8 Nov 09    Inside the Global Gold Frenzy, NYT, NELSON D. SCHWARTZ
7 Nov 09    Mises: The Man Who Predicted the Depression, The Daily Capitalist, Jeff Harding
6 Nov 09    The Man Who Predicted the Depression, WSJ, MARK SPITZNAGEL
2 Nov 09    Could America go broke?, WP, Robert J. Samuelson
13 juil 09   Le dollar peine toujours plus à garder sa prééminence mondiale, Le Temps, Alessandro Scipioni
13 juil 09   Les déficits contraignent les Etats-Unis à emprunter toujours plus,Le Temps, Alessandro Scipioni, commentaire
10 Jul 09   Mapping Out a Global Path for the Yuan, caijing.com.cn, Wen Xiu et al.
10 Jul 09   China Appoints Chief for Yuan's Global Push, caijing.com.cn, Wen Xiu
1 Jul 09   Debt is capitalism’s dirty little secret, FT, Ben Funnell
1 Jul 09   In China, New Limits on Virtual Currency, NYT, DAVID BARBOZA
29 Jun 09   China bars use of virtual money for trading in real goods, Xinhua, PRC, Ministry of Commerce
17 Jun 09   BRIC Dollar Bonds Beat Ruble Debt as Medvedev Frets, Bloomberg, Laura Cochrane et al.
17 Jun 09   Suitcase With $134 Billion Puts Dollar on Edge, Bloomberg, William Pesek, Commentary
8 juin 09    La Russie rejoint la Chine, remet en cause la suprématie du dollar, Le Temps, Ram Etwareea
14 May 09   The Almighty Renminbi?, NYT, NOURIEL ROUBINI
14 May 09   China’s Heart of Gold, NYT, VICTOR ZHIKAI GAO
7 May 09   Swiss National Bank is biggest looser in Europe's ill-advised gold sales: $19bn, FT, Javier Blas
23 Mar 09   Reform the International Monetary System, People's Bank of China, Zhou Xiaochuan
16 Mar 09   Nation urges more say in global finance, China Daily, Bernice Chan
8.Mär 09    Nationalbank schmilzt 21 Mio Tell- & Rütlischwur-Goldmünzen ein, Sonntagszeitung, Victor Weber
12 Feb 09   Gold Standard: Capitalism Needs a Sound-Money Foundation, WSJ, JUDY SHELTON
jan 2009   La BNS soutient-elle le dollar?, PME, Mohammad Farrokh
17 Nov 08   No regulation can match a gold peg's disciplinary effects on central & other banks, WSJ, G.O'Driscoll
14 Nov 08   Gold Standard: Stable, Real-Value Money Is the Key to Recovery, WSJ, Judy Shelton, comments
17.Jun 07   Goldbürgerstreich II: SNB will weitere 250t Gold abbauen!, BNS: 250t d'or à vendre!, Anton Keller
29.Jun 06   Goldbürgerstreiche I, Weltwoche, Claude Baumann

Four of the largest developing nations called for emerging economies to have a bigger say in the global financial system as G20 finance ministers vowed to combat the worst downturn since the 1930s.

Brazil, Russia, India and China, or BRIC, said in a statement on Saturday: "We call for urgent action with regards to voice and representation in the International Monetary Fund (IMF) in order that they better reflect their real economic weights."

They also wanted the representation reform of the World Bank, scheduled to be completed by April 2010, to be speeded up.

"More balanced, proactive, coordinated and countercyclical" economic policies are needed to promote global economic recovery, the statement said.

Finance Minister Xie Xuren called for joint efforts from the international community to accelerate the reform of international financial institutions and build a new global financial system, which is "fair and square, compatible and orderly".

"At a global level, the voice of emerging and developing economies in the international financial system should be increased and trade and financial protectionism should be prevented," Xie said.

The BRIC countries are taking measures to promote domestic demand and will continue to do so, the statement said, adding that protectionism should be jointly tackled.

The statement was released at Horsham in southern England at the G20 meeting of finance ministers and central bank governors, before their nations' leaders meet at the G20 summit in London on April 2.

Currently, developed economies dominate international institutions. For example, the voting rights of BRIC countries in the IMF are 9.62 percent of the total, which accounts for about half of the voting rights the US holds.

According to the schedule set at the weekend meeting, the next review of IMF quotas should be concluded by January 2011.

"China and other countries such as Saudi Arabia should be encouraged to actively increase IMF resources and the voting rights structure should be reformed," Uri Dadush a senior associate with the US think-tank Carnegie Endowment, told China Daily last week.

At the weekend meeting, ministers from the world's largest economies also pledged to regulate hedge funds and start closer checks on credit ratings agencies to prevent a repeat of a financial market crisis that is crippling businesses and putting millions out of work.

"We are committed to deliver the scale of sustained effort necessary to restore growth," the ministers said in a statement promising extra money for the IMF and regional lenders such as the Asian Development Bank.

No figure was released but one official attending the talks told Reuters they centered on more than doubling the $250 billion currently at the IMF's disposal to help countries hit by a halt to credit and investment.

Separately, British Prime Minister Gordon Brown, who will host the summit of G20 leaders on April 2, said "massive change" was about to take place in financial market regulation, notably supervision of hedge funds.

The G20 accounts for over 80 percent of the world's gross domestic product, which is expected to shrink in 2009 by more than any year since the 1930s after the financial crisis that erupted in the United States in 2007 engulfed confidence, activity, trade and jobs worldwide.

About the broadcaster:
Bernice Chan is a foreign expert at China Daily Website. Originally from Vancouver, Canada, Bernice has written for newspapers and magazines in Hong Kong and most recently worked as a broadcaster for the Canadian Broadcasting Corporation, producing current affairs shows and documentaries.

The outbreak of the current crisis and its spillover in the world have confronted us with a long-existing but still unanswered question,i.e., what kind of international reserve currency do we need to secure global financial stability and facilitate world economic growth, which was one of the purposes for establishing the IMF? There were various institutional arrangements in an attempt to find a solution, including the Silver Standard, the Gold Standard, the Gold Exchange Standard and the Bretton Woods system. The above question, however, as the ongoing financial crisis demonstrates, is far from being solved, and has become even more severe due to the inherent weaknesses of the current international monetary system.

Theoretically, an international reserve currency should first be anchored to a stable benchmark and issued according to a clear set of rules, therefore to ensure orderly supply; second, its supply should be flexible enough to allow timely adjustment according to the changing demand; third, such adjustments should be disconnected from economic conditions and sovereign interests of any single country. The acceptance of credit-based national currencies as major international reserve currencies, as is the case in the current system, is a rare special case in history. The crisis again calls for creative reform of the existing international monetary system towards an international reserve currency with a stable value, rule-based issuance and manageable supply, so as to achieve the objective of safeguarding global economic and financial stability.

I. The outbreak of the crisis and its spillover to the entire world reflect the inherent vulnerabilities and systemic risks in the existing international monetary system.

Issuing countries of reserve currencies are constantly confronted with the dilemma between achieving their domestic monetary policy goals and meeting other countries' demand for reserve currencies. On the one hand, the monetary authorities cannot simply focus on domestic goals without carrying out their international responsibilities. On the other hand, they cannot pursue different domestic and international objectives at the same time. They may either fail to adequately meet the demand of a growing global economy for liquidity as they try to ease inflation pressures at home, or create excess liquidity in the global markets by overly stimulating domestic demand. The Triffin Dilemma, i.e., the issuing countries of reserve currencies cannot maintain the value of the reserve currencies while providing liquidity to the world, still exists.

