The Case for Fewer but Stronger Currencies (Dollarization)

[54anickel]

http://www.nytimes.com/2006/02/19/business/yourmoney/19view.html?_r=1&oref=slogin

OUTSOURCING isn't just a one-way street on which rich countries shift jobs overseas. In recent years, some developing countries have contracted out the work of setting monetary policy to the United States. Ecuador and El Salvador, in 2000 and 2001, respectively, abandoned their own currencies, adopted the dollar and placed their monetary policy in the capable hands of Alan Greenspan, then the chairman of the Federal Reserve.

When outsourcing involves manufacturing and software programming it is often endorsed by economists and condemned by populist political leaders. So, too, is the tactic of outsourcing of monetary policy — known as dollarization, or euro-ization. After all, noted Robert E. Litan, senior fellow at the Brookings Institute, "currencies are symbols of national sovereignty, and countries are reluctant to give them up."

And yet nations can impose enormous costs on their citizens when they take extraordinary efforts to maintain independent currencies. "Devaluations of currencies cost people their savings and bring on rapid inflation," said Benn Steil, a senior fellow at the Council on Foreign Relations and co-author with Mr. Litan of "Financial Statecraft" (Yale University Press, 2006). The two argue that the globe's mélange of 200-plus currencies, backed only by the faith of investors, is inefficient and dangerous. Many emerging economies, they say, would be well advised to swap their currencies for strong, stable, widely used ones like the dollar or euro.

But economists say that smaller countries can encourage investment by lashing their monetary fortunes to larger regional powers. In Latin America, companies that need to make long-term investments — like utilities — are forced to borrow in dollars while they operate in local currencies, leaving them exposed to currency risk. Now that El Salvador has adopted the dollar, companies there can borrow or engage in hedging transactions in dollars with relative ease.

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Advocates of dollarization recognize that the trend is also at odds with the prevailing political winds in the Western Hemisphere. "There is a mini-anti-American revolt going on in Latin America as we speak," Mr. Litan said. "Countries that would otherwise be interested, like Bolivia and Venezuela, have elected leftist governments" that are ardently opposed to dollarization.

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[liberal N proud]

1. At one time the dollar had a good chance of becoming world currency

But since bu$h and co have destroyed the economy, I would bet on the Euro.

[Oversea Visitor]

2. Indeed

But bush came along.
Enough say on that.

[Canuckistanian]

3. Money likes to go where it's happy

As I heard one financial analyst say. And money hates instability and corruption.

Normally, this applies to third world countries or murderous dictatorships.

But now, the smart money is betting against the dollar in the long run.

Unless there is any kind of movement to control the budgetary deficit and trade deficit, the dollar won't be relied on.

[Zorro]

4. Dollarization problems

In Ecuador, dollarization has led to economic stability. That is a good thing.

However, dollarization has led to a couple of unexpected problems. There's reportedly now a lot of high-quality counterfeit hundred dollar bills flooding the country (rumored to originate from either North Korea or Iran). There's also a lot of Columbian drug money flowing into the country, and the increasing level of violent crime is being associated with the arrival of this money and the criminals that are spending it.

[depakid]

5. Dollarization DOES NOT sound very wise to me at this point

It might have made sense some years ago- where some of these economist's heads seem stuck- to peg your currency to the dollar, but I can't see how that argument could possibly be made now. US fiscal policy (and to some extent, monetary policy) has been incredibly irresponsible over the past 6 years- and looks to stay that way.

The situation is so bad that the NY Times reported a month or two ago that the administration can't find respected economists to come work for them anymore! No one wants to lose their credibility, jeopardize their academic postion or quite literally, have their colleagues laugh at them (Not that the Times has any left either- or cares. Their editors seem to let most anything pass these days- without a lot of regard for consistency or accuracy).

Moreover, Paul Krugman (who's well schooled in this particular area) just wrote about the twin budget and current accounts deficits in his column "Debt And Denial" last week. One of his points was that "the consensus view among trade experts that the dollar will eventually have to fall 30 percent or more to eliminate the trade deficit.

Don't think I'd want to hitch my wagon to that ox!