Financial Environment This Year the Research Proposal

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S. Treasuries (Gjelten, 2009).

What hasn't happened "officially," i.e. The establishment of a formal IMF SDR world currency system or some other form of a supranational currency, seems to be occurring in the market anyway, but just in a more informal fashion. For instance, already central banks throughout the world are favoring euros and the yen over the dollar as illustrated by the following numbers (Euro, yen to replace dollar as world reserve currency, 2009). During July through September 2009, banks put 63% their new cash into euros and the yen. As a result, the dollar's share of new cash in the central banks was down to 37 compared with approximately 67% a decade ago. Currently, according to the IMF, dollars account for about 62% of the currency reserve at central banks -- the lowest on record (Euro, yen to replace dollar as world reserve currency, 2009). Further, if China itself were to tie its currency to a basket of currencies and manage the value of the currency it could be better off. For example, the country could free the yuan's value from reliance on the value of the U.S. dollar and this could result in less far volatility due to the use of a more diversified basket of currencies (Daniels, Radebaugh, and Sullivan, 2007).

With the creation of the stimulus package that relies heavily on debt creation, the U.S. has simply created another problem, the devaluation and instability of its currency. In effect, this country has decided to borrow from the future for better current prosperity. The only question that remains is how the debt scenario will play out in five years time and what the implications will be for the U.S. currency in relation to others.

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Going forward, there are two main possibilities that could occur in the future. First, keeping interest rates at zero, printing even more money and selling more debt, could lead to hyperinflation and economic collapse (Euro, yen to replace dollar as world reserve currency, 2009). Certainly, in this scenario, foreign governments will either be successful at creating some of a new world currency such as IMF SDR or will take their own measures to diversify their foreign-exchange reserves out of U.S. dollars. If this happens, the dollar is likely to fall even more and bond yields are likely to rise as investors demand higher compensation for their risk. The U.S. would also import less goods from foreign countries. However, the U.S. dollar would have less of a role in world financial markets in five years compared to other currencies. If it even showed up in the IMF SDR basket of currencies, the dollar would have a significantly diminished weight in comparison to its current value used for reserves. The other scenario would be for the U.S. To raise interest rates from around zero to the high single digits and to stop printing so much money (Euro, yen to replace dollar as world reserve currency, 2009). However, higher interest rates and less liquidity would negatively impact growth and would strengthen exports into the U.S. market. but, this move could stave off calls for the replacement of the dollar as the de factor world currency or moves by countries to move their money into non-U.S. currencies. At least better financial stability would keep U.S. currency as a contender for inclusion in a basket of currents selected for the IMF SDR......

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