Friday, 26 June 2009

What keeps President Obama awake at night?

Earlier today I wrote a note on the call by the People's Bank of China for a new global reserve currency. Although the mainstream media pay polite attention to these growing calls from creditor nations for a new supra-national currency there seems to be a certain discomfort or disregard for thinking through the potential implications of such a new unit of account eclipsing the US dollar.

Nouriel Roubini has picked on some of these consequences in this piece.
So the process that will lead - in the medium-long term - to a challenge of the US dollar as the major global reserve currency has started. The US creditors - the BRICs, the Gulf states and others - are becoming increasingly alarmed that the US will deal with its unsustainable fiscal path via inflation and debasement of the value of the dollar via depreciation. So they will not sit idly waiting for this to happen: they are already diversifying into gold, into resources (as China purchases mines and energy, mineral and commodity resources all over the world) and into shorter term maturity US Treasuries that have less market risk than longer term Treasuries. With two-thirds of US Treasuries, being held by non-residents and the average maturity of such government debt down to 4.5 years, the risk of a refinancing crisis and disorderly fall in the dollar will increase over time unless the US presents a credible plan for medium term fiscal consolidation.
Even, the usually incisive Mr. Roubini seems to be rather polite in his last sentence as it seems unlikely that near the top of the agenda of the US Administration you will find a plan for medium term fiscal consolidation to avert such a re-financing crisis - and maybe this is what is keeping Mr. Obama awake at night.

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