Dollar losing it's reserve status: An ET Roundtable

This reserve currency concept is most likely nothing but a archaic idea like the Triffin dilemna (earlier link) Once we left the Bretton Woods system... being the dollar lost its edge...

Remember when Giselle made news by insisting on being paid in Euros. Every seller and buyer and choose the currency.

So what does reserve currency do for the U.S. nothing but perhaps force some people to have to arrange for a currency change when the dollar hits their account electronically.

If a country like China wants to peg to the dollar that is a strategic choice to be unnaturally competitive in the U.S. market. it is not because we are the reserve currency.

So what is left... the internet guys say that it is important that oil sells in dollars.... I just do not see why. Saudi get dollars and then they can buy gold or euros or hard assets... its not like they are stuck with dollars. I suppose in a sense if the money stays parked in dollars in an electronic account... it is as Dr. Zhivago said and interest free loan...
 
Quote from MohdSalleh:

From history we know that the loss of reserve currency status usually takes decades. This year i have travelled to Nepal and Turkey, both countries are still accepting USD in common circulation even above their own national currencies.

If you are 40++ and older, forget about it. You will be dead before the USA loses its status to China.
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Nepal... characterized by a combination of rapid population growth and inadequate economic growth that has led to widespread, chronic poverty.
source link

Turkey... The Guinness Book of Records ranked the lira as the world's least valuable currency in 1995 and 1996, and again in 1999 through 2004. The lira had slid in value to such an extent that one original gold lira coin could be sold for approximately 120,000,000 lira prior to the 2005 revaluation. source link


Such a strong argument you've made... But listen up: do not join a debate team. You will lose.
 
Great posts here Fellas, even you Doc Skids:) The most compelling argument appears to be that there is no better alternative to the greenback. However, it seems the question is what will be the effects of unlimited printing of new $$$'s to pay off our massive debt and obligations. Soon the interest alone will be over 1 trillion a year. It is not far fetched that a collapse of our current system is at hand which may bring on a hard asset based currency. Silver in particular. looks like a smart play here, especially considering it's currently very undervalued compared to gold. Should our dollar fail, the other currencies will too, ultimately leading to a one world currency. Due to the nature of commerce this transition to a new currency will need to happen literally overnight. To ignore the writing on the wall and not prepare for this is worse than the band playing after the Titanic hit the iceberg.

Rennick :cool:
 
When oil hits $150/barrel again and (real) unemployment in the U.S. is still 15-20% you will see the "buck stop there" if you will. As long as there is no wage->price spiral, which seems quite unlikely in our current climate, you will have a damping effect from commodity inflation (particularly food/energy, ironically excluded from CPI).

This will be the final trap for the Fed, where increasing money supply while trying to hold down rates will actively kill economic activity, and this baby will be on autopilot at a moderate rate of descent right into the ground.

A recent real life case study would be Japan. I know, I know, "we're not Japan". Well, looking at it from a broad strokes perspective, we're closer to a Japan-style zombie economy than say, an Argentine runaway train. The Japanese mess is going on for 20 years and is probably good for another 10-20 years. Japan's ultimate unwinding could actually trigger our unwinding.

The only responsible solution is massive austerity and rate jacking. Think 60-70% tax rate, and 20% interest rates if you are in a big hurry.

Since this is unlikely, I agree long, long term, you will see a default and it will be the mother of all defaults. How to play it? I think is is going to be so hard to time that massive diversification into non cash or fixed income assets is the best bet. Diversify assets physically. Consider credit risk, counter party risk, clearing firm health, etc.
 
Let's not forget that US has the biggest economy in the world & as long as there is even moderate growth a default is not that likely even in the face of big deficits. Moderate growth + QE + higher interest rates (if required) will keep the ball rolling. China needs the West as their GDP per capita had miles to go to catch up with USA, Germany, UK & quite a few others. So dissing USD will not get them far, I believe it's just muscle flexing what's going on. USD was "meant" to crash & burn years ago according to quite a few analysts, but it's still there where it was and perhaps higher. If EU is hit by new issues watch USD take off, which will cause higher asset prices in USA --> higher inflation --> higher interest rates.
 
Quote from jem:

This reserve currency concept is most likely nothing but a archaic idea like the Triffin dilemna (earlier link) Once we left the Bretton Woods system... being the dollar lost its edge...

Remember when Giselle made news by insisting on being paid in Euros. Every seller and buyer and choose the currency.

So what does reserve currency do for the U.S. nothing but perhaps force some people to have to arrange for a currency change when the dollar hits their account electronically.

If a country like China wants to peg to the dollar that is a strategic choice to be unnaturally competitive in the U.S. market. it is not because we are the reserve currency.

So what is left... the internet guys say that it is important that oil sells in dollars.... I just do not see why. Saudi get dollars and then they can buy gold or euros or hard assets... its not like they are stuck with dollars. I suppose in a sense if the money stays parked in dollars in an electronic account... it is as Dr. Zhivago said and interest free loan...
More...

