Eisen, Currencies after the Crash

Will the U.S. dollar maintain its status as the world’s reserve currency? Will the euro or the IMF’s SDR become viable alternatives? How will China’s policies affect global currency balances? Will gold continue to reassert itself as more of a currency than a commodity?

The nine authors whose original essays are collected in Currencies after the Crash: The Uncertain Future of the Global Paper-Based Currency System, edited with commentary by Sara Eisen of Bloomberg TV (McGraw-Hill, 2013), tackle these and many other topics that every investor should understand. Not only is forex the largest exchange market, with an average daily trading volume of $3.98 trillion in 2010, but currencies are a key component of most corporate earnings.

The contributors to this volume—Jörg Asmussen, Peter Boockvar, Megan Greene, Stephen L. Jen, Robert Johnson, Papa N’Diaye, James Rickards, Gary Shilling, Anoop Singh, and John Taylor—do not all belong to the same economic choir and hence do not speak with one voice. What they have in common is clear thinking and a respect for macroeconomic data. Their writing styles range from breezy to scholarly, but never turgid.

In trying to assess whether, to quote Shilling’s title, “the dollar will remain on first,” it is essential to understand the preconditions for reserve currency status. “According to Lim (2006), there are five factors that facilitate international currency status: large economic size, the existence of a well-developed financial system, confidence in the currency’s value, political stability, and network externalities.” (p. 111) Shilling adds, and makes it his most important condition, “rapid growth in the economy and GDP per capita, promoted by robust productivity growth.” (p. 21)

It’s easy to see why the U.S. dollar is the world’s reserve currency and the hurdles that competitors must overcome to challenge the dollar’s supremacy. And yet the dollar is vulnerable in one key area—credibility—since it “has been falling against other major currencies on a trade-weighted basis since 1985.” (p. 63)

Moreover, there seems to be a “powerful and irreversible trend toward general diversification from the dollar.” But this perception is flawed. It focuses on international trade accounts, not international capital flow. International trade is “a mere 2 percent of total currency transactions.” (p. 80)

Times change, of course, and eventually the dollar will be replaced with another currency or quasi-currency such as the IMF’s Special Drawing Right. “The IMF has already announced plans for the emergence of the SDR as the new world reserve currency,” according to which “the SDR would be endowed with all of the elements of a modern liquid bond market.” (p. 197) In fact, James Rickards maintains that “a global struggle between gold and SDRs for supremacy as ‘money’ may be the next great shock added to the long list of historic shocks to the international monetary system.” (p. 199)

In this review I’ve pursued a single theme, though a dominant one. But Currencies after the Crash offers the reader so much more—for example, an explanation of the Triffin dilemma, an analysis of China’s efforts to rebalance growth, speculation about the future of the eurozone (in the words of one author, “an amicable divorce is better than an unhappy marriage”), even a call for Americans to “rediscover their hard Calvinist core.” Lots of fodder here for the investor.