Discussion:
1. Is it fair that if a US investor/company wants to go abroad and do business in that country that the US investor/company cannot own 100 percent of the foreign entity but yet if a foreign investor/company wants to come to the US they can generally own 100 percent of the US entity here? For example, Budweiser, Coors, Miller, and Smithfield foods along with many others are not US owned entities. Elaborate.
2. Since the US Dollar has been the "world's default currency" will there be any effect upon the citizenry of the US when the Yuan becomes a world reserve currency or are concerns and worries unfounded? Elaborate.
3. On March 26, 2018 China officially starts selling oil in the Yuan thereby cutting out the US Dollar. How will this affect those of us here in the US? Elaborate.
Reading The U.S. Dollar as International Currency Reserve?
In February of 2011, the IMF called for Special Drawing Rights (SDRs) to replace the U.S. dollar as the world's reserve currency to shore up the global financial system.
"Over time, there may also be a role for the SDR to contribute to a more stable international monetary system," said Dominique Strauss-Kahn, then the managing director of the IMF. The IMF is also proposing SDR denominated bonds, which would reduce the use of U.S. Treasuries. Oil and gold, currently traded in U.S. dollars, would be priced using SDRs.
The nominal value of an SDR is derived from a basket of currencies- specifically, a fixed amount of Japanese Yen, U.S. Dollars, British Pounds, and Euros. SDRs were originally intended to be the primary asset held in foreign exchange reserves under Bretton Woods, but after the collapse of that system in the early 1970s, SDRs took on a far less important role.
After the financial meltdown of 2008, many of the so-called BRIC countries-Brazil, Russia, India and China (led by China and Russia)- have called for replacing the dollar and moving into a global currency scheme.
In summer of 2011, Brazil was especially concerned with the increased role of devaluation of major currencies such as the Chinese yuan and the U.S. dollar in an ongoing trade war. As one of the world's biggest exporters, Brazil was raising the spectre of a currency war because of the interventions of Japan and China in the foreign exchange markets. With the global economic recovery slowing in 2011, Japan and China both had intervened in currency markets to weaken their currencies to boost exports and secure better balance of trade payments.
At the time, Brazilian Finance Minister Guido Mantega criticized these moves, noted that they had forced Brazil to consider new taxes on shortterm fixed-income investments and other measures to stem a rally in the real, the country's currency.
"We're in the midst of an international currency war," Mr. Mantega said during a speech to a meeting of Brazilian industrial leaders. "This threatens us because it takes away our competitiveness."
His comments came at about the same time that the government of Brazil had vowed to use its sovereign wealth fund to weaken the real. Trading at or above above U.S. $1.71, the real was near its 10-month high and, according to Goldman Sachs Group, was the world's most-overvalued major currency.
Meanwhile, the United States has stepped up political pressure on China's currency, the yuan, which many economists were saying was undervalued. China's central bank said in June 2001 that it would let the yuan fluctuate more freely, but it rose just 1.8%. U.S. Treasury Secretary Timothy Geithner said in summer of 2011 that the level of the Chinese yuan relative to the dollar continued to have a negative impact on the U.S. economy.
The global economy needs the U.S. to prosper, but the U.S. also needs a weaker currency to help its manufacturing exports to promote its prospects for growth. But, with devaluation of the U.S. dollar, other countries must make adjustments, too.
In particular, lesser economies were starting to voice their opinion, with much of the concern directed towards China, who many felt could do more to strengthen its currency.
For its part, China has been calling for the end of the U.S. dollar as an international reserve currency. Early in 2009, China issued a call to dump the dollar and move into SDRs. "The role of the SDR has not been put into full play due to limitations on its allocation and the scope of its uses. However, it serves as the light in the tunnel for the reform of the international monetary system," said Zhou Xiaochuan, governor of the People's Bank of China.
With the current worldwide financial crisis that began in 2007-08, with all the government bailouts, the high debt load that the U.S. and
European nations are carrying, the leaders of many countries are losing confidence in the dollar and want to see something that is more globally oriented.
The IMF plan would probably include the yuan, also known as the renminbi, among SDR currencies. But the IMF has so far held off on spiking international foreign exchange reserve assets with the yuan. The problem is that China has yet to "liberalize" its currency. in other words the authoritarian state has yet to allow central banks to hold yuan-denominated deposits without restriction.
In June of 2010 the United Nations called for abandoning the U.S. dollar as the main global reserve currency, saying it has been unable to safeguard value. Nobel Prize-winning economist Joseph Stiglitz, who previously chaired a U.N. expert commission that considered ways of overhauling the global financial system, has also advocated the creation of a new reserve currency system, possibly based on SDRs.
In the summer of 2011, the "big three" ratings agencies (Moody's, Fitch, and S&P) determined that countries with very large Debt-to-GDP ratios would be downgraded. Greece was downgraded, as was Ireland, Portugal, Spain, and Italy. Finally, even the U.S. lost its AAA status.
In short, the period of 2011-12 brought a mix of economic circumstances that might lead toward a non-dollar based global currency. The timing of this is far from clear, but unless major nations' currencies are willing to be "re-pegged" to gold, the volatility in international currency markets will continue, and sovereign defaults could create the conditions for an international currency.