The Triffin Dilemma is alive and well. Think about it - As the world economy grows, so too should the supply of the reserve currency. But for the reserve currency to grow, someone has to "create" it. It must export this currency. And what happens when you export a currency? You consume, right? A trade deficit develops - but it can't exist forever, no?

Also, central banks do not go to the FOREX to exchange dollars like you and I. Here's how it works. Countries conduct trade using a reserve currency - why? Because most multinationals don't want to use other volatile currencies - they want certainty. And when these multinationals accumulate a lot of a reserve currency, they exchange it at their bank, which in turn exchanges it with the national central bank.

Now central banks can't just trade these reserve accumulations like you and I can. To do so would upset the markets and cause a flood of phone calls from pissed off countries. So what did they traditionally do with these dollar assets? Well, to get a income, they bought US Treasuries with the excess dollars. Why sit on a pile of dollars, when you can earn interest. And thus, the US Treasury market became the top sovereign debt market in the world - the exorbitant privilege.

But here's the kicker. That process is going in reverse - slowly but surely. As I mentioned, bilateral trade agreements are a growing trend. Holders of US debt are slowly divesting, or not buying as much as they used to. No one can do it suddenly, as that would be extremely volatile and akin to a full blown currency war.

But there is one more thing we need to keep in mind. Under the Bretton Woods gold standard, dollars were gold - a pure asset. So Central Banks around the world sat on accumulations of TRUE ASSETS. Today, what do they sit on? Sovereign debts of trading partners - A LIABILITY HAS NOW BECOME AN ASSET.

That change from storing a pure asset - gold - to storing the debt of a trading partner - an asset that is someone else's liability - has created the huge trade imbalances we see today and created the massive global debt bubble that is about to pop.

I agree with Rennick, that the system will likely go, and as a result, a pure asset will once again be used. And not because governments want to be constrained by a gold or silver standard, but because there will be nothing left to replace the current system.

Global monetary systems are dictated by global powers, usually after a war. But what happens when the world becomes increasingly multilateral? Who dictates what? Either a war determines the outcome, or a this unsustainable system ends, gold or silver, by default returns.

Ask yourself, why do central banks store gold? It's an insurance hedge against collapse of the current fiat debt-based system.
 
Triffin - is not alive and well.

Triffin - was about the need to match up the physical currency with world demand for use of the that physical currency.

With a floating currency and electronic currency the only people who really need physical currency are people in the U.S. and black market people. (and we know that black market also likes euros)

While I appreciate your analysis... I see that you are intertwining trading partners desire to not see the dollar go down because they sell in dollars to the U.S. vs trading partners choice to sell in any currency they wish and then store in any currency they wish.

If central banks wish to store their reserves in treasuries that is not because we are a reserve currency - its because our currency had the least risk of implosion.

Its because our Federal Reserve runs the U.S. and because even the left most possible president bowed down to the Fed. Hence the dollar is the least risky currency to store your reserves....
 
Quote from tiddlywinks:

Nepal... characterized by a combination of rapid population growth and inadequate economic growth that has led to widespread, chronic poverty.
source link

Turkey... The Guinness Book of Records ranked the lira as the world's least valuable currency in 1995 and 1996, and again in 1999 through 2004. The lira had slid in value to such an extent that one original gold lira coin could be sold for approximately 120,000,000 lira prior to the 2005 revaluation. source link


Such a strong argument you've made... But listen up: do not join a debate team. You will lose.
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This is exactly what you do not understand and what i mean. There are MANY countries around with poor economies and much worse inflation than the USA. for them the preferred and sometimes ONLY choice is to transact in USD. I could give you many examples of how in many countries i travelled, there were not willing to even accept my spare euros or pounds but only the dollar.

It took 40 years for the british pound to lose its reserve currency status. Even if the process starts now, most of you 40+ oldies on this forum would be long dead before they deign to use the USD as toilet paper. There are hundreds of millions, billions of people out there in the world who know nothing or care less of the problems in America. For them, the USD is the standard. You should acquire a passport and get out more often.
 
Quote from MohdSalleh:

This is exactly what you do not understand and what i mean. There are MANY countries around with poor economies and much worse inflation than the USA. for them the preferred and sometimes ONLY choice is to transact in USD. I could give you many examples of how in many countries i travelled, there were not willing to even accept my spare euros or pounds but only the dollar.

It took 40 years for the british pound to lose its reserve currency status. Even if the process starts now, most of you 40+ oldies on this forum would be long dead before they deign to use the USD as toilet paper. There are hundreds of millions, billions of people out there in the world who know nothing or care less of the problems in America. For them, the USD is the standard. You should acquire a passport and get out more often.
More...

I've traveled a lot through latin america and europe and you are 100% right on your statement.
 
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