Dollarization and Euroization

This is a republish of the NASSCOM Emerge blog: A Macro economy view point by Shrikrishna Prakash, Saravu prior to September 2008 market collapse & USD 700B bailout. It has played out.

Scenario
Around 80% of foreign exchange/trade transactions is denominated in US dollars(USD) and a majority of these in crude oil import export. Crude being a lever to control USD flow (back to US), its rise impacts balance of payment for net crude oil importers, inflation and increase in cost of capital for business. Hence stocks discovering its prices to the re-adjusted EPS. In December 2007 realized time was not far off for business to chase funds and Private Equity (PE) and not the other way round.

Wall Street Outcomes
The heady day’s perceived profits in instruments, are now ill-liquid assets. To improve liquidity, earlier banks sought petro USD’s, some consolidated within Wall Street and others are filing for bankruptcy. About USD 450 billion of illiquid assets from various banks crept into Freddie Mac & Fannie Mae. Freddie & Fannie had to be bailed out by the US Federal Reserve(Fed). Fed released more than USD 250 billion in emergency funding. Fed has to clean up its balance sheet. New laws are being enacted giving treasury powers to create market for ill-liquid assets, buy and sell assets to tune of USD 700 billion.

OTC USD derivatives as an enabler ?
Most of USD’s are derivative positions and are traded on secretive OTC. As one of the steps to arrest the USD decline, central banks led by Fed in a synchronized manner went long on USD to the point of triggering short covering and shoring up USD. Central banks long positions were/are in the money. Globally, institutional investors who went long USD post the short squeeze upsurge, will feel the long squeeze when the intervention impact reduces and USD starts depreciating. This will make them square off and take on losses. (Read from central banks, as the coordinated entities would have booked profits at USD highs and positioned to buy at lower levels).

USA’s borrowings are denominated in home currency and the above process will assist in shoring up current assets in Fed’s balance sheet helping even out the ill-liquid assets. The reduction in OTC leveraged USD and a better Fed balance sheet enables printing USD in large quantity, controlling inflationary pressures- strategic in the world order. The consumption story will continue.

Possibilities
As the effect of coordinated intervention reduces, the USD is expected to weaken. If countries consume more USD’s, it will help ease the equation, else crude will continue to remain as a lever.

If Fed’s balance sheet gets cleaned up with no great inflationary effect, USD could get stronger. However to reach that state, the implementation of new monetary framework will have the affect of a “Manthan”, a sanskrit word for churning of the ocean to obtain nectar, when consumed attains immortality.

India over the next 18–24 months is expected to reduce crude import to an extent of 40%, a result of increasing production from KG-D6 block. On this materializing, equivalent USD’s will find its way back, assuming India’s orders for importing nuclear reactors & ancillaries will not off-set the reduction. Industrialist Mr. Godrej believes India has the potential to be a net exporter aswell. All these means the RBI may build USD reserves helping maintain USD 80–20 balance. The rupee’s (INR) movement depends on above equation, ECB, FII money flows and the existing flow dynamics.

Closing Comments
USA on its part will manoeuvre back to maintain world order and invent new “alpha seeking opportunities”. “Manthan’s” impact on India, its domestic story in healthcare, materials, industrial’s, infrastructure, financial services and software product space will be keenly watched.

Disclaimer: Views expressed here are personal.

Sažetak: U ovom radu, nakon teorijskih razmatranja troškova i koristi napuštanja vlastite i zvaničnog usvajanja tuđe valute kao legalnog sredstva plaćanja, bavimo se ispitivanjem tekuće politekonomske konstelacije Srbije u pokušaju da sagledamo kakav bi bio efekat zvanične jednostrane (ili dogovorene) dolarizacije na ključne makroekonomske promenljive, poput monetarne i finansijske stabilnosti, platnobilansnog salda, privrednog rasta, započetog procesa priključenja EU itd. Iz analize proizlazi da zvanično uvođenje evra treba da prati formalnu agendu pristupanja EMU samo u slučaju da Srbija želi da razvije jak realni sektor privrede, promišljenu i dalekosežnu strategiju industrijske politike i industriju kao granu, dok u suprotnom preporučujemo raniji bilo dogovoren bilo jednostrani prelazak na evro. Abstract: In this paper, after theoretically considering the costs and benefits of abandoning one's own national currency and official introduction of foreign currency as a legal tender, we have examined the ongoing polit-economic constellation of Serbia in an attempt to figure out what would be the effect of official unilateral (or consensual) dollarisation on key macroeconomic variables such as monetary and financial stability, balance of payments, economic growth, ongoing EU accession process etc. Analysis

The Currency Board (CB) is a particular monetary regime combining legally set fixed exchange rate and full coverage of domestic currency by highly liquid holdings in a stable reserve currency with an explicit relinquishment of active monetary policy by national monetary authorities aiming at enhancing and making this commitment more credible. It exhibits the theoretical functioning of an automatic mechanism linking the performances of the domestic economy as represented by the balance of payments dynamics providing reserve currency to the Currency Board and the money supply dynamics based on it. In the short-run such a political decision largely contributes to stabilisation policies and exhibits significantly positive results in fighting inflation, reflating economic activity and setting hard budget constraints to all economic agents.
Although it is often related as the hardest of all pegs, it is argued here that it is but a mere monetary substitution of external to domestic currency thus breaking the necessary or even vital link provided by the monetary procedure, as a relation between the monetary product and the economic behaviour of economic agents. Therefore the CB introduces a relative-price distortion through a continuous real exchange rate appreciation. It consists therefore in hiding and postponing economic troubles amplified by the necessity of an exit strategy towards discretionary managed monetary policy by the Central Bank or dollarization/euroisation and total dependence on foreign discretionary monetary policy.

