Pros and Cons of being Reserve Currency

Friday, Oct 31 2008 by

Filed Under: Forex, Markets, Foreign Exchange,


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4 Posts on this Thread show/hide all

rpcroft 31st Oct '08 1 of 4

Holding the printing presses of the worlds reserve currency is a clear short term advantage for the US.

The inflationary implications of monetary expansion are diluted due to foreign held dollars.

For example if there were no foreign held dollars and you print up new currency equivalent to say 10% of all the money in the country then you will expect, all other things being equal, to have an eventual 10% rise in prices.

And what has just happened is that the government, or whoever had the keys to the printing press, has stolen 10% of the country's wealth. Citizens may or may not complain, they may accept this form of taxation or not. They would be wise not to as the detrimental impact of the disincentive to save is taken on without compensation.

If however there are a great deal of foreign held dollars, say 50% are foreign held. Then when you print up new currency equivalent to 10% of all the money in the country, you will have only a 5% rise in prices.

Half the burden of the taxation has been carried by the foreign owners of the dollars. Your citizens will no doubt be delighted by the reduced burden and accept the inflation. The disincentive to save has been reasonably compensated.

However how long will the foreigners wear it?

And if they decide to get a new reserve currency what will be the implcations of all those foreign dollars coming home?

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stockopede 31st Oct '08 2 of 4

Very interesting post indeed... I had never thought about it that way.  So the US can just prime the money pumps and the rest take the consequences... what a damn fine way for them to get out of a mess as long as the reserve holders don't start dumping dollars... which certainly at the moment they don't seem to be doing.

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stopthenewworldorder 31st Oct '08 3 of 4

Bernanke is employing a full squadron of choppers to rain some fiat loo-roll across the the US from now until Christmas.  By 2009 the world will have a different view of the USDollar;060303_mb_HelicopterTN.jpg perception in the City of the bailouts is changing fast as people get past their amazement and consider consequences as well as necessity...

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stopthenewworldorder 9th Nov '08 4 of 4

Bloomberg Sues Fed to Force Disclosure of Collateral (Update1) 

By Mark Pittman

Nov. 7 (Bloomberg) -- Bloomberg News asked a U.S. court today to force the Federal Reserve to disclose securities the central bank is accepting on behalf of American taxpayers as collateral for $1.5 trillion of loans to banks.

The lawsuit is based on the U.S. Freedom of Information Act, which requires federal agencies to make government documents available to the press and the public, according to the complaint. The suit, filed in New York, doesn't seek money damages.

``The American taxpayer is entitled to know the risks, costs and methodology associated with the unprecedented government bailout of the U.S. financial industry,'' said Matthew Winkler, the editor-in-chief of Bloomberg News, a unit of New York-based Bloomberg LP, in an e-mail.

The Fed has lent $1.5 trillion to banks, including Citigroup Inc. and Goldman Sachs Group Inc., through programs such as its discount window, the Primary Dealer Credit Facility and the Term Securities Lending Facility. Collateral is an asset pledged to a lender in the event that a loan payment isn't made.

The Fed made the loans under 11 programs in response to the biggest financial crisis since the Great Depression. The total doesn't include an additional $700 billion approved by Congress in a bailout package.

Fed's Position

Bloomberg News on May 21 asked the Fed to provide data on the collateral posted between April 4 and May 20. The central bank said on June 19 that it needed until July 3 to search out the documents and determine whether it would make them public. Bloomberg never received a formal response that would enable it to file an appeal. On Oct. 25, Bloomberg filed another request and has yet to receive a reply.

The Fed staff planned to recommend that Bloomberg's request be denied under an exemption protecting ``confidential commercial information,'' according to Alison Thro, the Fed's FOIA Service Center senior counsel. The Fed in Washington has about 30 pages pertaining to the request, Thro said today before the filing of the suit. The bulk of the documents Bloomberg sought are at the Federal Reserve Bank of New York, which she said isn't subject to the freedom of information law.

``This type of information is considered highly sensitive, and it would remain so for some time in the future,'' Thro said.

The Fed didn't give Bloomberg a formal response because ``it got caught in the vortex of the things going on here,'' said Michael O'Rourke, another member of the Fed's FOIA staff.

Thro declined to comment on the lawsuit.

The case is Bloomberg LP v. Federal Reserve, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Mark Pittman in New York

Last Updated: November 7, 2008 12:39 EST
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