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We Need Economic Stimulus, And We Need It Now!

It is a wondrous thing to be the global reserve currency.  We can run government deficits of any size that we want, and the rest of the world gets to fund us by buying our debt.  Thus, when I look at calls for still greater stimulus (through Government spending and borrowing) from men like Bill Gross, Larry Summers, and Bob Shiller, I just groan.  When does the rest of the world say “Enough!”, particularly the Persian Gulf States and other oil exporters who don’t have as much of an economic reason to support the US Dollar, because they don’t have to promote exports to the rest of the world.  But, perhaps for political reasons, they keep buying US debts.

This will not end well; the only questions are when, and how severe?  On this issue, I’m not sure it matters who the next president is, because the US no longer independently controls its own destiny.  (Great question for the debates: “Sir, what will you do as President to strengthen the Dolllar’s position as the global reserve currency?”  I would expect the intelligent equivalent of a stutter.)  The main barrier is that there is no good replacement for the Dollar as the global reserve currency.  The Euro could still fail; large-scale monetary unions need to be political unions for them to succeed in the long run.  The rest of the currencies are too small, or their banking systems insufficiently liberalized.

But, maybe the world could live without a single reserve currency.  Currencies could compete against each other, and gold, and other commodities.  This is an age of computers; I’m not sure why there would have to be one standard of value, particularly, when the standard of value varies so much.

I’m still away on vacation, so I may not post a lot until I am back on July 8th.  I did do a trade today; I bought some Smithfield Foods (rebalancing buy).  I suspect they will export a lot more as time goes on, and perhaps one their new major owners agrees.  After all, China’s staple meat is pork, and Smithfield is a high-quality provider.  This is just another way that I consider global demand, rather than local demand.

Bringing this piece full circle, perhaps China found a better way to recycle dollars; at least this investment brings home the bacon.

Full disclosure: long SFD

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3 Responses to We Need Economic Stimulus, And We Need It Now!

  1. BobC says:

    “But, maybe the world could live without a single reserve currency.”

    Hmmmm. Interesting thought. But, in my naivete, I’m thinking that any system as complex as the world economy needs a frame of reference. Without an agreed upon system of measure, where would quantum physics be?

  2. I’m surprised people are still talking of more fiscal stimulus, it is hard to do more than has already been implemented. With US house prices falling at the rate they are, reflating the economy is like trying to walk up a downward moving escalator…

  3. I see the idea of a single reserve currency as being a way to attempt to oversimplify a complex system. What is a “true measure of value,” especially when the supply of that currency keeps increasing? The value of the currency itself would be changing, thus negating it’s value as a measure of value.

    I have issues with using gold as a measure of value for currencies, but I think it’s better than using a single currency. If anything else, the supply of gold is relatively constant. More is mined each day, but as a percentage, it is minuscule against the supply of available gold.

    Measuring the value of money has always been a problem, for thousands of years. Read Peter Bernstein’s book, The Power of Gold: The History of an Obsession for a great, accessible introduction to the extreme complexity with measuring the value of any money.

    So, I tend to agree with Mr. Merkel. I think there should not be any single reserve currency. Instead, I see a system of competing currencies being more useful and fair.


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.

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