When a national currency is used in pricing primary commodities, trade settlements and is adopted as a reserve currency globally, efforts of the monetary authority issuing such a currency to address its economic imbalances by adjusting exchange rate would be made in vain, as its currency serves as a benchmark for many other currencies. While benefiting from a widely accepted reserve currency, the globalization also suffers from the flaws of such a system. The frequency and increasing intensity of financial crises following the collapse of the Bretton Woods system suggests the costs of such a system to the world may have exceeded its benefits. The price is becoming increasingly higher, not only for the users, but also for the issuers of the reserve currencies. Although crisis may not necessarily be an intended result of the issuing authorities, it is an inevitable outcome of the institutional flaws.

II. The desirable goal of reforming the international monetary system, therefore, is to create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies.

1. Though the super-sovereign reserve currency has long since been proposed, yet no substantive progress has been achieved to date. Back in the 1940s, Keynes had already proposed to introduce an international currency unit named "Bancor", based on the value of 30 representative commodities. Unfortunately, the proposal was not accepted. The collapse of the Bretton Woods system, which was based on the White approach, indicates that the Keynesian approach may have been more farsighted. The IMF also created the SDR in 1969, when the defects of the Bretton     Woods system initially emerged, to mitigate the inherent risks sovereign reserve currencies caused. Yet, 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.

2. A super-sovereign reserve currency not only eliminates the inherent risks of credit-based sovereign currency, but also makes it possible to manage global liquidity. A super-sovereign reserve currency managed by a global institution could be used to both create and control the global liquidity. And when a country's currency is no longer used as the yardstick for global trade and as the benchmark for other currencies, the exchange rate policy of the country would be far more effective in adjusting economic imbalances. This will significantly reduce the risks of a future crisis and enhance crisis management capability.

III. The reform should be guided by a grand vision and begin with specific deliverables. It should be a gradual process that yields win-win results for all

The reestablishment of a new and widely accepted reserve currency with a stable valuation benchmark may take a long time. The creation of an international currency unit, based on the Keynesian proposal, is a bold initiative that requires extraordinary political vision and courage. In the short run, the international community, particularly the IMF, should at least recognize and face up to the risks resulting from the existing system, conduct regular monitoring and assessment and issue timely early warnings.

Special consideration should be given to giving the SDR a greater role. The SDR has the features and potential to act as a super-sovereign reserve currency. Moreover, an increase in SDR allocation would help the Fund address its resources problem and the difficulties in the voice and representation reform. Therefore, efforts should be made to push forward a SDR allocation. This will require political cooperation among member countries. Specifically, the Fourth Amendment to the Articles of Agreement and relevant resolution on SDR allocation proposed in 1997 should be approved as soon as possible so that members joined the Fund after 1981 could also share the benefits of the SDR. On the basis of this, considerations could be given to further increase SDR allocation.

The scope of using the SDR should be broadened, so as to enable it to fully satisfy the member countries' demand for a reserve currency.

Set up a settlement system between the SDR and other currencies. Therefore, the SDR, which is now only used between governments and international institutions, could become a widely accepted means of payment in international trade and financial transactions.

Actively promote the use of the SDR in international trade, commodities pricing, investment and corporate book-keeping. This will help enhance the role of the SDR, and will effectively reduce the fluctuation of prices of assets denominated in national currencies and related risks.

Create financial assets denominated in the SDR to increase its appeal. The introduction of SDR-denominated securities, which is being studied by the IMF, will be a good start.

Further improve the valuation and allocation of the SDR. The basket of currencies forming the basis for SDR valuation should be expanded to include currencies of all major economies, and the GDP may also be included as a weight. The allocation of the SDR can be shifted from a purely calculation-based system to a system backed by real assets, such as a reserve pool, to further boost market confidence in its value.

IV. Entrusting part of the member countries' reserve to the centralized management of the IMF will not only enhance the international community's ability to address the crisis and maintain the stability of the international monetary and financial system, but also significantly strengthen the role of the SDR.

1. Compared with separate management of reserves by individual countries, the centralized management of part of the global reserve by a trustworthy international institution with a reasonable return to encourage participation will be more effective in deterring speculation and stabilizing financial markets. The participating countries can also save some reserve for domestic development and economic growth. With its universal membership, its unique mandate of maintaining monetary and financial stability, and as an international "supervisor" on the macroeconomic policies of its member countries, the IMF, equipped with its expertise, is endowed with a natural advantage to act as the manager of its member countries' reserves.

2. The centralized management of its member countries' reserves by the Fund will be an effective measure to promote a greater role of the SDR as a reserve currency. To achieve this, the IMF can set up an open-ended SDR-denominated fund based on the market practice, allowing subscription and redemption in the existing reserve currencies by various investors as desired. This arrangement will not only promote the development of SDR-denominated assets, but will also partially allow management of the liquidity in the form of the existing reserve currencies. It can even lay a foundation for increasing SDR allocation to gradually replace existing reserve currencies with the SDR.

Submit Date:2009-3-23 17:35:00

THE 19th century was dominated by the British Empire, the 20th century by the United States. We may now be entering the Asian century, dominated by a rising China and its currency. While the dollar’s status as the major reserve currency will not vanish overnight, we can no longer take it for granted. Sooner than we think, the dollar may be challenged by other currencies, most likely the Chinese renminbi. This would have serious costs for America, as our ability to finance our budget and trade deficits cheaply would disappear.

Traditionally, empires that hold the global reserve currency are also net foreign creditors and net lenders. The British Empire declined — and the pound lost its status as the main global reserve currency — when Britain became a net debtor and a net borrower in World War II. Today, the United States is in a similar position. It is running huge budget and trade deficits, and is relying on the kindness of restless foreign creditors who are starting to feel uneasy about accumulating even more dollar assets. The resulting downfall of the dollar may be only a matter of time.

But what could replace it? The British pound, the Japanese yen and the Swiss franc remain minor reserve currencies, as those countries are not major powers. Gold is still a barbaric relic whose value rises only when inflation is high. The euro is hobbled by concerns about the long-term viability of the European Monetary Union. That leaves the renminbi.

China is a creditor country with large current account surpluses, a small budget deficit, much lower public debt as a share of G.D.P. than the United States, and solid growth. And it is already taking steps toward challenging the supremacy of the dollar. Beijing has called for a new international reserve currency in the form of the International Monetary Fund’s special drawing rights (a basket of dollars, euros, pounds and yen). China will soon want to see its own currency included in the basket, as well as the renminbi used as a means of payment in bilateral trade.

At the moment, though, the renminbi is far from ready to achieve reserve currency status. China would first have to ease restrictions on money entering and leaving the country, make its currency fully convertible for such transactions, continue its domestic financial reforms and make its bond markets more liquid. It would take a long time for the renminbi to become a reserve currency, but it could happen. China has already flexed its muscle by setting up currency swaps with several countries (including Argentina, Belarus and Indonesia) and by letting institutions in Hong Kong issue bonds denominated in renminbi, a first step toward creating a deep domestic and international market for its currency.

If China and other countries were to diversify their reserve holdings away from the dollar — and they eventually will — the United States would suffer. We have reaped significant financial benefits from having the dollar as the reserve currency. In particular, the strong market for the dollar allows Americans to borrow at better rates. We have thus been able to finance larger deficits for longer and at lower interest rates, as foreign demand has kept Treasury yields low. We have been able to issue debt in our own currency rather than a foreign one, thus shifting the losses of a fall in the value of the dollar to our creditors. Having commodities priced in dollars has also meant that a fall in the dollar’s value doesn’t lead to a rise in the price of imports.

Now, imagine a world in which China could borrow and lend internationally in its own currency. The renminbi, rather than the dollar, could eventually become a means of payment in trade and a unit of account in pricing imports and exports, as well as a store of value for wealth by international investors. Americans would pay the price. We would have to shell out more for imported goods, and interest rates on both private and public debt would rise. The higher private cost of borrowing could lead to weaker consumption and investment, and slower growth.

