Alex’s Notes: Ultimately, history repeats. History tells us that fiat currency cycles end in failure of the currency. Failure of the currency generally means that the newly accepted form of currency has to be relinked to a stable measure of value. History also shows us that the stable measure of value most commonly used when currencies fail is gold (why do you think Central banks hold so much of it?).

I am not saying we should go to a pure gold standard (ie I trade you a piece of gold for a haircut).

What I am saying is that for currency to have value as a medium of exchange, it has to have the confidence of the people using it. If the medium of exchange does not have the confidence of the people, then the currency crashes (kind of like what we are seeing today).

To use SDR’s as the “super-sovereign reserve currency” (is that like, super with a cape and tights?), is just a bandaid on a gushing severed limb. Its not going to fix the problem, because the IMF doesnt really have anything backing it up, it simply calls gold on its books assets, when in reality its the property of the participating nation. If push comes to shove, you think any country is going to give up its gold reserves?

Wed Mar 18, 2009 11:16am EDT

By Jeremy Gaunt, European Investment Correspondent

LUXEMBOURG (Reuters) – A U.N. panel will next week recommend that the world ditch the dollar as its reserve currency in favor of a shared basket of currencies, a member of the panel said on Wednesday, adding to pressure on the dollar.

Currency specialist Avinash Persaud, a member of the panel of experts, told a Reuters Funds Summit in Luxembourg that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket.

Persaud, chairman of consultants Intelligence Capital and a former currency chief at JPMorgan, said the recommendation would be one of a number delivered to the United Nations on March 25 by the U.N. Commission of Experts on International Financial Reform.

“It is a good moment to move to a shared reserve currency,” he said.

Central banks hold their reserves in a variety of currencies and gold, but the dollar has dominated as the most convincing store of value — though its rate has wavered in recent years as the United States ran up huge twin budget and external deficits.

Some analysts said news of the U.N. panel’s recommendation extended dollar losses because it fed into concerns about the future of the greenback as the main global reserve currency, raising the chances of central bank sales of dollar holdings.

“Speculation that major central banks would begin rebalancing their FX reserves has risen since the intensification of the dollar’s slide between 2002 and mid-2008,” CMC Markets said in a note.

Russia is also planning to propose the creation of a new reserve currency, to be issued by international financial institutions, at the April G20 meeting, according to the text of its proposals published on Monday.

It has significantly reduced the dollar’s share in its own reserves in recent years.

GOOD TIME

Persaud said that the United States was concerned that holding the reserve currency made it impossible to run policy, while the rest of world was also unhappy with the generally declining dollar.

“There is a moment that can be grasped for change,” he said.

“Today the Americans complain that when the world wants to save, it means a deficit. A shared (reserve) would reduce the possibility of global imbalances.”

Persaud said the panel had been looking at using something like an expanded Special Drawing Right, originally created by the International Monetary Fund in 1969 but now used mainly as an accounting unit within similar organizations.

The SDR and the old Ecu are essentially combinations of currencies, weighted to a constituent’s economic clout, which can be valued against other currencies and indeed against those inside the basket.

Persaud said there were two main reasons why policymakers might consider such a move, one being the current desire for a change from the dollar.

The other reason, he said, was the success of the euro, which incorporated a number of currencies but roughly speaking held on to the stability of the old German deutschemark compared with, say, the Greek drachma.

Persaud has long argued that the dollar would give way to the Chinese yuan as a global reserve currency within decades.

A shared reserve currency might negate this move, he said, but he believed that China would still like to take on the role.

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