good afternoon welcome to capital account i'm lauren lyster here in washington d.c. these are your headlines for tuesday december fourth two thousand and twelve the g.o.p. has made a counteroffer to the white house on the fiscal cliff and the endless conversation continues today with president obama giving his first post-election one on one interview here's a snippet i think reassured him and when will the two of you sit down in around the world i don't think would be assured now sitting in a room. there was plenty of that throughout the interview but do these twenty four seven deficit debates do you want to undermine perceptions of america and the dollars position in the international monetary system then they do to address the nation's growing debt we'll discuss uncle sam's exorbitant privilege despite the

budget woes and assess the competitive currency landscape plus the dollar fell against other currencies to a six week low this morning according to reuters which cited concerns over a fiscal cliff deal but what does this so-called dollar index really gauge when it comes to the greenbacks true value will break it down and word of the day and paying people to track the comings and goings of private corporate jets in the big woods on them amounts to this. material nonpublic information which is different as the information that the average investor doesn't have a good this is an insider trading case pretty damn. there is a debate will talk about it and loose change let's get to today's capital account.

while a fiscal cliff debate seems to consume the domestic airwaves it also reverberated around the global echo chamber providing the baseline for headlines like this that we found a day in the english edition of the chinese government news source no deal in sight on the u.s. fiscal cliff to the international edition of the german paper der spiegel budget disarray us set to restage greek tragedy now it may not represent the same type of threat but it is reminiscent of the debt ceiling debate in the summer of two thousand and eleven after which the u.s. of course lost its aaa credit rating from s. and p. for the first time in history now the ratings agency then said washington's deal on the debt ceiling didn't go far enough to address america's deteriorating finances nonetheless the u.s. has continued to enjoy its exorbitant privilege despite the downgrade despite the debt that the that the government has been racking up that exorbitant privilege of

course is the issue issuing the global reserve currency the u.s. dollar and despite the downgrade and more fed money printing the dollar has held up relative to other currencies this is given rise to endless metaphors the cleanest dirty shirt the best horse at the glue factory you name it all in the global context of the eurozone crisis and concerns about a hard landing in china and now someone who has made a career out of examining monetary history is here to help us make sense of this is barry eichengreen professor of economics at u.c. berkeley and author of this book exorbitant privilege the rise and fall of the dollar and the future of the international monetary system so professor i can green thanks so much for being on the show so happy to have you. good to be here it's great to have you so let's start with this focus on the fiscal cliff because as i said up you know sitting here in washington it's very much framed as a domestic debate but it is reverberate around the world you know people across the world read these headlines so for other countries sitting on reserves of u.s.

dollar depending on the u.s. saw great faith to back the global want to terry system what is the perception. well foreign central banks and governments clearly are watching closely but i think everybody needs to draw distinctions between what might happen on january first to the dollar and what could happen in the long run i remind you that when we have that ceiling imbroglio in august of two thousand and eleven the dollar actually strengthened when lehman brothers failed in september two thousand and eight the dollar actually strengthened its safe haven currency and when there is a crisis even if we cause it ourselves in the united states there tends to be flying toward the dollar rather than away and that could happen again at the beginning of next year if indeed we go off the fiscal cliff in the longer run.

all that it's chaos surrounding u.s. fiscal policy and questions about whether we can get our house in order. that's not going to be good for the dollar. looking out over a longer period i do think feeling. aggressor fiscal problems would be dollar negative ok so then let's talk more about this because we could add to what you point out is the strengthening of the u.s. dollar after these events that you would imagine would negatively impact it add to that that we've seen three years of quantitative easing and we haven't seen a dollar collapse there the dollar crisis that some predicted when they were seeing the fed issue all of this new currency and expand the monetary base inflation concerns remain low the. concerns about a dollar collapse are sedated is this a false sense of security and you kind of said yes that longer term this could be an issue so then i want to know what the concern is i know you've seen you write about about china preparing the right maybe to act as

a reserve currency. well the concern is number one that the u.s. it's not going to remain twenty five percent of the global economy what it is now forever merging markets will continue to emerge will continue to grow faster than the u.s. the u.s. government is not going to be able to pump out safe and liquid assets on the scale that the global economy requires so there will have to be other sources of those assets in my book a year and a half ago i said the eurozone and china are the most likely alternatives but they're both having problems at the moment so there really is no alternative to the dollar that's one factor supporting the currency and the other fundamental is the liquidity of u.s. financial markets the u.s. treasury bond market is the single largest and most liquid financial market in the