This decline of the dollar might take more than a decade, but it could happen even sooner if we do not get our financial house in order. The United States must rein in spending and borrowing, and pursue growth that is not based on asset and credit bubbles. For the last two decades America has been spending more than its income, increasing its foreign liabilities and amassing debts that have become unsustainable. A system where the dollar was the major global currency allowed us to prolong reckless borrowing.

Now that the dollar’s position is no longer so secure, we need to shift our priorities. This will entail investing in our crumbling infrastructure, alternative and renewable resources and productive human capital — rather than in unnecessary housing and toxic financial innovation. This will be the only way to slow down the decline of the dollar, and sustain our influence in global affairs.

Nouriel Roubini is a professor of economics at the New York University Stern School of Business and the chairman of an economic consulting firm.

IN China, many people refer to the dollar as mei jin, or “American gold.” Government officials, businessmen and people on the street all use the term. So if a Chinese person tells you that he owes you 100 American gold, don’t expect a big fortune, because he’s planning to pay you $100.

Chinese impressions of the American dollar as the gold standard were so deeply entrenched that they survived President Richard Nixon’s 1971 delinking of gold and the greenback. Around 30 years ago, China’s foreign exchange reserves were as little as $167 million. At one important meeting in the late 1970s, Deng Xiaoping, the leader of China, prophesied to an audience of top government officials: “Comrades, just imagine! One day we may have a foreign reserve as big as $10 billion!” Silence fell on the audience, because that figure seemed so improbable. After a long pause, Deng went on to tell the unconvinced crowd: “Comrades, just imagine! With 10 billion American gold, how much China can do!”

Deng’s view of the dollar reflected his admiration for many positive elements of American capitalism. In November 1986, I served as Deng’s interpreter when he met with John Phelan, the chairman of the New York Stock Exchange, who was visiting Beijing. During the meeting, Deng told him: “You are the rich capitalists with great wealth, and China is still very poor with little wealth. You know finance and capital markets very well. You need to teach China a lot about finance and capital markets. One day in the future, China will also have its own stock exchange.”

That was the prelude to China’s rapid economic growth. China’s foreign reserves are now close to $2 trillion, and around $1.5 trillion of it is invested in dollar assets. With the global financial crisis, the attention of the world often focuses on this huge pile of American dollars in Chinese hands.

What many don’t remember is that for years, there was either a shortage or a feared shortage of American dollars. In the 1980s, for example, the government required everyone to convert dollars into the Chinese currency, the renminbi, which literally means “people’s money.” As a result, American gold became a status symbol. Despite the mandatory conversion into renminbi, many people held onto their dollars, or bought them at inflated exchange rates, if they could find a seller at all.

No one knows for sure when the tide started to turn, or the exact moment when American gold started its slow but seemingly irreversible loss of luster. But now, many shops in China no longer accept dollar-based credit cards issued by foreign banks (the customer pays in dollars, but the shopkeeper is paid in renminbi) and foreigners cannot convert American dollars into renminbi beyond a given quota.

In the past, people held dollars for no immediate purpose. Today, they are more likely to keep them only if they need them to send their children abroad for school, travel or to do business in another country. Over all, the government is becoming more worried about the safety of its investments in the United States, which are largely in Treasury bonds and quasi-sovereign securities issued by Fannie Mae and Freddie Mac.

Beijing recently called for a greater role in international trade for the special drawing rights currency of the International Monetary Fund. But China is also fully aware that the United States can veto an I.M.F. decision. China’s call was more meant to sound an alarm to the United States.

Many Chinese people increasingly fear the rapid erosion of the American dollar. The United States may want to consider offering inflation-protection measures for China’s existing investments in America, and offer additional security or collateral for its continued investments. America should also provide its largest creditor with greater transparency and information.

We still call the dollar American gold. But the United States should not assume that this will never change.

Victor Zhikai Gao is an executive director of the Beijing Private Equity Association and a director of the China National Association of International Studies.

Pas de répit pour le dollar américain. Il a été de nouveau attaqué ce week-end. Son instabilité inquiète les principaux partenaires des Etats-Unis. Pour le ministre russe des Finances Alexeï Koudrine, l’apparition d’une nouvelle devise de réserve mondiale est nécessaire et possible.

Parlant en marge du Forum économique de Saint-Pétersbourg qui a conclu ses travaux samedi, Alexeï Koudrine a jugé que la monnaie chinoise pourrait devenir une monnaie internationale dans un délai de dix ans à condition que Pékin libéralise l’économie du pays. «Je ne crois pas que de nouvelles unions monétaires majeures vont émerger dans un futur proche. Je pense que la voie la plus courte serait que la Chine ouvre son économie et assure la convertibilité du yuan», a-t-il déclaré. A la mi-mai, le chef d’Etat russe Dmitri Medvedev avait aussi attaqué le billet vert et annoncé qu’il proposerait au sommet du G8, début juillet en Italie, de faire du rouble une devise de réserve mondiale.

Assaut chinois
La semaine dernière, le président russe a laissé entendre qu’il mettra la question de l’hégémonie du dollar sur la table lorsqu’il recevra ses homologues de la Chine, de l’Inde et du Brésil. Ce sera à l’occasion du premier sommet des pays dits BRIC (Brésil, Russie, Inde et Chine) qui est prévu le 16 mai à Ekaterinburg la troisième ville russe, à l’est du pays. Selon Le Monde de ce dimanche, le président Medvedev a déclaré que «les Etats qui possédaient des monnaies de réserves endossaient la responsabilité de la politique économique mondiale et que les autres pays, qui n’émettent pas de monnaie de réserve, peuvent devenir les otages de la politique des Etats émetteurs.»

L’assaut sur la monnaie américaine a été donné par la Chine, le plus grand créancier, devant le Japon, de l’économie américaine. C’était le 25 mars, soit à quelques jours du sommet du G20 qui réunissait les grandes économies au chevet de l’économie mondiale. Le gouverneur de la banque populaire de Chine suggérait la création d’une «devise internationale synthétique» dans le but de réduire la dépendance de l’économie mondiale sur le seul billet vert.

Dans un premier temps, la proposition chinoise avait eu un écho favorable de la part du Secrétaire américain au Trésor Timothy Geithner qui se déclarait prêt à étudier la proposition chinoise. Il devait se rétracter quelques heures après, suite à la glissade du dollar qui avait suivi ses déclarations. Parallèlement, le directeur du Fonds monétaire international Dominique Strauss-Kahn avait jugé «légitime» les discussions lancées par la Chine.

Si les autorités chinoises n’ont pas repris publiquement leurs revendications, elles ne cachent pas pour autant leurs inquiétudes vis-à-vis de l’instabilité et l’affaiblissement de la monnaie américaine ainsi que du déficit croissant des Etats-Unis. Il y a une semaine, Timothy Geithner s’est rendu à Pékin pour rassurer les responsables économiques chinois sur les mesures prises pour redresser et consolider l’économie américaine. Il a affirmé son attachement à un billet vert stable et fort.

Réformes au FMI
Le ministre Alexeï Koudrine a également abordé la question de réformes du Fonds monétaire international (FMI) au Forum économique de Saint-Pétersbourg. «On voit beaucoup de retards et d’obstacles sur ce chemin, a-t-il déploré. Les pays devraient être représentés en fonction de l’importance de leur économie et leur rôle dans le monde; ce qui n’est pas le cas à présent.» Ce sujet fera l’objet de discussions la semaine prochaine au sommet des BRIC. Les quatre pays se disent prêts à participer dans le refinancement du FMI.

It’s a plot better suited for a John Le Carre novel. Two Japanese men are detained in Italy after allegedly attempting to take $134 billion worth of U.S. bonds over the border into Switzerland. Details are maddeningly sketchy, so naturally the global rumor mill is kicking into high gear.

