Dollar losing it's reserve status: An ET Roundtable
- Thread starter William Rennick
- Start date
as I finished reading the paper --- here is my take... with my analysis...
this is an interesting subject to think about.
1. Current system..
If during a trade we buy tvs... our stores represent the sale in digits... those digits eventually transfer to asia as digits in their account... there is no advantage to be the reserve which I can see...
2. Old system...
It does seem that if you buy a tv. with cash and some of that cash went to asia and part of that cash sat in a guys wallet in case of emergency... we benefited by not having to give someone back a service, value or asset for that cash...
Hence, DR. Zhivagos point about it being an interest free loan..
However,
that indicates there was massive demand for our currency....
If fed had not massively increased the money supply to sate the world demand to keep dollars as a second currency... imagine how strong the dollar would have been.
We very well could have bought the same tv... for 1 tenth the amount of dollars.
---
Conclusion... being the reserve currency would have allowed americans to have purchased far more good had not the Fed chose to created dollars and sate the world demand.
So by being the world currency, the fed had the power to create massive inflation and it seems to have done so.
We also spent a shit load on paper, ink and security.
---
Finally it is possible the fed managed this all well and balanced demand with supply.
this is an interesting subject to think about.
1. Current system..
If during a trade we buy tvs... our stores represent the sale in digits... those digits eventually transfer to asia as digits in their account... there is no advantage to be the reserve which I can see...
2. Old system...
It does seem that if you buy a tv. with cash and some of that cash went to asia and part of that cash sat in a guys wallet in case of emergency... we benefited by not having to give someone back a service, value or asset for that cash...
Hence, DR. Zhivagos point about it being an interest free loan..
However,
that indicates there was massive demand for our currency....
If fed had not massively increased the money supply to sate the world demand to keep dollars as a second currency... imagine how strong the dollar would have been.
We very well could have bought the same tv... for 1 tenth the amount of dollars.
---
Conclusion... being the reserve currency would have allowed americans to have purchased far more good had not the Fed chose to created dollars and sate the world demand.
So by being the world currency, the fed had the power to create massive inflation and it seems to have done so.
We also spent a shit load on paper, ink and security.
---
Finally it is possible the fed managed this all well and balanced demand with supply.
Being the reserve has its costs, as you note, the main one being the need to create more dollars than you need for the domestic economy, the Triffin dilemma noted above, which of course leads to that tv being more expensive in nominal terms. I think it comes out cheaper in real terms though.
The cost to me is this: you get world domination at the expense of gradually destroying your economic independence, and that of course means you wind up losing reserve status. How long it takes is I suppose a function of how powerful you are and maybe how well you manage your position.
The way the world economy works is actually amazingly simple when you sit and think about it on a global scale. If it grows at, say, 2% a year, it needs something as a world currency to also expand at 2% a year to keep prices stable. Above that rate you'll get inflation, and below that deflation, on an overall global level.
If you're moving from one standard to another, as Mundell points out, the old standard currency will experience inflation as people move away from it to the new standard, and the new standard currency will experience deflation as people buy it up and force its price up relative to the output of the world.
You can think of the current situation as one where very slowly people are starting to shift out of the dollar. This should cause more inflation in dollars, apart from anything the Fed or the USG does.
If it moves towards keeping, say, euros as a reserve, or doing business with the yuan, then both of these will experience if not deflation, then we could at least say more price stability than you would think just because euros and yuan are being bought as dollars are being sold. Thus the ECB, for instance, might find that monetizing the debt of the peripherals didn't cause nearly the inflation they would have thought, because the excess euros were being mopped up by Asia.
Gold is probably the simplest way to play inflation in the US caused by the rest of the world moving away from it as a standard.
Myself, I doubt the dollar is going to be dethroned any time soon. China doesn't want to have the reserve currency because they know what it costs and know it's too expensive for them for now, but they will do what they need to to dominate their neighbors, which will partially dethrone the dollar in Asia. In the eurozone, Germany just wants stable prices. About the only place in there that would like to see the euro become a global reserve is France, which has been trying to maneuver its way into this position through all kinds of different means for more than a hundred years, and still dreams of using the euro as its vehicle for this goal, even if it means having to ally with Germany. But France is simply not powerful enough economically to get its way. So, by default if nothing else, the dollar is it for the foreseeable future.