world and that's important in times of turbulence that's what continues to make the dollar and only the dollar crude safe haven currency so then even if there were because you're saying the euro the renminbi they're not qualified even if they were do you see a scenario where you would ever be confident that central banks could have an orderly transition to another fee based monetary order where another currency was the reserve currency. i do think that's possible. i do think that central banks and private investors could adapt themselves to a world where there were three true global currencies the dollar the euro and the renminbi where there were deep and liquid markets in all of them and where all of them were used in international transactions i think indeed that could make the world a safer financial place because if one of the issuers say the u.s.

government. misbehaves doesn't follow prudent policies there would be alternatives that were moving away from the dollar wouldn't mean. global liquidity shortage if there were alternative sources of liquidity in europe and china that's interesting do you see this stage being set where that could be a reality. in my book i did see that possibility and i. forecast that ten years from now we could be in a world where the euro and the renminbi were serious competitors to the dollar i've become a little more pessimistic be cause as everyone knows the eurozone has not been able to grab a line under its crisis the euro has been losing ground in the last year or so as a reserve currency and the chinese have problems as well but with their growth

slowing down it's important to note that all the important reserve currencies in history have been the currency it's a political democracy it's where investors are confident that there are limits on the arbitrary power of the executive one has to wonder whether china's political system may be the obstacle to the renminbi becoming the crude global currency ok and we set up now what an orderly transition would look like. where the dollar was not so dominant what about a disorderly one what do you think what i just imagine what a disorderly scenario would be and what do you think would happen would there be more of a role for private currencies would people flee to commodity when you pick well i think if there was a crisis of confidence in the dollar and there hadn't been time for alternatives alternative currencies to emerge. investors would flee and second tier

currencies the swiss franc the norwegian. canadian dollar the problem being that there are not enough swiss francs in canadian dollars to go around they would flee into commodities gold first and foremost but. gold doesn't really have the liquidity that importers an exporter and financial market participants require so even though there would be flight and second tier currencies and commodities i think we'd be facing a global liquidity shortage and twenty first century globalization really would be at risk you know i want to ask more about this i know that your new think that there were charges that kind of a gold standard is ridiculous i want to know why is that we're taking away i mean isn't there something ridiculous pout a debt based money system too. i hope always think of winston churchill in what he said about democracy the worst possible system except for the

alternatives so i think the same is true of money systems we have been moving away from them gradually we've been moving away from commodity money systems gradually over the course of centuries and. doman do misters notwithstanding the evidence that money is always and everywhere and you have inflation that what the. ted has been doing is going to. unleash the demons of hyper inflation the historical record simply is not consistent with that view i think the fact that gold still plays a limited monetary role that central banks continue to hold some of it that people spent of china has been accumulating some more testifies powerfully to the long shadow of history that gold mattered one hundred years ago there is an

infrastructure where the federal reserve bank of new york warehouses gold for foreign central banks and where the bank of england warehouse is called for foreign central banks so there are. some reasons grounded in history why it continues to play a monetary role but i don't think there is a logic for why gold should be more important monetarily them silver copper tim or bananas yeah and some people would argue that you know maybe any of those monetary metals would be one kind of kind of commodity backed currency metal that people would gravitate towards or that the market gravitate towards one issue i want to bring up because it's often put out is that it's a matter of the amount of gold that there's not enough gold with how and how massive the the amount of money in circulation is but then there are folks like jim rickards euro currency wars who says no this is an issue of price and i want to play

a little of what he said in the past. people would say well there's not enough gold to support world truth well there's not enough gold is seven hundred dollars an ounce but there is enough gold at seven thousand dollars an ounce another is the same quantity of gold will support any amount of underlying transactions depending on the price so just quickly before we go to break is there a point to do people kind of frame this argument incorrectly and he's making kind of a point to address that but at the price you have to worry about. you know if we want to replace all the money circulating in the world with gold we could do what. price of seven or more likely ten thousand dollars per ounce but that doesn't mean tying monetary policy to gold would be desirable it just means that. it's a mistake we could make along with many other possible mistakes bearing up ok more on this after the break we'll talk about interest rates and the central bank's role right now manipulating them more with barry eichengreen professor of economics at u.c. berkeley author of exorbitant privilege in