Are these would-be smugglers agents of Kim Jong Il stashing North Korea’s cash in a Swiss vault? Bagmen for Nigerian Internet scammers? Was the money meant for terrorists looking to buy nuclear warheads? Is Japan dumping its dollars secretly? Are the bonds real or counterfeit?

The implications of the securities being legitimate would be bigger than investors may realize. At a minimum, it would suggest that the U.S. risks losing control over its monetary supply on a massive scale.

The trillions of dollars of debt the U.S. will issue in the next couple of years needs buyers. Attracting them will require making sure that existing ones aren’t losing faith in the U.S.’s ability to control the dollar.

The dollar is, for better or worse, the core of our world economy and it’s best to keep it stable. News that’s more fitting for international spy novels than the financial pages won’t help that effort. It is incumbent upon the U.S. Treasury to get to the bottom of this tale and keep markets informed.

GDP Carriers
Think about it: These two guys were carrying the gross domestic product of New Zealand or enough for three Beijing Olympics. If economies were for sale, the men could buy Slovakia and Croatia and have plenty left over for Mongolia or Cambodia. Yes, they could have built vacation homes amidst Genghis Khan’s Gobi Desert or the famed Temples of Angkor. Bernard Madoff who?

These men carrying bonds concealed in the bottom of their luggage also would be the fourth-largest U.S. creditors. It makes you wonder if some of the time Treasury Secretary Timothy Geithner spends keeping the Chinese and Japanese invested in dollars should be devoted to well-financed men crossing the Italian-Swiss border.

This tale has gotten little attention in markets, perhaps because of the absurdity of our times. The last year has been a decidedly disorienting one for capitalists who once knew up from down, red from black and risk from reward. It almost fits with the surreal nature of today that a couple of travelers have more U.S. debt than Brazil in a suitcase and, well, that’s life.

Clancy Bestseller
You can almost picture Tom Clancy sitting in his study thinking: “Damn! Why didn’t I think of this yarn and novelize it years ago?” He could have sprinkled in a Chinese angle, a pinch of Russian intrigue, a dose of Pyongyang and a bit of Taiwan-Strait tension into the mix. Presto, a sure bestseller.

Daniel Craig may be thinking this is a great story on which to base the next James Bond flick. Perhaps Don Johnson could buy the rights to this tale. In 2002, the “Miami Vice” star was stopped by German customs officers as he was traveling in a car carrying credit notes and other securities worth as much as $8 billion. Now he could claim it was all, uh, research.

When I first heard of the $134 billion story, I was tempted to glance at my calendar to make sure it didn’t read April 1.

Let’s assume for a moment that these U.S. bonds are real. That would make a mockery of Japanese Finance Minister Kaoru Yosano’s “absolutely unshakable” confidence in the credibility of the U.S. dollar. Yosano would have some explaining to do about Japan’s $686 billion of U.S. debt if more of these suitcase capers come to light.

‘Kennedy Bonds’
Counterfeit $100 bills are one thing; two guys with undeclared bonds including 249 certificates worth $500 million and 10 “Kennedy bonds” of $1 billion each is quite another.

The bust could be a boon for Italy. If the securities are found to be genuine, the smugglers could be fined 40 percent of the total value for attempting to take them out of the country. Not a bad payday for a government grappling with a widening budget deficit and rebuilding the town of L’Aquila, which was destroyed by an earthquake in April.

It would be terrible news for the White House. Other than the U.S., China or Japan, no other nation could theoretically move those amounts. In the absence of clear explanations coming from the Treasury, conspiracy theories are filling the void.

On his blog, the Market Ticker, Karl Denninger wonders if the Treasury “has been surreptitiously issuing bonds to, say, Japan, as a means of financing deficits that someone didn’t want reported over the last, oh, say 10 or 20 years.” Adds Denninger: “Let’s hope we get those answers, and this isn’t one of those ‘funny things’ that just disappears into the night.”

This is still a story with far more questions than answers. It’s odd, though, that it’s not garnering more media attention. Interest is likely to grow. The last thing Geithner and Federal Reserve Chairman Ben Bernanke need right now is tens of billions more of U.S. bonds -- or even high-quality fake ones -- suddenly popping up around the globe.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net

For all the criticism of the U.S. currency by leaders of the so-called BRIC nations, dollar bonds sold by the largest emerging-market countries are outperforming debt traded in reais, rubles and yuan.

Russian President Dmitry Medvedev, Chinese President Hu Jintao, Indian Prime Minister Manmohan Singh and Brazilian President Luiz Inacio Lula da Silva called for a “more diversified” monetary system yesterday to reduce dependency on the world’s reserve currency. The four leaders met in the Urals city of Yekaterinburg, where they planned to discuss buying each other’s bonds and foreign exchange, said Arkady Dvorkovich, Medvedev’s top economic adviser.

“It’s not up to politicians to determine which currency will be the world reserve currency,” said Lutz Karpowitz, a currency strategist at Commerzbank AG in Frankfurt. “In the end the market decides it.”

Dollar bonds sold by China earned 11.4 percent in the past year, more than double the 4.6 percent for debt in yuan, JPMorgan Chase & Co. indexes show. Brazil’s U.S. currency bonds returned 3.6 percent as real-based notes lost 4.9 percent, and Russia’s dollar bonds outperformed with a 1.9 percent loss compared with a 7 percent drop in ruble debt. India doesn’t have dollar-denominated debt.

‘Illiquid Market’
Bonds sold in dollars have beaten domestic debt in part because Russia and China manage the ruble and yuan. Those denominated in the U.S. currency can trade more freely, giving fund managers confidence they can sell the securities and get their money when they need it.

The result is limited foreign investment in local-currency bond markets, said Ward Brown, who manages $5 billion of emerging-market debt at Massachusetts Financial Services in Boston. Only Brazil’s real is free-floating. India imposes capital controls to protect the rupee.

China and India are “highly restrictive on the local debt side” and Russia has “quite an illiquid market” for foreign investors, said Cristina Panait, an emerging-market strategist at Los Angeles-based Payden & Rygel, which manages more than $50 billion. “Currency performance is a big portion of returns.”

The real rallied 11.2 percent last month, the ruble gained 6.9 percent and the rupee rose 6.4 percent against the dollar. The yuan appreciated 21 percent between July 2005, when the government allowed it to trade more freely, and July 2008. China has prevented the currency from strengthening since then as the economy slowed.

The Chinese government today sold 28.27 billion yuan ($4.13 billion) of yuan-denominated bonds maturing in 2019.

IMF Bonds
Political and financial leaders in the BRIC countries say they want to take a larger role in the world financial system as their foreign reserves swell and the U.S. economy endures its worst crisis since the 1930s. The Dollar Index, which measures the U.S. currency against those of six trading partners, has dropped 9.4 percent from a three-year high in March.

The BRICs account for 15 percent of the world economy and hold $2.8 trillion in foreign-currency reserves, or about 42 percent of the total, according to data compiled by Bloomberg.

Last week, Russia and Brazil announced plans to buy $20 billion of bonds from the International Monetary Fund, after China said it was considering purchasing $50 billion of the securities. The purchases would both support the IMF, established to help nations rebuild from the ruins of World War II, and diversify some of their holdings.

Too Early
The BRIC leaders, among the biggest holders of U.S. assets, alternate between critiques of the dollar and support. Premier Wen Jiabao called in March for the U.S. “to guarantee the safety of China’s assets” and central bank Governor Zhou Xiaochuan the same month proposed a new global currency to reduce reliance on the dollar.

Treasury Secretary Timothy Geithner said on June 2 Chinese leaders hadn’t expressed concern about the safety of U.S. debt during meetings in Beijing and said they “expect the dollar to be the principal reserve currency for a long period of time.”

