I read Brad DeLong's weblog frequently, as I understand what he says about economics. Lately he has been writing about the threat to the dollar's dominance of the currency popularity charts--the dollar has been the world's reserve currency for a very long time.
What I don't understand is why, when evaluating which currency will supposedly replace the dollar, economists don't recognize how easy it is for banks, other countries and even individuals to evaluate the political risk of depending on other currencies. Would you really want your or your country's savings denominated in Euros, controlled by Brussels? Or yuan, where China is dealing with 300 protests a day?
America is not treating its fiscal policy with the attention it deserves, but it doesn't have to be faster than the bear--just faster than the others fleeing the bear.
In 2003, I wrote that the best possible candidate to back up, if not replace, the dollar could be quite a surprise--I nominated the UK pound sterling. The UK's position has since eroded due to Gordon Brown's borrowing and spending tactics, but if I had significant cash and was worried about the stability of the dollar, only the pound has sufficient size, weight and stability to offer an alternative.
Should sanity return to UK budgeting, I still believe that the pound could serve as a reserve currency. Evidently, Russian billionaires as well as Middle Eastern oil princes agree. I'm not quite sure economists follow behaviour as closely as they should when evaluating questions of this type.
If there are economists who read this (oh how coy I'm being--I fully intend to submit this to Britblog for their round-up of UK blog posts, and it's run by an economist), I hope they will correct my simplistic view of the situation.
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