a moment still ahead you can't paying people to track the comings and goings of private corporate jets than the people who ride on a mountain insider trading talk about it in loose change first your closing market numbers. carly who. offers your show and an issue. what's the matter you. most of the residents never heard the performance. of coming all the sinners there and you look up and there's one check in on you he's the alpha beta gamma he was

always the fine now it's time to try and he's let me know what's going on so you can pinpoint. the dirt right now. dog shows become income mortal danger and a piece of art. is exempt. from some pretty.

welcome back we're talking about the monetary system and rewinding a bit under bretton woods there were automatic adjustments to address strength or weakness and other economies now central banks have much more flexibility and their ability to determine their own currencies values this allows them to build up chronic current account surplus is our deficit so how is that a sustainable model for trade let's ask our guest as he is the expert in all things

global monetary system related we will go to barry eichengreen in just one moment he is a professor so i want to ask you how is that a sustainable model for trade where you can build up these massive chronic current account surplus as our deficits because of the monetary system well you've got to have a system that's flexible enough to make those chronic surpluses and deficits go away . for a century and more we thought that stable exchange rates and. domestic inflation and deflation was the way to adjust prices and make those imbalances go away the modern view is that there is an argument akin to daylight savings time you can adjust all the prices at once through exchange rate commissions it doesn't work perfectly all the time but again i think the historical record shows that it's

a more effective way than. artificially peg government controlled exchange rates to deal with the imbalance problem ok so if the problem is artificially controlled exchange rates what about artificially controlled interest rates because we see central banks having so much power and ability to manipulate interest rates and these are really the market signals these are the price signals and we've seen some unprecedented manipulation of them especially since the financial crisis so this i mean you could argue it moves us further away from a true capitalist system and more towards a centrally planned one it is that good. it's not good at all times and places but it's good right now because starting in two thousand and eight the market system. the capitalist system malfunctions horrendously so clearly there are different interpretations of the financial crisis but that's mine . in which. financial markets stopped functioning properly for some

central banks to resort to extraordinary measures to get them and the economy feet again but now even some of the people that worse stewards of the u.s. financial system during that period for example sheila bair who was chair of the f.d.i.c we interviewed her yesterday and she says ok everyone still looking at cleaning up from that crisis i'm worried about the next one and she points to central bank the federal reserve policy when she talks about that let's play a clip of it. moving forward i think the really the interest rate risk and the and perhaps that into the consequences of this period patrik a period of near zero interest rates that is that kind of the future thing that i'm worried about. so now this is the situation that she's worried about when she is looking at ok where could the next crisis come from what's your view on that. well she was right to worry about that but the question is what do you do in response

central banks really have to have this with one have their interest rate setters and they're trying to get economic activity going again and bring down the unemployment rate with the other had on their regulators and i think the problem that is spear points to is a problem of the regulation we need to regulate banks and financial markets vigorously and even more vigorously in periods swim borrowing is cheap and there is still a lot of liquidity sloshing around and so there is a problem the fed and the other regulators need to crack down where they see financial excesses and yeah rates increase rates at this point would not be the way to do it what about letting the market decide for a while without them letting the market set like when she was talking about what she was really concerned about it wasn't necessarily what the banks were doing but the fact that actually these central bank policies they weren't being shown to really help the economy they weren't being shown to really help lending they were

creating more i detected consequences with banks needing to search for more and more risk they actually don't want to lend out because the interest rates are so low. well if. you mean let the market decide by raising interest rates back up to three four five percent i would say that it's socially irresponsible and politically impossible in a period when unemployment is seven point nine percent and when the economy is only growing by two and a half percent if we had a normal unemployment rate and people weren't suffering if we had a reasonably robustly growing economy then i would agree then i would say both the interest rate setting fed and the fed as regulator could let the market decide but now. all right well thank you so much i appreciate you being on the show you were means we can't get into i don't have time i do want to know how the fed's policies have helped unemployment but want to save that for another day thanks so