Medvedev said earlier this month that the dollar wasn’t in a “spectacular position.” On June 13, Finance Minister Alexei Kudrin reassured investors of the country’s confidence in the greenback by saying it was “still early to speak of other reserve currencies.”

Treasury Holdings
In May, China and Brazil began studying a proposal to move away from the dollar to settle trade and use yuan and reais instead. Brazilian Finance Minister Guido Mantega said on June 10 the government’s decision to switch reserves into IMF bonds wasn’t aimed at weakening the dollar.

China and Russia agreed to use each other’s currencies more in bilateral trade to lessen dependence on the dollar, Medvedev told reporters in the Kremlin today after talks with Hu.

The leaders of the BRIC nations didn’t discuss the possibility of buying each other’s bonds during the summit in Yekaterinburg yesterday, Brazil’s Lula told reporters today in Astana, the capital of Kazakhstan.

China trimmed its holdings of U.S. Treasuries by $4.4 billion to $763.5 billion in April, Russia’s slipped by $1.4 billion to $137 billion and Brazil’s by $600 million to $126 billion. In May, the BRIC nations spent more than $60 billion buying foreign currencies, mainly dollars, to stop their currencies from gaining, according to central bank data and strategist estimates.

While the ballooning budget deficit is keeping the U.S. reliant on foreign financing, the world’s biggest economy is almost double the size of Brazil, Russia, India and China combined, based on 2008 figures compiled by Bloomberg. America’s market sustains the world’s biggest developing nations, with China increasing sales to the U.S. to $337.7 billion last year from $321.4 billion in 2007.

‘Political Gesture’
The dollar accounted for 64 percent of central bank reserves worldwide at year-end, up from 62.8 percent in June 2008, according to the IMF. The currency has underpinned exchange rates since the 1971 collapse of the Bretton Woods system, which linked their value to gold.

Statements about changing the global foreign exchange system are “just a political gesture,” said Pablo Cisilino, who manages $10 billion in emerging-market debt at Stone Harbor Investment Partners in New York. “At the end of the day, there is only one reserve currency on the planet.”

To contact the reporter on this story: Laura Cochrane in London at lcochrane3@bloomberg.net

China has unveiled the first official rule on the use of virtual currency in the trade of real goods and services to limit its possible impact on the real financial system.

The government also spelled out the definition of "virtual currency" for the first time, which includes prepaid cards of cyber-games, according to a joint circular from the Ministry of Culture and the Ministry of Commerce Friday.

"The virtual currency, which is converted into real money at a certain exchange rate, will only be allowed to trade in virtual goods and services provided by its issuer, not real goods and services." it said.

China has the world's largest population of Internet users, with 298 million people online as of the end of last year.

According to media reports, the virtual money trade topped several billion yuan last year after rising around 20 percent annually.

Since 2007, virtual money trading has drawn official attention, with the government demanding tighter controls as such trading became an avenue for gambling and illicit trade.

Under the new rules, using virtual money for gambling will be punished by public security authorities, and minors may not buy virtual money.

The Ministry of Culture also vowed to step up supervision on money laundering via virtual credits and other illegal online activities.

The most popular Chinese online credits are "QQ coins" issued by Tencent. com, which has at least 220 million registered users. In a media statement Saturday, the company said it "resolutely" supported the new rule.

The statement said Tencent had strongly opposed the underground trading of virtual money, which could enable online theft and fraud. The company would work with the authorities to combat online crimes, according to the statement.

Cui Ran, an expert on the Chinese online industry, said the regulation aimed to "nip illegal online activities in the bud," as current trading volume was still too small to shake the nation's entire financial system.

But as the trade expanded steadily, with increasing conversions between virtual and real money, there would be an impact on the financial system, he noted.

SHANGHAI — The buying and selling of the make-believe currencies used in online gaming has become so widespread that Chinese authorities fear it will affect the real economy.

To quell that threat, those authorities said on Tuesday that they had issued new regulations aimed at restricting the trade and use of virtual money.

China is one of the world’s biggest markets for huge so-called multiplayer online games like World of Warcraft, and tens of millions of young people are believed to be trading virtual goods and credits for real goods and cash.

The coin of fantasy realms have already moved markets here. So-called QQ coins — a form of currency produced by the Chinese Internet giant Tencent — have sometimes risen sharply in value against China’s official currency, the renminbi, alarming officials at the nation’s Central Bank.

Some people have even traded virtual currencies in China, and exchanged them for clothes, cosmetics and other goods.

Last year, nearly $2 billion in virtual currency was traded in China, according to the China Internet Network Information Center. Some experts say they believe there is a much larger underground economy in the virtual world.

Most of China’s big Internet companies — like Sohu.com, Netease and Tencent — have some gaming component and virtual currencies have grown up alongside many of them.

Some smaller gaming companies have even set up what are called virtual sweatshops, cramped quarters where young people play online games to earn credits that the companies then sell at a profit to overseas customers in Taiwan, South Korea and even the United States.

This practice is popularly known in the online gaming community as gold farming.

Many online marketplaces, like eBay and China’s Taobao, even have online advertisements offering virtual goods for sale, like World of Warcraft gold coins and virtual swords for the game Legend of Swordmen.

Edward Castronova, a professor of telecommunications at Indiana University Bloomington who says he believes virtual currencies could pose a threat to world economies, applauded Beijing’s move.

“This action shows that at least one government is concerned about the way virtual worlds challenge its control of society,” Professor Castronova said in an e-mail message Tuesday. “As virtual currencies take over more and more purchasing power, control over the effective money supply shifts from the central bank to the game developers."

On Tuesday, China said that new regulations would restrict the trading and use of virtual money, and that virtual currencies would be banned from being exchanged for goods.

The government also said it was moving to fight online gambling and disputes over virtual coins.

In a release, Beijing said that while virtual currencies had helped promote online gaming, they have “also brought new economic and social problems.”

Beijing has repeatedly sought to tame the online gaming market with new regulations (and even Internet addiction camps) but the activity continues to grow.

The new rules, issued jointly last weekend by the Ministry of Commerce and the Ministry of Culture in Beijing, are the government’s strongest effort yet to tame virtual money.

The regulations were widely circulated just as Beijing announced it would delay adoption of a widely criticized plan to install software that was supposed to censor pornographic and other “unhealthy” Web sites in all personal computers sold in China.

Richard Ji, an Internet analyst at Morgan Stanley, released a brief report Tuesday saying he expected only limited financial impact on Chinese gaming companies because much of the trading in virtual currencies and goods does not occur on the sites of big, publicly listed gaming companies, he says; it occurs on other Web sites.

Just why is there so much debt in the Anglo-Saxon world? Bankers and regulators know well that it is in nobody’s long-term interests to have allowed borrowing to escalate to a position where the US now owes far more, as a multiple of the economy, than at the start of the Great Depression.

The answer is capitalism’s dirty little secret: excessive lending was the only way to maintain the living standards of the vast bulk of the population at a time when wealth was being concentrated in the hands of an elite.

The amount by which the elite has benefited is startling, and illustrates the problem with lightly regulated free markets: the rich get much richer while the rest do not get richer at all. According to Société Générale economists, the inflation-adjusted income of the highest-paid fifth of US earners has risen by 60 per cent since 1970, while it has fallen by more than 10 per cent for the rest. As was recently pointed out in the New York Review of Books, the Walton family, of Wal-Mart fame, is wealthier than the bottom third of the US population put together – about 100m people. These are staggering statistics, confirmed by measures such as the US and UK’s ever-rising Gini coefficients, which estimate income disparity. Another way of putting this is that the share of profits in gross domestic product is at a 100-year high, or was until very recently.

