Comments on Brendan Kelly “Brazil, Russia, India, and China (the BRICs) throw down the gauntlet on monetary system reform”, 28/06/2009, http://www.eastasiaforum.org/2009/06/28/brazil-russia-india-and-china-the-brics-throw-down-the-gauntlet-on-monetary-system-reform/
It is an interesting article. However, I find it difficult to understand the following argument, to quote from the article:
“Such international confidence also requires development of deep and highly liquid markets for short-term Chinese government securities, a condition that leads to a fundamental but often overlooked point – in a fiat currency world (unlike under the gold standard), as the principal reserve asset is a reserve nation’s debt, a dominant reserve currency nation must be a net debtor, or at least accumulate very significant external liabilities. Other countries must run current account surpluses so that they can invest in these debt securities. Such a reality would require dramatic changes to China’s growth model and trade policy.”
Why should that be the case that a dominant reserve currency country must be a net debtor, or at least accumulate very significant external liabilities? Has the US always been a net debtor since the US dollar became the world main reserve currency?
We can’t just simplistically use the current US external debt position and extrapolate that into other would-be reserve currencies.
Perhaps a simple question will make the point clear. Most countries have their own currency, their own default reserve. Are the governments of all those countries have always been net debtor to make their own currency their countries’ default reserve? I bet not.
The Australia government, for example, paid down all its debts and became a net creditor during the later years of the Howard / Costello government era, although that became short lived due to the current economic crisis and government deficits. During that time, Australia still had its own currency.
It is true that a central bank issuing the dominant reserve currency needs to have assets to balance its liability for the circulated currency. But that does not automatically mean that it has to become a net debtor, or does it?
Put it in another way, suppose that the central bank that issues the reserve currency to other countries by buying those countries’ official securities, or providing loans to those countries. The so called reserve currency would be in circulation as part of the international reserve in those countries. But in this scenario, the country that issues the reserve currency does not have to incur foreign debts, or does it?
My logic may be seriously wrong, although I doubt that it is the case. Otherwise, it appears the above argument by Kelly is incorrect.
Would anyone help me clear my mind? If Kelly's argument is correct, it would be a very interesting constraint to the reserve currency country. Maybe that is the price that country has to pay. But I am not sure that is the case.