much barry eichengreen professor of economics at u.c. berkeley author of exorbitant privilege thank you. all right it's time now for word of the day where we break down a term for our smart viewer but just perhaps not the expert and given our conversation with professor i can bring about the international monetary system and the role of the u.s. dollar the word of the day is that you've got to get it dollar index now there is certainly plenty of mention of the dollar and on mainstream financial outlets the dollar index has hit a month the dollar index and the last six months has dropped fourteen percent you know the dollar index is a great bunch more government is doing very accustomed to it i've been looking at it for years. ok so it's always use to really look at what's happening with the

dollar but what is it exactly it is a measure of the value of the u.s. dollar relative to the majority of its most significant trading partners relative to a basket of foreign currencies but what exactly fills up this basket well the index is calculated by factoring in the exchange rate of six major world currencies the euro the japanese yen and the canadian dollar the british pound this week and the swiss franc you can see them all there now the u.s. dollar index was first instituted in one nine hundred seventy three you guessed it after the breakdown of bretton woods and since its inception the dollar index has only been changed once and this is when the euro was first introduced right before the turn of the century and as you can see here nearly sixty percent of the dollar indexes value is weighted on the euro and an additional twelve percent is the british pound which is highly correlated with the euro so now this is why some see

that index is actually an inverse euro instrument in this graph you can actually see that you can see just how highly correlated the u.s. dollar index is with the euro u.s. dollar so take a look at that i mean it's so highly correlated and many say that the index is falsely associated with conveying general strength or weakness of the dollar and that's just one reason why now the index currently shows the strength of the u.s. dollar is out around eighty and it started right around here but one of the biggest problems with the dollar index is that it doesn't take into account changes that have occurred in the global monetary system since the breakdown of bretton woods you heard our guest talks about the renminbi for example not to mention if you look at the purchasing power of the dollar in terms of another commodity like oil it paints a different picture of the dollar value so just as in the case of the vix which we broke down recently you can check it out online the u.s. dollar index does not tell nearly the entire story. so.

let's wrap up with loose change dimitri kofi annan is here to talk about this interesting predicament first insider trading we've heard so many cases recently has it become the new normal. drugs roger of them is sentenced to eleven years in prison in saudi dealing the move comes a week after a former portfolio manager was charged with running the most lucrative insider trading scheme as he sees billionaire founder steve cohen told clients today he's confident that he quote acted appropriately. so there are a couple in the comment thread as an informant who has been helpful to the f.b.i.

in a number of these cases his name is david slain there was a major article done in bloomberg he's a former morgan stanley director and one of his original tips that the article cites was a fund manager who was paying people to figure out who was coming and going on corporate jets at this small airport to try and figure out maybe the deals that were being made and john carney at net net this and he seemed like you brought up a really good point which is is this insider trading no because anybody can actually if they do some due diligence of their own looking at various websites can actually get this information and so we wanted to bring it up because this idea that this is insider trading this is just entrepreneurial creative due diligence i grant you that you can get the information i mean i mean i wanted to warn you but my point but i agree with you argue it's why would you stifle creativity well i mean the point is that ok these people that work at the airport they can see who's coming and going they're not bound by confidentiality according to carney. these

articles so you know if you're getting the information from them that's information that anybody could really hypothetically get they want you know that is what the kind of edge that you need to get you know ever since sarbanes oxley management teams can't tell a different people different information you know it's much more they have to be to tell everybody the same thing so you have to get more creative i mean that's how the role that i had in equity research was born because hedge funds were always trying to get an edge and how do you get that edge in a time when when you can't get that edge from information is coming from a management team and here is a prime example you know you kind of read the tea leaves and figure out what could be going on based on who's coming and going out of an airport. really are. going to argue with you on this story probably much less interesting ok well we don't have time for another one so we're going to have to leave it at that but be sure to come back tomorrow that's all we have time for however we'll have a great show tomorrow and in the meantime you can follow me on twitter at lauren

lyster you can like any of our facebook page it's right there or you can give us feedback and it shows you missed catch that vixen volatility index word of the day at you tube you tube dot com slash capital account be sure to leave feedback because you know that we respond on fridays which is just around the corner really and you can catch any of our shows in h.d. this is the only place we're on in h.d. on hulu at hulu dot com slash capital dash account if you missed our sheila bair interview you saw me reference that you should go take another listen and from everyone here at capital account have a great night. for . ya. white

color. i've seen.