I see this as a seventies type situation. When it's all over, the dollar will still be there, just as it was the last time when the dust settled.
The cost to me is this: you get world domination at the expense of gradually destroying your economic independence, and that of course means you wind up losing reserve status. How long it takes is I suppose a function of how powerful you are and maybe how well you manage your position.
The way the world economy works is actually amazingly simple when you sit and think about it on a global scale. If it grows at, say, 2% a year, it needs something as a world currency to also expand at 2% a year to keep prices stable. Above that rate you'll get inflation, and below that deflation, on an overall global level.
If you're moving from one standard to another, as Mundell points out, the old standard currency will experience inflation as people move away from it to the new standard, and the new standard currency will experience deflation as people buy it up and force its price up relative to the output of the world.
You can think of the current situation as one where very slowly people are starting to shift out of the dollar. This should cause more inflation in dollars, apart from anything the Fed or the USG does.
If it moves towards keeping, say, euros as a reserve, or doing business with the yuan, then both of these will experience if not deflation, then we could at least say more price stability than you would think just because euros and yuan are being bought as dollars are being sold. Thus the ECB, for instance, might find that monetizing the debt of the peripherals didn't cause nearly the inflation they would have thought, because the excess euros were being mopped up by Asia.
Gold is probably the simplest way to play inflation in the US caused by the rest of the world moving away from it as a standard.
Myself, I doubt the dollar is going to be dethroned any time soon. China doesn't want to have the reserve currency because they know what it costs and know it's too expensive for them for now, but they will do what they need to to dominate their neighbors, which will partially dethrone the dollar in Asia. In the eurozone, Germany just wants stable prices. About the only place in there that would like to see the euro become a global reserve is France, which has been trying to maneuver its way into this position through all kinds of different means for more than a hundred years, and still dreams of using the euro as its vehicle for this goal, even if it means having to ally with Germany. But France is simply not powerful enough economically to get its way. So, by default if nothing else, the dollar is it for the foreseeable future.
I see this as a seventies type situation. When it's all over, the dollar will still be there, just as it was the last time when the dust settled.
Ahh. But within your pedantic geographical analysis you have glazed over the fact that those hundreds of millions, billions of people out there who know nothing of or care less of the problems live and learn in a government controlled bubble. It is the "confidence" of the controlling government that matters. The millions and billions of impoverished, whether by freewill or limited options, live and learn through the eyes, ears, actions, and edicts of the government. One stroke of the pen and those currency exchange kiosks can change the people, change a nation.
Perhaps you've heard China and Russia began THIS WEEK trading in non-USD currency.
Perhaps you've heard Gulf States (not to be confused with Texas and Louisiana USA) have said crude-oil, within a handful of years will trade in non-USD currency.
Perhaps you've heard Brazil enacted a 6% foreign-capital inflow tax in October. As of TODAY it is being tweaked lower but only for foreign-based private equity investors wanting to help finance Brazil infrastructure projects directly.
Perhaps you've realized China's backing of Greece debt, is really USD dumping, cleansed into Euro. And this week, Portugal asked for China to help, and China said no problem! (it's slightly off-topic, but it works
)Perhaps you missed the news TODAY, China and India, two rivals, are talking about economics! Perhaps a non-USD free-trade zone?
Earlier in this thread someone mentioned US does not have an alternative currency. With that, the same argument you make about the people not knowing not caring can be made about the US citizenry. They don't know or care about anything but USD. This not knowing will be make the USD dethroning all the more painful. Simultaneously, the fact of not knowing will hasten the overall experience because government is here to help.
Capital-inflow tariffs (the word tariff or tax is not a requirement) are coming to a country near you, soon, within 12-18 months! The US consumes everything, and gives only paper. If you accumulate enough paper, you might grow some green shoots soon to be suffocated and smothered with more paper.
On it's current path, USD will lose reserve status within 5 years, not 40 years. It's just simple math. I will be alive and I will be prepared. It makes preparing so much easier if others just keep sending us "stuff". I get "cheap" stuff, they get pillow stuffing.
jem,
There is a clear advantage to having the world reserve currency. How else do you explain the US spending more than the next ten largest countries combined on defense?
Having the world reserve currency also makes (indirectly) the rest of the world finance your military. You really think the US can pay for such a large military on its own? It's called cost-shifting and it has been going on since Roman and Greek times.
