Quote from: caveden on August 02, 2013, 06:23:30 PM

Quote from: evoorhees on August 02, 2013, 05:23:03 PM

I don't believe this is true. A government (or any other entity) cannot maintain a peg indefinitely unless they have a indefinite amount of resources with which to do it (and no, money printing doesn't count Wink

).

Panamá and Hong Kong have their currencies pegged to the USD for decades now, don't they?

AFAIK, all cases of failed pegged currencies were in situations where the money issuers also attempted to use money creation to manipulate interest rates (or any other price). As long as it only creates and destroy currency with the goal of keeping a parity price with a foreign currency, I fail to see what's the great danger.

It's trivial to create a currency with a perfectly stable peg: just maintain 100% reserves in the same asset you're pegging to. Decrease this reserve ratio, or swap out the reserves for ones whose price has less than a guaranteed perfect correlation with the pegged-to asset going forward, and you increase the risk of being overrun and the peg breaking.

The scheme presented here proposes 0% of the reserves be held in the pegged-to asset, and all of them to be held in a new and unnecessary asset with no established liquidity, whose price has no reason to be anything other than completely uncorrelated with that of the pegged-to asset. It strikes me as maximally risky.