Is the US $ about to be replaced as the reserve currency? Words of wisdom from The Automatic Earth

Is the US $ about to be replaced as the reserve currency?
Words of wisdom from The Automatic Earth
http://theautomaticearth.blogspot.com/
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Damned if you do, doomed if you don’t!
March 4, 2011

US Dollar About to Lose Reserve Currency Status – Fact or Fantasy?

A number of sites are commenting on a Bloomberg video in which El-Erian, PIMCO Co-CEO says “Dollar could lose its reserve currency status”.

Bloomberg: “Mohammad what does a weak dollar signal to you, a dollar that can’t jump up here on a day like we’ve seen today?”

El-Erian: “It is a warning shot to America that we cannot simply assume flight to quality, flight to safety. That people are starting to worry about the fiscal situation in the U.S. They are starting to worry about the level of debt. They are starting to worry about what they hear about states and municipalities. So, I would take this as a warning shot that we cannot assume that we will maintain the standing of the reserve currency as we have in the past.”

Fact and Fantasy:

The first part of what El-Erian said is factual. Here it is again for convenience. “People are starting to worry about the fiscal situation in the U.S. They are starting to worry about the level of debt. They are starting to worry about what they hear about states and municipalities.” Those are true statements. Unfortunately, his “warning shot” regarding reserve currency status is fallacious.

Global Beggar-Thy-Neighbor Policies:
It is pretty pale to suggest the end of the US dollar as a reserve currency when countries hold dollars as a function of math, then hold still more dollars to suppress their currencies, hoping to keep their exports up to “stimulate growth”.

Mathematical Impossibility:
Another mathematical relationship says the dollar, the pound, the Yen, and the Yuan cannot all be weak at the same time (relative to each other). Yet that is precisely what every country wants. It’s mathematically impossible. You can see the effect in rising commodity prices.

If commodity prices were a function of the US dollar alone, then they would be rising in US dollar terms alone. Instead there is upward pressure on commodities in all currencies. At some point the desirability to hoard commodities will peak.

Will Another Fiat Currency Replace the Dollar?
The Canadian and Swiss economies are simply not big enough for them to be global reserve currencies. In regards to the Euro, is Europe in a better fundamental situation than the US? Would it matter even if it was? To answer the second question, please remember trade deficit math.

As for the Yuan, it is complete silliness to suggest the currency of a command-economy dictator-led country that will not even float its currency will be some sort of major reserve currency. To the extent that China trades with Russia, South Korea, etc., local reserves in varying currencies can happen (and are happening already), but the global significance of it is wildly overstated. The amounts in question are tiny, as a simple function of math.

Will the dollar remain the global reserve currency forever? Of course not. However, it is highly unlikely any of the presumed leading Fiat candidates including the Yuan and the Keynesian wet-dream IMF SDRs (Special Drawing Rights), will take the dollar’s place. SDRs are essentially a basket of currencies. The concept of trading in baskets of currencies backed by nothing is even more ridiculous than the existing setup. People do not buy goods and services in baskets of currencies.

What can replace the dollar?
Gold, or a mechanism like gold that would impose hard restrictions on perpetual deficits is what it takes to restore sanity. However, we may not see a significant move towards gold until there is a massive currency crisis or revolt against fiat currencies in general, not just the US dollar.