Put simply, the benefits of economic growth have gone into the pockets of plutocrats rather than the bulk of the population. So why has there been no revolution? Because there was a solution: debt. If you couldn’t earn it, you could borrow it. Cheap financing was made widely available. Financial innovations such as the asset-backed securities market aided this process, as did government-sponsored agencies such as Fannie Mae and Freddie Mac. Regulators welcomed it all while perhaps taking insufficient account of the moral hazard problem it posed: that ever-increasing leverage meant the authorities had to keep interest rates low, otherwise the debt burden would cripple consumption. This prompted more leverage, which exacerbated the problem.

A walk in any low-income area in the UK confirms this. There are BMWs in the driveways, satellite dishes on the roofs and furniture delivery vans on the streets. In both Britain and America the jobless were encouraged to buy their own homes. No one begrudges anyone else the right to own a home or buy luxury goods. The problem is that the luxuries need to be paid for out of earnings and the houses out of equity topped up with an affordable amount of debt.

The question is whether the debt load – total US credit market debt outstanding was $53,000bn (€38,000bn, £32,000bn) at the end of March, or 3.7 times GDP – is at all sustainable and, if not, how it can be lowered without sinking the economy. Those pushing extra debt in an effort to boost the economy via increased consumption point to the scale of assets backing the debt. The net worth of US households, including their houses and after counting debt, was $50,000bn in March, according to the Fed. Not a bad tally for 306m people: $165,000 each. However, the cost of servicing this debt as a proportion of income, even with record low rates, is at a 30-year high, above 15 per cent, as incomes have stagnated and the total level of debt has risen.

The debt burden has to come down, which means more saving and lower economic growth for many years to come. Along the way inflation is likely to return, probably sooner and more violently than most expect, which will prompt investors to demand a higher return and make it even harder for governments to tackle the debt. At best the debt will fall slowly over many cycles and simply trim otherwise resilient growth. At worst it could cause growth to lurch upwards before tumbling again, with all the attendant uncertainty that entails. At this point, no one can know which is more likely. I incline to the more benign view because of the size of household assets but, if the dollar’s reserve currency status should come under serious attack, rates would have to rise to defend it and that could itself cause a consumption crisis.

What can be done? First, although it is not ideal, we should not be too hasty about abandoning the capitalist model. It is less bad than any other system yet invented. But we should redouble our efforts to increase productivity through innovation and creating new markets; simply squeezing lower-income workers is a bad option, which helped get us into this mess in the first place. This requires investment in education and research. Second, we have to learn to live within our means. This means spending less than we earn, perhaps doing without the BMWs, flat-screen television sets and leather sofas. Third, we should be careful in distributing the higher tax burden that we will inevitably have to bear over the coming decade. Very high marginal tax rates did not work in the 1970s and will not work now. That said, income disparity at current levels is a political time-bomb that needs to be dealt with. Finally, we should all come to terms with the fact that these are structural issues needing structural solutions; they need to be enforced over a longer time period than any one government’s term. So we need a new political consensus, one aimed at reducing overall debt levels while reducing inequality by encouraging education, entrepreneurship and investment in innovation.

The writer is an asset manager at GLG Partners

Caijing has learned of key appointments at the central bank which will affect the yuan and may signal monetary policy changes.

(Caijing.com.cn) China's cabinet has put the current head of China's foreign exchange agency, Hu Xiaolian, in charge of a soon-to-be-formed special monetary policy office to promote internationalization of China's currency, the yuan.

Hu Xiaolian

Caijing learned that Hu, 51, has been named by the State Council to head the Monetary Policy Department II, which is soon to open at the People's Bank of China, the central bank, as part of a government push to globalize the yuan for trade.

The State Council also approved the appointment of Yi Gang, deputy president of China's central bank, to replace Hu as director of the State Administration of Foreign Exchange (SAFE).

The personnel swap came at a time of growing speculation that China may tighten what's now a loose monetary policy. The appointments also could fuel speculation that the central bank may take new steps aimed at draining excess liquidity and preventing inflation.

Yi's appointment was expected to be made public soon, according to senior management sources at SAFE and the central bank. Bank officials nominated Yi in May and later submitted the official proposal to the State Council.

Yi Gang

Hu is the third-highest ranking vice president at the central bank. She is considered an expert in China's fight against so-called "hot money."

China has been advocating a broader role for the yuan on the world's financial stage.

China recently signed currency swap agreements with several key trading partners, including Brazil and Argentina. In addition, China has launched a pilot program for using the yuan in bilateral trade settlements.

A government effort to ease the yuan into cross-border trading is moving forward, although finding the best route has been tricky.

(Caijing Magazine) After months of uncertainty, a pilot program for yuan-based trade settlement took a substantial step forward when the People's Bank of China, the central bank, recently released new rules for cross-border transactions.

That same day – July 2 -- Shanghai officials said they were ready to launch the first transaction for a program approved by the State Council, China's cabinet, almost three months earlier.

The Standing Committee of the State Council decided April 8 that five cities would be allowed to launch yuan settlement for cross-border trade. But according to a central bank source, that committee meeting ended without an agreement on implementation measures, leaving work on complex details to government agencies and banks. And Shanghai's program launch stumbled and had to be suddenly canceled for "technical reasons."

Indeed, more work will be needed before the yuan is elevated to international currency level. Questions about exchange procedures, tax rebates and the yuan's appreciation are still shadowing the process.

Monetary Complexities

The day after the State Council ruling in April, the central bank brought together officials from various government agencies to discuss provisions in the draft rules. Beijing's goal was to release a full set of administrative rules in May.

But sorting out the details was far more complicated than originally thought. This complexity has been blamed for a long pre-launch period. Now, according to the central bank source, amending the rule is being handled as a systematic project.

Yuan settlement touches all kinds of issues. Systematic supervision and review procedures are for transactions, which involve opening new accounts, receipts, account balance management and customs supervision. Other top issues involve arranging yuan settlements inside and outside China, bank transactions, tax rebates for foreign trade.

Government agencies are keenly interested in tax rebating. A source told Caijing that, with the pilot's launch, certain import and export transactions would no longer need foreign exchange receipts and verifications, both used to be under the supervision of state administration of foreign exchange. This development will increase supervisory risks among taxation administrations. The settlement rule calls for tracking export data to help determine export tax rebates.

Wang Yongli, a deputy governor at the Bank of China, said in an interview with Caijing that export tax rebate issues can be resolved through use of an accounting currency. Two currency symbols would be adopted: one for yuan circulated within China; the other for yuan used in cross-border trade settlements. Customs officials can better track each kind of deal and decide whether to issue tax rebates.

A source at the State Administration of Taxation told Caijing his agency had studied export tax rebate and yuan settlement issues. As part of the study, opinions were solicited from other government bodies. New policy is expected in the near future.

Les grands pays émergents veulent changer le système. Le coût sera néanmoins très élevé

Il faut dire que les déséquilibres macroéconomiques sont de taille. Le solde du compte courant aux Etats-Unis, structurellement déficitaire en raison d’un excès d’importations systématique, a transformé ce pays en plus grand emprunteur du monde. Une position de débiteur net, qui s’accroît de plus en plus vite, reflétant l’accumulation de ses dettes envers l’étranger. Il n’est donc pas étonnant de voir ses créanciers évoquer l’abandon du dollar comme système de mesure de la richesse.

Monnaies régionales
Evidemment, la question est de savoir ce qui pourrait remplacer la monnaie américaine? L’euro est la première réponse qui vient à l’esprit. D’une certaine manière, la devise européenne a déjà commencé à jouer partiellement ce rôle, puisque les banques centrales à travers le monde s’en servent pour diversifier leurs réserves officielles. Les pays du golfe Persique avaient même proposé d’utiliser la monnaie unique pour coter le prix du baril de pétrole. Mais Washington s’y était opposé fermement de crainte qu’une appréciation de la devise européenne ne renchérisse le prix des importations américaines, freinant ainsi l’activité outre-Atlantique. Les producteurs d’or noir ont finalement écarté cette idée pour ne pas froisser leur principal client. Du moins, pour le moment.

