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10 november 2010, the need to change global reserves

It's freezing out, so my study has made its annual migration from conservatory to dining room. It's cold too for some in the sovereign debt markets, with irish troubles worsening by the day, as countries become the new banks, ready to topple over, but for an imf or ecb bail-out. Biggest debtor of all is of course america, but it has no trouble raising endless funding due to dollar dominance. This is now being challenged though as never before. Ideas about a more balanced basket for global reserves are hardly new - see eg manchester's own stiglitz - but the greenback's relentless downward spiral, and the firm policy intention to drive it down further to drive growth and avoid inflation in the us (our currency, your problem) has moved this debate from obscure imf papers on creating a new global currency (the bancor) to the front page. It is the main item of discussion at the g20. In fact, there's already a perfectly serviceable global foreign reserve currency, the imf's own sdr, although alas it has no market presence and so is not really attractive for wider use. This may change, but more likely is an ebbing into slowly building up reserves in other currencies, mostly of course the euro, although the prospect of bailouts is hardly an advert for euro stability either. The big change will come when the yuan becomes fully convertible, and china has already taken the very first crucial steps towards making that happen. With some 15% of global gdp now tied up in reserves though, starving the world of capital, something, somewhere has to give, and it won't be pretty. It also won't be that soon - so for now, buy gold.