You become a world power by having everyone else pay your bills, otherwise, you will never reach that kind of power on your own.
As the world becomes more multilateral - expect challenges to this arrangement. The arrangement worked well when India and China were practically non-existent, and the rest of the world was divided into the West, The Soviet Sphere, and the third world.
Times have changed.
There is a clear advantage to having the world reserve currency. How else do you explain the US spending more than the next ten largest countries combined on defense?
Having the world reserve currency also makes (indirectly) the rest of the world finance your military. You really think the US can pay for such a large military on its own? It's called cost-shifting and it has been going on since Roman and Greek times.
You become a world power by having everyone else pay your bills, otherwise, you will never reach that kind of power on your own.
As the world becomes more multilateral - expect challenges to this arrangement. The arrangement worked well when India and China were practically non-existent, and the rest of the world was divided into the West, The Soviet Sphere, and the third world.
Times have changed.
Please explain how that works... I really can not see how being the reserve currency finances the military.
We have massive military budget and a massive debt and massive economy - over spending was financed until recently by others by lending ... not by the magic of being a reserve currency.
If fact the size of our economy, the strength of our military and our deeply rooted Fed is what made the lending seem like a good risk to those lending. The fact that China pegged to our currency made them need a place to bury their reserves in our debt instruments including those ridiculous bonds.
Had they not buried their reserves in our debt they would have driven the dollar down.
I see nothing magical about reserve currency status.
Now that I am really thinking about this I think being the reserve currency may have given the fed more power.
You must be kidding! I agree, nothing magical, but OMFG!
In a nutshell... many NECESSARY commodities (think grains, think oil, think metal) are priced in a reserve currency which FORCES (causes) other countries to hold THAT currency for use as payment of those NECESSITIES.
What you said above is 50% correct, and 50% incorrect - but you're on the right page. Let me explain:
No other country can print the way we do without feeling huge inflationary pressures.
The US Dollar is the world's reserve currency - and so, as the world economy grows, so too does the amount of dollars needed to grow with it - irrespective of the growth of the US Economy.
As Central Banks around the world accumulate dollar reserves from global trade, they need to do something with them. They are basically deposited at a reserve account with the Fed - they buy treasuries and earn interest from them.
Thus, having the world's reserve currency gives you increased global demand for your debt. An unfair advantage, if you will.
However... look at my Modern Monetary Theory post. What is the real purpose of selling US Sovereign debt? It doesn't necessarily fund the US gov't - it sops up excess global liquidity.
Money is merely electronic digits on balance sheets around the world. As Central Banks accumulate electronic dollars from foreign US Dollar denominated trade - those dollars are deposited at an account with the Fed in return for Treasuries.
How many countries can pull that off on that scale? Imagine if you are Russia, or Saudi Arabia. You have to play the dollar game. Your currency is second rate to the dollar. Your demand for paper dollars in return for selling real things like commodities, and subsequently ending up with dollar debt, helps the Fed with its goal of hitting the target rate.
You are an unwitting participant.
I'm not saying this process or system will last forever. It is breaking down right now... but gradually. The situation, I would say, is very fragile. An event - financial or geopolitical, could really accelerate its demise.
The US has been exporting its inflation - which is really a form of a free lunch. That's the "exorbitant privilege." In ancient times, Rome had a silver standard. Yes, it exported inflation by debasing the amount of silver the denarius contained, but it also exacted tribute from colonies.
The US does not exact tribute, it exports inflation through a paper fiat system.
Very unlikely to happen, there are no credible alternatives. Nearest one is the Euro, and...enough said.
The dollar is a decent buy against most currencies at the moment IMO, especially the Euro and Pound.
The dollar is a decent buy against most currencies at the moment IMO, especially the Euro and Pound.
The US won't lose its status to a 3rd world socialist dictatorship. China will need to be democratic and actually capitalist before it can even catch up with Singapore, let alone the USA.
People seem to confuse going from $3k GDP per capita to $10k, as in some way becoming the world's pre-eminent power. Er no, that's still poorer than Bulgaria. Come back when Mr Hu with no degree out in the provinces is making $50k per annum on his farm.
Seriously, can you imagine the world's capital going to the safe haven of China? Lol.