Why The Yen Should Be The Global Reserve Currency

By Chandrashekar (Chandra) Tamirisa, (On Twitter) @c_tamirisa

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Mourning the lives lost in the atomic bombing, we pledge to convey the truth of this tragedy throughout Japan and the world, pass it on to the future, learn the lessons of history, and build a peaceful world free from nuclear weapons.

Hiroshima National Peace Memorial Hall for the Atomic Bomb Victims

Aspiring sincerely to an international peace based on justice and order, the Japanese people forever renounce war as a sovereign right of the nation and the threat or use of force as means of settling international disputes. (2) To accomplish the aim of the preceding paragraph, land, sea, and air forces, as well as other war potential, will never be maintained. The right of belligerency of the state will not be recognized.

Article 9 of the Japanese Constitution

The legendary investor Warren Buffett, often the world’s richest man, who had essentially invented the private equity marketplace with an attention span that only rivals his longevity and seldom found among today’s Wall Street investors who look like children afflicted with Attention Deficit Hyperactivity Disorder (ADHD) when compared to him had presciently cautioned about financial weapons of mass destruction in 2002. He knew about it all too well, first hand, because he had bailed out, once upon a time, Salomon Brothers from the excesses of the Wall Street bond trader John Merriwether who had subsequently gone on to found Long Term Capital Management (LTCM) which had threatened to bring down the global economy to it knees in 1998, a year after Robert Merton and Myron Scholes, LTCM’s board members, had shared the Riksbank Prize in Economics in Memory of Alfred Nobel for their work on valuing derivatives.

Sovereign debt levels in the G7 advanced countries are at their highest levels today. Their saving grace is that the G7 is perceived as the relatively more stable economic game in town. The other countries are worse, either because of their stage of economic development (India, China and Brazil) or because they are simply too many other social and political problems they have to contend with. The G7 includes Japan, the only Asian member of the elite club and more importantly the only de jure non-militant nation since the end of World War II.

The U.S dollar has served as the global anchor since the end of the system of fixed exchange rates tied to the gold standard in 1971. Now that anchor has stumbled. Japan is also indebted, more indebted than the United States, but its debt uses US treasuries as a hedge. Crisis in America would be a crisis for Japan, not only because of the Japanese investment in the United States, but because Japan is a small country, similar to its World War II nemesis and victor, the United Kingdom, both eclipsed by the rising China, a major nuclear power and a member of the United Nations permanent security council since it was recognized in 1972, a privilege neither Japan nor Germany have been granted. And China is vying to become a global reserve currency with mostly America’s help since Nixon, a relationship that has become very tense in the last several years because post- Cold War China is not the post World War II Japan, politically yet. When economic competition is clouded by ideological political differences, establishing mutual trust can be a deeply discomforting and trying exercise in geopolitics.

China has been lobbying the international monetary system for a new global currency anchor. It wants the International Monetary Fund’s Special Drawing Rights (SDRs), a synthetic currency no different in concept from the Chinese exchange rate basket, to take the dollar’s place. It is a clever idea. Though it may not be necessary.

America and Europe need to stop issuing new debt to extricate themselves from the current economic crisis. They can buy back all of their outstanding debt and use their currencies at home for the much needed domestic investments to create jobs to ensure stability in this century. Dollars, euros and pounds in the foreign markets will also return to the United States, the eurozone and the UK respectively as a result.

Japan, a nation committed to real technical change, competitively toe-to-toe with the rest of its G7 peers, since the end of World War II, can then be freed up to anchor global transactions in its currency, the yen, in the place of war-motivated technical change in the United States which is currently at its highest levels as a share of US government spending at a full one-third (not to forget economic confrontation and military-motivated financial innovation whose safety net from the Federal Reserve is currently at 50 per cent of US GDP or about $7T of monetary easing since 2007, far surpassing the Great Depression levels).

Japan, as a country, needs to export technology and financial capital to grow in Asia Pacific and elsewhere in the emerging markets. The emerging markets need Japanese technology and the natural resources of Canada and Australia, and their own in the Middle East, Russia, South Africa and Latin America. It would be a timely and natural geopolitical alliance made in heaven that can preserve global economic stability and sustain the growth of all toward peace and sustainability, for a nation constitutionally committed to global peace and nuclear disarmament can be most trusted of all.


About Chandrashekar (Chandra) Tamirisa

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One Response to Why The Yen Should Be The Global Reserve Currency

  1. You have referred to my own post at the end of your comment. Please search my blog for several articles critiquing the recent nuclear diplomacy of the Obama administration since Prague.

    I am also cross-posting an extended clarifying comment about my own article here because some readers were confused about the intent of the argument:

    This is a time when the understanding of the world should change to rebalance the global economy.

    My arguments are normative and deviate from the current policy stance. Ideas about cultural monetary stance are typical of the Clinton economic team, propounded by Alan Greenspan in his book, The Age of Turbulence. However, it is in Asia’s (and Eurasia’s) interest to diminish America’s role geopolitically in the world. And it could be a win-win and peaceful process if the yen steps in.

    I am not advocating that the world cut off oil supplies to the United States. Current US oil supply comes largely from within, Canada, Venezuela, Mexico, Saudi Arabia and a few other Persian Gulf countries. I am simply saying that the demand for resources supplied by the resource rich countries will increase in India and China in competition with the United States which conserves most of its resources to import them cheaply from abroad. So, it will be a soft resource import crunch for the US as Asian demand rises for the same and it will increase domestic pressure in the United States to reform energy policy in particular, sooner than later.

    Foreign confidence in the US dollar, given the level of US debt, in the absence of serious domestic reforms to curtail government spending, will only decline as time goes on. The United States is buying time and exports for China and itself with the cheaper dollar, even though China is not politically in the best interest of the United States in the long run, unless US is also headed politically in the Chinese direction. Therefore, the current path of the US dollar to accommodate the emerging Chinese yuan when it floats in its global market share of trade will create a political nemesis and an ideological battle.

    Japan is now the world’s third largest economy after China, and is being deliberately sidelined in favor of China even though politically it is a US ally.

    The bottom line is that I am advocating a US debt buyback over the next decade. A complete freeze of new US debt issuances and flooding the world with US dollars from the debt buybacks. The world will dump most of those dollars back into the US markets eventually because American currency will find most value in America. This will raise US stock values and increase domestic real investment because of the cheap dollar. It will raise US exports and increase US import substitution.

    But some other currency must take the place of the US dollars being sold in the Chinese basket and elsewhere. That would be the yen, not the euro, euro remaining largely at the same level in its global market share of world trade. China can take its time to float and rely on the yen more than on the dollar to prevent domestic instability as it liberalizes.

    China needs technology. Japan needs a larger market and it can find it in India and China just as it did in the United States. Japan is very competent at globalizing better the rest of the G7 countries on matters of IP.

    The truth is that this has been the intent of US exchange rate policy, since the United States left Bretton Woods, to create a sustainable and stable floating exchange rate system of more floating currencies joining the world currency markets.

    The dollar’s time to go has come. And it can only be done cleanly if another G7 advanced democracy, Japan, steps in because the euro needs time to stabilize and expand the zone through 2050.

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