Cet épisode montre bien que la fonction d’unité de compte d’une monnaie est essentielle pour contester le statut actuel de monnaie de référence du billet vert. En d’autres mots, la facturation des échanges ou la dénomination de la dette doit se faire dans une autre devise que le dollar pour prétendre rivaliser avec celui-ci. C’est, sans doute, ce qui pousse les pays sud-américains à évaluer l’idée de créer une monnaie régionale et une banque centrale de l’Amérique latine, comme l’a rappelé Rafael Correa, président de l’Equateur, en marge d’une réunion de l’ONU à New York en juin dernier. Il semblerait, en outre, que la Chine ait déjà signé, cette année, des accords bilatéraux avec l’Argentine et le Brésil pour effectuer leurs échanges commerciaux en yuans et non plus en dollars.

La perspective de substituer progressivement le billet vert par quelques monnaies régionales, et non pas uniquement par l’euro, s’impose petit à petit comme la solution la plus réaliste. D’ailleurs, Jean-Claude Trichet, président de la Banque centrale européenne, expliquait la semaine dernière qu’il était nécessaire, selon lui, «d’avoir plusieurs monnaies de réserve» et de «penser à la création de devises régionales de réserve».

Pour sa part, la suggestion du gouverneur de la Banque de Chine d’utiliser le DTS en remplacement du dollar pose un problème majeur. Déterminé par un panier de devises, qui comprend actuellement le dollar, l’euro, la livre sterling et le yen, le DTS n’est pas imprimé et ne sert pas de monnaie de facturation des échanges. Il est, dès lors, difficile de l’envisager comme un substitut valable au billet vert. Ce panier de devises est, toutefois, déjà employé comme réserve officielle dans les comptes des banques centrales, mais son poids relatif reste modeste.

Une solution plus radicale a été avancée par deux Américains, le milliardaire Steve Forbes et le controversé membre du Congrès Ron Paul. Ils suggèrent de revenir à un régime de change fixe, où l’or jouerait le rôle de garde-fou pour éviter toute création monétaire abusive. Le représentant du Texas rappelait, en début d’année, que «selon la Constitution, seuls l’or et l’argent ont cours légal aux Etats-Unis». Le problème est que, dans un tel système, les autorités monétaires américaines seraient contraintes de brimer le crédit, ce qui se traduirait par une baisse des importations et un rééquilibrage de leur déficit commercial. Outre le fait qu’une telle solution compromettrait la croissance de l’activité et l’emploi aux Etats-Unis, il est impensable que Washington se prive de son autonomie en matière de politique monétaire. De manière générale, un retour à un régime de change fixe paraît improbable.

Steinbrück défend le dollar
Bien sûr, certains dirigeants se veulent plus rassurants quant à l’avenir du billet vert. Peer Steinbrück, ministre allemand des Finances, déclarait à la veille du G8 qu’il est «improbable que le dollar perde son rôle de monnaie dominante». Malgré tout, sous l’impulsion des pays BRIC (Brésil, Russie, Inde et Chine), une refonte du système monétaire international devient de plus en plus inévitable. Côté russe notamment, le président Dmitri Medvedev confirmait, le 16 juin dernier, que le monde avait besoin d’une monnaie de réserve internationale autre que le dollar. Ce remaniement décrétera vraisemblablement la fin d’une époque, celle où le billet vert régnait en maître incontesté sur le commerce et les investissements. Le relais sera assumé par les pays qui oseront miser sur le développement de leur marché intérieur, au détriment de leurs exportations.

Puisque les Etats-Unis importent structurellement plus qu’ils n’exportent, ils ont besoin d’une entrée nette de capitaux pour financer la différence. Cela signifie que les Etats-Unis doivent vendre plus d’actifs aux autres pays (par exemple des bons du Trésor), ou le cas échéant, emprunter plus. C’est ainsi que le Japon et la Chine ont accumulé, au fil des années, une grande quantité de titres américains, libellés en dollar, constituant de la sorte d’énormes réserves internationales.

La question que tout le monde se pose est de savoir si cette situation est soutenable à long terme. En d’autres mots, l’excès de consommation outre-Atlantique peut-il être continuellement financé par l’épargne des autres pays? En théorie, dans le régime de changes flottants actuel, cela n’est pas possible. Le dollar se déprécierait inlassablement face aux monnaies des pays exportateurs, augmentant ainsi les prix à l’importation et réduisant la demande globale américaine. Le déséquilibre commercial se dissiperait du même coup.

Le précédent de 1971
En pratique, le billet vert joue le rôle de monnaie de réserve internationale. Cela implique que si les autres pays veulent continuer d’exporter vers les Etats-Unis, ils n’ont d’autres options que de garder en réserve les dollars ou les dettes américaines. Le billet vert conserve ainsi sa valeur et le gouvernement peut continuer à mener des politiques fiscales et monétaires expansives, sans avoir à en subir les conséquences. Dans les années 1960, le général de Gaulle appelait ce phénomène le «droit de seigneuriage».

Mais les politiques de création monétaire unilatérale trouvent toujours leurs limites, peu importe le régime de change en vigueur. Ce fut le cas à l’époque du président américain Johnson (1963-1968), compromettant irrémédiablement le système de change de Bretton Woods. Son successeur, Richard Nixon, dut mettre un terme à la convertibilité du dollar en or en 1971. Ce sera encore le cas si les Etats-Unis s’acharnent à baser leur croissance sur le crédit débridé.

The idea that the government of a major advanced country would default on its debt -- that is, tell lenders that it won't repay them all they're owed -- was, until recently, a preposterous proposition. Argentina and Russia have stiffed their creditors, but surely the likes of the United States, Japan or Britain wouldn't. Well, it's still a very, very long shot, but it's no longer entirely unimaginable. Governments of rich countries are borrowing so much that it's conceivable that one day the twin assumptions underlying their burgeoning debt (that lenders will continue to lend and that governments will continue to pay) might collapse. What happens then?

The question is so unfamiliar that the past provides few clues to the future. Psychology is crucial. To take a parallel example: the dollar. The fear is that foreigners (and Americans, too) will lose confidence in its value and dump it for yen, euros, gold or oil. If too many investors do that, a self-fulfilling stampede could trigger sell-offs in U.S. stocks and bonds. People have predicted such a crisis for decades. It hasn't happened yet. The currency's decline has been orderly, because the dollar retains a bedrock confidence based on America's political stability, openness, wealth and low inflation. But something could shatter that confidence -- tomorrow or 10 years from tomorrow.

The same logic applies to exploding government debt. We have moved into uncharted territory and are prisoners of psychology. Consider Japan. In 2009, its budget deficit -- the gap between spending and taxes -- amounts to 10 percent or more of gross domestic product (GDP). The total government debt -- the borrowing to cover all its deficits -- is approaching 200 percent of GDP. That's twice the size of its economy. The mountainous debt reflects years of slow economic growth, many "stimulus" plans, an aging society and the impact of the global recession. By 2019, the debt-to-GDP ratio could hit 300 percent, says a report from JPMorgan Chase.

No one knows how to interpret these numbers. If someone had predicted 20 years ago that Japan's debt would rise so spectacularly, the forecast would doubtlessly have inspired this alarm: Japan will pay crushing interest rates as fearful lenders demand high returns to compensate for the risk that government might default or inflate away its debt. Instead, the opposite has happened. Japanese investors -- households, banks, insurers -- have absorbed 94 percent of the debt, reports JPMorgan. Interest rates on 10-year Japanese government bonds have dropped from 7.1 percent in 1990 to 1.4 percent now.

Superficially, it's possible to explain this. Japan has ample private savings to buy bonds; modest deflation -- falling prices -- makes low interest rates acceptable; and investors remain confident that new and maturing debt will be financed.