Resumen: Un eventual proceso de dolarización en Venezuela requeriría una modificación
a la Constitución, la aprobación de una Ley especial y un proceso de implementación,
todo lo cual pudiera extenderse por nueve meses. Por ello, bajo las
actuales condiciones institucionales en Venezuela, el proceso de dolarización no
es, desde el punto de vista jurídico, una medida a corto plazo.
Palabras Clave: Palabras claves: dolarización, política monetaria, hiperinflación
en Venezuela.
Abstract: A hypothetical dollarization process in Venezuela would require a modification
of the Constitution, the approval of a special Law and an implementation
process that could last ninth months. Because of this, dollarization, under the current
institutional framework in Venezuela, is not a short run policy.
Key words: Dollarization, monetary policy, hyperinflation in Venezuela

Contrairement au dollar, l’euro ne se réfère à aucune
autorité supérieure, politique et symbolique, fondant le
lien de confiance qui « fait société ». Affichant portails et
fenêtres ouverts sur le vide, ses billets renvoient
uniquement à un espace sans limites, déterritorialisé et
déshumanisé : celui du marché. Et, en guise de garantie
ultime, une institution technocratique n’ayant de
comptes à rendre à personne : la Banque centrale
européenne. Le pari implicite est que, de la monnaie,
sortira nécessairement une communauté politique.
L’histoire ne connaît cependant que la séquence
inverse...

Entretien accordé à la revue Causeur le 07.01.2021. Considéré par certains comme le dernier héritage de la colonisation, le Franc CFA (FCFA) est encore l'objet de tous les fantasmes. Il y a un an, les présidents français et ivoirien ont annoncé que cette monnaie commune à quinze pays africains serait remplacée dans la moitié ouest-africaine d'entre eux, par « l'Eco », une nouvelle devise dont la création se fait toujours attendre. Dans un ouvrage récent, La fin du franc CFA (oct. 2020, VA Éditions, Versailles), le géopolitologue Loup Viallet dévoile les enjeux vertigineux de la coopération monétaire franco-africaine pour l'Europe et pour l'Afrique. Pour le magazine Causeur, il a accepté de répondre à nos questions sur ce sujet qui cristallise beaucoup de passions et alimente de nouvelles idées.

En este segundo Tomo de la colección se estudia el caso de los países dolarizados, con especial énfasis en Ecuador, hoy por hoy el país dolarizado más grande del mundo tanto en territorio, población y así como también en el tamaño de su economía. El libro contiene 4 secciones, las cuales dejan lecciones sobre el manejo del Comercio Exterior y los esfuerzos por alcanzar la Convergencia Económica en un país dolarizado.

En la primera sección se presenta la historia y la importancia del Comercio Exterior para el desarrollo de un país en general, y de Ecuador en particular, de donde se desprenden dos grandes lecciones: primera, los modelos de crecimiento económico basados en comercio exterior, donde destaca el modelo CBE aplicado por los famosos Tigres Asiáticos, implican que el país para crecer debe volverse parte de las cadenas de valor global. La segunda lección es que el mayor crecimiento del comercio exterior podría no estar con el país “ancla”, Estados Unidos para la región donde se ubica Ecuador.

La segunda sección del libro utiliza la Economía Comparativa para contrastar el sistema de la Dolarización con otro previo y muy popular: el patrón oro. De está sección se desprende que la Dolarización es un sistema Neo-Mercantilista, enfocado a obtener circulante de dinero-especia, pero que no actúa discriminando las importaciones, no tiene un sesgo anti-exportador, ni tampoco lo acompaña un aparataje militarista como en el patrón oro.

La tercera sección analiza el comportamiento del comercio exterior ecuatoriano, para corroborar que la Dolarización, además de ser una reforma monetaria, también es una reforma liberalizadora del comercio exterior. Se comparan los resultados de Ecuador contra las teorías de Smith, Ricardo, y Heckscher-Ohlin, encontrando resultados sorprendentes en cuanto a que sucede cuando se liberaliza el comercio en lo relativo al crecimiento del comercio, la especialización y el origen de esa posible especialización.

Finalmente, la cuarta sección se enfoca en el sector laboral y la economía del conocimiento y como la Dolarización afecta a ambos restringiendo al país en sus posibilidades de desarrollo económico y mejores niveles de vida.

