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Comment by Rod | Hacker News Reader

"In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said the goal would be to create a reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies."

Monetary policy is definitely not my forte, but why not use the Euro instead of the U.S. Dollar then? The Euro is not connected to any individual nation, after all. Creating a new currency takes such a long time that I wonder whether it would be practical.

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Well, from what I read in the FT article, they are actually implying a shift from US dollars to SDRs, which already exist and are well established. SDRs are effectively a currency in the ways that matter, at least at this (international finance) level. Since the SDR is defined in terms of the US dollar, the euro, and a couple of other currencies, the SDR is potentially more stable than either the dollar or the euro alone.

Another thought: Changing from one reserve currency to another is kind of a big deal - you can't just go to some currency exchange window and say "hello, I'd like to exchange this $372.4 billion in USD into Euros please". Throws the markets out of whack. So perhaps another reason for choosing the SDR is that they are less likely to need to change it in the future. Say thirty years from now if conditions change, and the euro starts hyperinflating and the USD is solid again, the SDR value will be relatively stable.

I'm at best an amateur in these matters, so I could be mistaken. Not to mention the fact that I did not read the original article (at http://www.pbc.gov.cn/english/detail.asp?col=6500&id=168 - the page will not even render readably in any browser I have). Anyone who can read Chinese care to comment?

Edit: I threw around a little jargon above... SDR stands for "Special Drawing Rights", and can be viewed as a kind of pseudo-currency used by the IMF. See http://en.wikipedia.org/wiki/Special_Drawing_Rights

Throws the markets out of whack

It's important that we adjust what we do so we don't break the system that models what we are doing. /nods sagely/

It's hard to see how that kind of basket would work. If you don't have fixed pegs between the currencies, then you have not increased the stability of the system. If you have fixed pegs, then each member country must cede complete control of its monetary policy to the international bank. Otherwise the temptation to inflate would be too great.

I think it would work something like this

1 SDR = 1.3 USD + 1 EURO + 80 YEN + 0.5 GPB + etc

It isn't perfectly stable but it isn't so dependant on any individual currency. Even if the USD halves in value then the total impact is less than 25% on the SDR. And presumably the other currencies would increase to offset much of the impact.

As currencies changed in value over time you would probably need to re-balance the percentages. I'm not sure how this would happen.

EDIT: This page actually has the current ratios http://www.imf.org/external/np/fin/data/rms_sdrv.aspx

Do you think there are any benefits doing it against currencies rather than against a basket of resources?

Money serves two purpose: store of value, mechanism of exchange. If inflation kicks in, people with government backed currencies that are easing will be caught with their pants down.

I've been thinking about this on a small scale recently. Now there's no systematic reason you couldn't have your cash held by a bank in terms the GS commodities index (http://www2.goldmansachs.com/services/securities/products/sp...) and then convert it to local currencies at the last minute - either when you're paying your bill or getting money from an ATM. They could manage the risk of moving it into and out of currencies (so that they have liquidity to service people at ATMs) as part of their service.

I spent my first year in London operating like this against AUD - being paid into an Australian account and spending from it on Visa debit. (You're subject to foreign exchange risk, but actually that's just a perspective thing. You're subject to it when you've got pounds via opportunity cost, you just don't realise it.)

China is doing a crude version of this at the moment - converting USD into commodities countries at a rapid rate. But if they want to get a new currency, why not peg it against tangibles rather than building a new castle on already shaky foundations?

It's an interesting idea. Seems better than just gold. However I don't necessarily think it would be more stable. Changes in supply and demand of resources could have numerous unintended consequences.

That's the reason you spread it against a basket of them instead of against a single one :)

I don't think you would gain any day to day stability from doing so. You would still have all the instability in the USD multiplied by the instability in your commodities index. The advantage would be a hedge vs. inflation but that's got limited value relative to stability when talking about small amounts of money.

You'd have instability, but not necessarily consistent loss of purchasing power which is what you get with an inflationary ccy.

I thought that China moved to a basket currency a few years ago?

> e, but why not use the Euro instead of the U.S. Dollar then? The Euro is not connected to any individual nation,

Yes, but isn't there one European Central bank? That is the problem.

I don't think it would be a real currency, it would just be a broadening of the current basket the IMF uses. We'd use an expanded form of special drawing rights as reserves, and the SDRs would be based on the broader basket of currencies.

Just curious, what will happen if China and India joins EU?

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