fund through which unwanted dollars could be converted
into special drawing rights, the international money created initially
by the fund in 1969 and of which $34 billion-worth now exists. Such
an account was worked out in great detail in 1978-1980 during an
earlier bout of currency diversification and freefall of the dollar
that closely resembled today's circumstances.

There was widespread agreement, including from influential
private-sector groups and congressional leaders as well as the IMF's
governing body, that the initiative would enhance global monetary
stability. It failed only because the sharp rise in the dollar that
followed the Federal Reserve's monetary tightening of 1979-1980
obviated much of its rationale, and over disagreement between Europe
and the US on how to make up for any nominal losses that the account
might suffer as a result of further depreciation of dollars that
had been consolidated.

The idea of a substitution account is simple. Instead of converting
dollars into other currencies through the market, depressing the
former and strengthening the latter, official holders could deposit
their unwanted holdings in a special account at the IMF. They would
be credited with a like amount of SDR (or SDR-denominated certificates),
which they could use to finance future balance-of-payment deficits
and other legitimate needs, redeem at the account itself, or transfer
to other participants. Hence the asset would be fully liquid.

The fund's members would authorise it to meet the demand by issuing
as many new SDRs as needed, which would have no net impact on the
global money supply (and hence on world growth or inflation) because
the operation would substitute one asset for another. The account
would invest the dollar deposits in US securities. If additional
backing were deemed necessary, the fund's gold holdings of $80
billion would more than suffice.

All countries would benefit. Those with dollars that they deem
excessive would receive an asset denominated in a basket of currencies
(44 per cent dollars, 34 per cent euros, 11 per cent each yen and
sterling), achieving in a single stroke the diversification they
seek along with market-based yields. They would avoid depressing
the dollar excessively, minimising the loss on their remaining
dollar holdings as well as avoiding systemic disruption.

The US would be spared the risk of higher inflation and potentially
much higher interest rates that would stem from an even sharper
decline of the dollar. Such consequences would be especially unwelcome
today with the prospect of subdued US growth or even recession over
the next year or so.

The international financial architecture would be greatly strengthened
by a substitution account. In the wake of the dollar crises of the
early postwar period, the IMF membership adopted SDR as the centrepiece
of a strategy to build an international monetary system that would
no longer rely on a single currency.

The move to floating exchange rates by most major countries in the
1970s postponed the need to pursue that strategy to its conclusion
but also generated the extreme currency instability that triggered
official consideration of an account. The global imbalances and
large currency swings in recent years, and the accelerated accumulation
of official dollar holdings by countries that have essentially
reverted to fixed exchange rates, replicate the conditions that led
to both the creation of SDR and the negotiations on an account.

A substitution account would not solve all international monetary
problems nor would it suffice to restore a stable global financial
system.

The dollar needs to decline further to restore equilibrium in the
US external position. China, many other Asian countries, and most
oil exporters will have to accept substantial increases in their
currencies now and much more flexible exchange rates for the long
run. But early adoption of a substitution account would minimise
the risks of adjustment of the present imbalances and the inevitable
structural shift to a bipolar monetary system based on the euro as
well as the dollar.

[The writer is director of the Peterson Institute for International
Economics. He was assistant secretary of the Treasury for international
affairs in 1977-1981 and led the substitution account negotiations
for the US in 1980.]

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