The American situation is similar. Despite huge deficits, interest rates on 10-year Treasury bonds have hovered around 3.5 percent. In time of financial crisis, investors have sought the apparent sanctuary of government bonds. But the correct conclusion to draw is not that major governments (such as Japan and the United States) can easily borrow as much as they want. It is that they can easily borrow as much as they want until confidence that they can do so evaporates -- and we don't know when, how or whether that may happen.

Wealthy societies everywhere face a similar dilemma. Debt is ballooning from already high levels. The Congressional Budget Office reckons the Obama administration's planned budgets would increase the debt-to-GDP ratio from 41 percent in 2008 to 82 percent in 2019. Higher interest rates would aggravate the debt burden. Anticipating higher rates, the CBO estimates annual interest payments on the federal debt at $799 billion in 2019, up from $170 billion in 2009. Even the size of exposed debt is unclear; adding Fannie Mae's and Freddie Mac's debts (effectively guaranteed by the government) to Treasury debt would raise the total sharply.

But containing debt by spending cuts or tax increases would involve wrenching and unpopular measures that might, perversely, weaken the economy and worsen deficits. In Japan, the existing value-added tax (national sales tax) of 5 percent would have to go to 12 percent, says JPMorgan, along with deep spending cuts. Against choices like that, some advanced country might decide that a partial or complete default, though dire, would be less damaging economically and politically than the alternatives.

Deprived of international or domestic credit, defaulting countries in the past have suffered deep economic downturns, hyperinflation, or both. The odds may be against a wealthy society tempting that fate, but even the remote possibility underlines the precariousness and the novelty of the present situation. The arguments over whether we need more "stimulus" (and debt) obscure the larger reality that past debt increasingly constricts governments' economic maneuvering room.

Ludwig von Mises was snubbed by economists world-wide as he warned of a credit crisis in the 1920s. We ignore the great Austrian at our peril today.

Mises’s ideas on business cycles were spelled out in his 1912 tome “Theorie des Geldes und der Umlaufsmittel” (”The Theory of Money and Credit”). Not surprisingly few people noticed, as it was published only in German and wasn’t exactly a beach read at that.

Taking his cue from David Hume and David Ricardo, Mises explained how the banking system was endowed with the singular ability to expand credit and with it the money supply, and how this was magnified by government intervention. Left alone, interest rates would adjust such that only the amount of credit would be used as is voluntarily supplied and demanded. But when credit is force-fed beyond that (call it a credit gavage), grotesque things start to happen.

Government-imposed expansion of bank credit distorts our “time preferences,” or our desire for saving versus consumption. Government-imposed interest rates artificially below rates demanded by savers leads to increased borrowing and capital investment beyond what savers will provide. This causes temporarily higher employment, wages and consumption.

Ordinarily, any random spikes in credit would be quickly absorbed by the system—the pricing errors corrected, the half-baked investments liquidated, like a supple tree yielding to the wind and then returning. But when the government holds rates artificially low in order to feed ever higher capital investment in otherwise unsound, unsustainable businesses, it creates the conditions for a crash. Everyone looks smart for a while, but eventually the whole monstrosity collapses under its own weight through a credit contraction or, worse, a banking collapse.

The system is dramatically susceptible to errors, both on the policy side and on the entrepreneurial side. Government expansion of credit takes a system otherwise capable of adjustment and resilience and transforms it into one with tremendous cyclical volatility.

“Theorie des Geldes” did not become the playbook for policy makers. The 1920s were marked by the brave new era of the Federal Reserve system promoting inflationary credit expansion and with it permanent prosperity. The nerve of this Doubting-Thomas, perma-bear, crazy Kraut! Sadly, poor Ludwig was very nearly alone in warning of the collapse to come from this credit expansion. In mid-1929, he stubbornly turned down a lucrative job offer from the Viennese bank Kreditanstalt, much to the annoyance of his fiancée, proclaiming “A great crash is coming, and I don’t want my name in any way connected with it.”

We all know what happened next. Pretty much right out of Mises’s script, overleveraged banks (including Kreditanstalt) collapsed, businesses collapsed, employment collapsed. The brittle tree snapped. Following Mises’s logic, was this a failure of capitalism, or a failure of hubris?

Mises’s solution follows logically from his warnings. You can’t fix what’s broken by breaking it yet again. Stop the credit gavage. Stop inflating. Don’t encourage consumption, but rather encourage saving and the repayment of debt. Let all the lame businesses fail—no bailouts. (You see where I’m going with this.) The distortions must be removed or else the precipice from which the system will inevitably fall will simply grow higher and higher.

Mises started getting some much-deserved respect once “Theorie des Geldes” was finally published in English in 1934. It is unfortunate that it required such a disaster for people to take heed of what was the one predictive, scholarly explanation of what was happening.

But then, just Mises’s bad luck, along came John Maynard Keynes’s tome “The General Theory of Employment, Interest and Money” in 1936. Keynes was dapper, fresh and sophisticated. He even wrote in English! And the guy had chutzpah, fearlessly fighting the battle against unemployment by running the currency printing press and draining the government’s coffers.

He was the anti-Mises. So what if Keynes had lost his shirt in the stock-market crash. His book was peppered with fancy math (even Greek letters) and that meant rigor, modernity. To add insult to injury, Mises wasn’t even refuted by Keynes and his ilk. He was ignored.

Fast forward 70-some years, during which we saw Keynesianism’s repeated disappointments, the end of the gold standard, persistent inflation with intermittent inflationary recessions and banking crises, culminating in Alan Greenspan’s “Great Moderation” and a subsequent catastrophic collapse in housing and banking. Where do we find ourselves? At a point of profound insight gained through economic logic, trial and error, and objective empiricism? Or right back where we started?

With interest rates at zero, monetary engines humming as never before, and a self-proclaimed Keynesian government, we are back again embracing the brave new era of government-sponsored prosperity and debt. And, more than ever, the system is piling uncertainties on top of uncertainties, turning an otherwise resilient economy into a brittle one.

How curious it is that the guy who wrote the script depicting our never ending story of government-induced credit expansion, inflation and collapse has remained so persistently forgotten. Must we sit through yet another performance of this tragic tale?

Mr. Spitznagel is the founder and chief investment officer of the hedge fund Universa Investments LP, based in Santa Monica, Calif.

I’ve been meaning to write a piece on Ludwig von Mises, the greatest economist who ever lived, and, if you will, a hero of mine. This is a piece from the Op-Ed page of the Wall Street Journal by Mark Spitznagel. Spitznagel is the head of Universa Investments and is a protege and partner of Nassim Taleb of Black Swan fame. Those of you who have been following this blog know of my admiration of Mr. Taleb. He and Mr. Spitznagel were “right,” and Universa made a lot of money for their investors from our economic crisis.

Mises had as big a brain as you can get, and,  in the social sciences field, he is the equivalent of Albert Einstein. His masterpiece, Human Action, was the summation of his ideas and philosophy. To explain his ideas would take some time. The thing is, it’s difficult stuff. But, to use an analogy, he created a “unified field theory” equivalent for the social sciences. That is, he started with the basics, epistemology (the science of who you know what you know) and worked up from there, and created a complete explanation of human action, especially as an economic being.

His scholarship is peerless, his ideas are timeless, and, as Spitznagel puts it, he was “right.” And still is. I don’t mean to be hagiographic here, but he’s that important of a scholar. I actually met Mises and his wife just before he died. I recall bringing my copy of Human Action along, but I was too shy to actually ask him to autograph it, although he and his wife were very gracious.

For those who wish to know more about Mises, there is plenty of information at the Mises Institute. I highly recommend his biography, Mises: The Last Knight of Liberalism, a massive work but is virtually a history of economics.