grov, good article. You might like this also - a technical thesis on exchange rates and the trilemma (impossible trinity). It's worth reading the whole thing, but have pasted the conclusion below.
This might take some heat and paranoia that is in the currency debate, and who might be doing what to whom. I doubt there are any malicious intents anywhere on the planet, as what happens within the sovereign borders is foremost to governance, then seeing what can be done to reconcile others problems externally.
Selfishly, many other countries have a lot to lose in simply assisting in response to the US balance of trade problems. I'll maintain that the US problems are all structural and internal and need to be fixed from within. This article with yours explains that intervention by other countries papers over the problems if not managed properly, and potentially cripples others.
Global economies are likely to continuously find new equilibriums for some time and the media/politicians will keep using it to springboard fear mongering to suit their own selfish means in covering up their own misgivings (it's always easier for it to be someone elses fault).
Interestingly, there is no mention on the use of Gold, and merely refers to substantial holdings of international currencies. If not for the lack of gold possibly, this is a great medium to hold for this purpose (and was historically). But like everything else (even USD reserves), it's the end game of variatons in value of that asset that causes concerns. This holds true whenever you hold a very large quantity of any asset - paper or otherwise.
One thing I've thought of is for countries to hold a few (more than one) currency reserve assets, so that there is flexibility in trading value in the event one of the other assets becomes depressed (as USD is now). Maybe this is what is being contemplated for gold (a type of hedging) - Another thing to ponder is for countries to eventually base their reserve values on a fund management approach, rather that be resigned to trying to manage it themselves.
The first option might explain India's recent gold purchase?
In all, I honestly think the US is looking for a free ticket out of this mess without first tidying up there own broken affairs.
rgds, pw
4. Concluding Remarks In this paper, we have described a methodology to trace the changing patterns in the configurations the trilemma has manifested. Our methodology reveals the striking differences in the choices that industrialized and developing countries have made over the 1970-2006 period.
Recent trends suggest that among developing countries, the three dimensions of the trilemma configurations -- monetary independence, exchange rate stability, and financial openness -- are converging towards a “middle ground” with managed exchange rate flexibility, underpinned by sizable holdings of international reserves, and intermediate levels of monetary independence and financial integration. Industrialized countries, on the other hand, have been experiencing divergence of the three dimensions of the trilemma and moved toward the combination of high exchange rate stability and financial openness and low monetary independence (most clearly exemplified by the advent of the euro).
The system has evolved over time, it would be a mistake to think of the process as being smooth and continuous. Rather, there have been a number of discrete, structural breaks associated with significant events: the collapse of the Bretton Woods system, the debt crisis of 1982, and the Asian crisis of 1997-98. In addition, accelerating globalization and the rise of China have also affected policy arrangements substantially.
We also tested whether the three macroeconomic policy goals are “binding” in the context of the impossible trinity, by estimating the nature of the trade-offs faced by countries. Because there is no specific functional form of the trade-offs or the linkage of these three policy 21 goals, we estimated the simplest linear specification for the three trilemma indexes and examined whether the weighted sum of the three trilemma policy variables equals a constant. Our results confirmed that countries do face a binding trilemma. That is, a change in one of the trilemma variables induces a change with the opposite sign in the weighted average of the other two variables. In that sense, we have provided substantial content to the hypothesis of the ‘impossible trinity”.