Como un caso de estudio, se presenta un capítulo sobre la conveniencia o no de firmar un Tratado de libre comercio entre Ecuador y Estados Unidos, su país ancla.

Even after more than a decade of low inflation, Croatia remains highly dollarized. Commercial hanks avoid currency mismatch hy indexing loans to the exchange rate. Although this eliminates direct currency risk, it creates credit risk, because any larger depreciation might induce borrower defaults. Monetary and exchange rate policies focus on exchange rate smoothing to safeguard financial stability. DoUarization has prevented the use of monetary policy to stabilize output. Given Croatia's likely entry into the EU and adoption ofthe Euro, dedollarization .seems unfeasible. Rather than attempting to reverse doUarization, the central bank has taken measures to make the banking system more robust to shocks. {JEL E52, E58, F31, G21, P24)

Liberia has been a dollarized nation almost for as long as the nation has existed. However, since the end of the crisis, the nation is faced with a choice of keeping the policy or scraping it. This paper examines the issues surrounding the keeping or discarding of the dollarization policy. What are the benefits of maintaining it, adopting a mix or formulating a new policy all together.

L’ensemble des orateurs de la table optent pour une rerielisation très progressive et market-driven. Ils sont soutenus dans ce choix par la littérature internationale. Toutefois, cette orientation fait abstraction du nouveau contexte mondial de grande instabilité financière et monétaire que la crise de 2007-2008 aux USA a mis en évidence. On ne peut faire abstraction des risques d’une nouvelle crise financière encore plus profonde concernant cette fois non plus les dettes privées comme celle de 2007- 2008, mais les dettes publiques et corrélativement les monnaies. Une crise profonde des devises de référence actuelles, le dollar et l’euro, doit être envisagée sérieusement. Compte tenu de la forte dépendance de l’économie cambodgienne à l’égard de la politique monétaire étatsunienne, une crise du dollar précipiterait la nécessité d’une rerielisation et un plan d’urgence devrait être conçu pour faire face à une telle éventualité. Par ailleurs, même sans crise majeure du système monétaire et financier international, une stratégie à long terme pour la rerielisation devrait prendre en compte la probabilité d’évolutions possibles différentes de ce système et de ce que ces évolutions impliqueraient du point de vue d’une rerielisation.

Quando Washington starnuta, l'Europa si becca la polmonite − si diceva fino a qualche tempo fa. Ma non ci sono voluti troppi anni perché si ridimensionasse visibilmente la pretesa eterna salute degli Stati Uniti. Tuttavia il sarcastico commento dell'Economist sulla struttura drogata dell'economia americana si riferisce soltanto all'epifenomeno, non alle sue origini. Non dice da dove arriva il flusso di valore che permette a Washington di gonfiare ancora i muscoli. Se lo dicesse dovrebbe ammettere che quello appena incominciato non sarà affatto il "secolo americano", lo è stato già quello appena trascorso, ed è storia passata, irripetibile. Ma non sarà nemmeno un "secolo capitalistico" sotto altra bandiera. L'Europa non potrà prendere il posto dell'America, non essendo una nazione né una federazione unitaria, e proprio per questo è ancor più significativo il fatto che adesso uno starnuto dell'Europa cagioni una polmonite a Washington. Con grave rischio dell'intero sistema capitalistico mondiale. Se pensiamo che nel mondo attuale sono in molti a starnutire − Cina, India, Giappone, Russia, per non parlare che dei maggiori paesi con problemi− si capirà che tira un'aria poco favorevole per la salute americana.

This paper analyzes some recent theoretical and practical evidence in terms of economic results of different exchange rate systems. It begins with a historical review and a summary of fixed versus flexible exchange rate systems. Then it compares the experiences of recent currency unions, mostly unilateral, and their relative economic performance during the past currency crises in Latin America, East Asia and Eastern Europe. A set of issues is discussed in order to weigh the overall costs and benefits for several economies. These issues include exchange rates, GDP performance, inflation rates and foreign reserves. The case of
Argentina is also considered separately, comparing mostly seigniorage costs and interest-rate savings. The benefits and costs of the producers (central banks/governments) and the consumers (citizens) of money are discussed separately. Free banking is also considered in a fast-changing world where there will probably be fewer but better currencies. Not just the euro is a reality now, but maybe the “amero” and the “worldo” or the “mondo” very soon.

The provocative thesis of Tyler Shipley’s “Currency Wars: Oil, Iraq, and the Future of US Hegemony” is that the war in Iraq may have been motivated by oil interests, but not in the manner described by most critics. Rather, Shipley argues that the war is about preserving dollar hegemony in the international oil market. The rise of the euro, together with actions by individual states, have led to the perception by the Bush administration that the US dollar is under threat. And it is this perception, Shipley explains, that underpins the motivation for war in Iraq. By preventing OPEC from abandoning the US dollar in favour of the euro, the Iraq war has also ensured a continued flow of seigniorage revenues arising from the dominance of the US dollar within OPEC.