Author Topic: The USA desperately needs to lose world reserve currency status.  (Read 11600 times)

talltexan

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #100 on: December 10, 2019, 01:30:29 PM »
Suppose all of my savings are in a bank that can be mismanaged and become insolvent.

Which type of crisis should be worrying me?

maizefolk

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #101 on: December 10, 2019, 02:25:34 PM »
Suppose all of my savings are in a bank that can be mismanaged and become insolvent.

Which type of crisis should be worrying me?

I guess in that case both kinds, no?

For a bank that has currency mismatches between assets and liabilities (like many eurozone banks that had been borrowing in dollars during the great recession), it would seem that either a currency crisis or an economic crisis could become a disaster.

For US bank dealing totally in dollar denominated assets I guess the direct effects of a currency crisis would be smaller, although the purchasing power of your hypothetical cash savings could still be eroded by a currency crisis. At the same time economic crisis would certainly increase the risk that mismanagement would lead to insolvency.

Yikes.

Paul990

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #102 on: January 06, 2020, 03:03:27 AM »
Suppose all of my savings are in a bank that can be mismanaged and become insolvent.

Which type of crisis should be worrying me?
I don't think you have understood what a currency crisis is talltexan, probably because US citizens never experienced one.

During an economic crisis, if you lose all your savings, your mother can give you some $.
You can ask your friends and neighbours. They will give you some $.
You can sell your bike on eBay, and get some $.
You have a job, so you'll get some $ at the end of the month.
Your bank, maybe, will give you a loan. More $.
... Now you have $ and you can buy things and live.

During a currency crisis, all those $ are tendentially worthless.
You can do nothing with them.
Which type of crisis should be worrying you?

talltexan

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #103 on: January 06, 2020, 07:10:21 AM »
If the currency has collapsed, then things like the bike (which is a real asset) would retain their value.

ctuser1

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #104 on: January 06, 2020, 11:37:57 AM »
Suppose all of my savings are in a bank that can be mismanaged and become insolvent.

Which type of crisis should be worrying me?
I don't think you have understood what a currency crisis is talltexan, probably because US citizens never experienced one.

During an economic crisis, if you lose all your savings, your mother can give you some $.
You can ask your friends and neighbours. They will give you some $.
You can sell your bike on eBay, and get some $.
You have a job, so you'll get some $ at the end of the month.
Your bank, maybe, will give you a loan. More $.
... Now you have $ and you can buy things and live.

During a currency crisis, all those $ are tendentially worthless.
You can do nothing with them.
Which type of crisis should be worrying you?

Has there been a currency crisis that has NOT been coupled with an economic crisis?
Even stronger statement: Has there been a currency crisis that has NOT been caused by an economic crisis?

If economic crisis is a necessary, but not sufficient condition for currency crisis, then your question does not make sense as stated - no?

Your question should then really be re-stated as:
"Which type of crisis should be worrying me? An economic crisis, or a massive economic crisis that also causes people's trust in the central authority (i.e. the currency) to collapse".



maizefolk

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #105 on: January 06, 2020, 11:48:55 AM »
Has there been a currency crisis that has NOT been coupled with an economic crisis?
Even stronger statement: Has there been a currency crisis that has NOT been caused by an economic crisis?

To the first of your two statements, I cannot think of a single good example where a currency crisis was not coupled with an economic crisis.

To the second of your two statements, I would put forward Weimar Germany as a good example of a currency crisis which was not caused by the economic crisis. Weimar Germany had to make large, gold denominated, payments to foreign countries, resulting on a government revenue crisis and large scale printing of money, that was not initially tied to an economic crisis.

In fact, if anything, in the short term high inflation caused the german economy to boom because people were trying to invest their depreciating currency into productive assets as fast as they could. Long term the outcome was still an economic crisis, but there was a substantial lag between the two so it's hard to argue the economic crisis was the cause of the currency crisis.

ctuser1

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #106 on: January 06, 2020, 12:24:23 PM »
Has there been a currency crisis that has NOT been coupled with an economic crisis?
Even stronger statement: Has there been a currency crisis that has NOT been caused by an economic crisis?

To the first of your two statements, I cannot think of a single good example where a currency crisis was not coupled with an economic crisis.

To the second of your two statements, I would put forward Weimar Germany as a good example of a currency crisis which was not caused by the economic crisis. Weimar Germany had to make large, gold denominated, payments to foreign countries, resulting on a government revenue crisis and large scale printing of money, that was not initially tied to an economic crisis.

In fact, if anything, in the short term high inflation caused the german economy to boom because people were trying to invest their depreciating currency into productive assets as fast as they could. Long term the outcome was still an economic crisis, but there was a substantial lag between the two so it's hard to argue the economic crisis was the cause of the currency crisis.

Yeah, I did not remember Weimer Germany. That one was likely not caused by an economic crisis.

Your point, however, seems to further strengthen the point I was hoping to arrive at. Let me explain:

Paul990 said "A gold standard prevents currency crises" and then explained why he things gold standard is better.

Weimar Germany lived in an era of gold standards, and was indeed was on gold standard itself (https://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic - "To pay for the large costs of the ongoing First World War, Germany suspended the gold standard (the convertibility of its currency to gold) when the war broke out").
 
Isn't it then logical to conclude that:
1. Gold standard did not prevent the currency crisis. Wiemar Germany could also have defaulted on it's debt, which they apparently thought was worse than abandoning the gold standard.
2. Not only that, Gold Standard actually exacerbated the currency crisis - because they were the only ones who had to abandon it while others were on Gold Standard.

robartsd

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #107 on: January 06, 2020, 12:30:44 PM »
If the currency has collapsed, then things like the bike (which is a real asset) would retain their value.
Yes, but without a reliable currency available to exchange with, transactions would become much less efficient.

talltexan

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #108 on: January 06, 2020, 12:43:47 PM »
Has there been a currency crisis that has NOT been coupled with an economic crisis?
Even stronger statement: Has there been a currency crisis that has NOT been caused by an economic crisis?

To the first of your two statements, I cannot think of a single good example where a currency crisis was not coupled with an economic crisis.

To the second of your two statements, I would put forward Weimar Germany as a good example of a currency crisis which was not caused by the economic crisis. Weimar Germany had to make large, gold denominated, payments to foreign countries, resulting on a government revenue crisis and large scale printing of money, that was not initially tied to an economic crisis.

In fact, if anything, in the short term high inflation caused the german economy to boom because people were trying to invest their depreciating currency into productive assets as fast as they could. Long term the outcome was still an economic crisis, but there was a substantial lag between the two so it's hard to argue the economic crisis was the cause of the currency crisis.

Yeah, I did not remember Weimer Germany. That one was likely not caused by an economic crisis.

Your point, however, seems to further strengthen the point I was hoping to arrive at. Let me explain:

Paul990 said "A gold standard prevents currency crises" and then explained why he things gold standard is better.

Weimar Germany lived in an era of gold standards, and was indeed was on gold standard itself (https://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic - "To pay for the large costs of the ongoing First World War, Germany suspended the gold standard (the convertibility of its currency to gold) when the war broke out").
 
Isn't it then logical to conclude that:
1. Gold standard did not prevent the currency crisis. Wiemar Germany could also have defaulted on it's debt, which they apparently thought was worse than abandoning the gold standard.
2. Not only that, Gold Standard actually exacerbated the currency crisis - because they were the only ones who had to abandon it while others were on Gold Standard.

Indeed I often see people conflating these two things, and arguing that the USA has essentially been in default status since 1973 because we suspended the gold standard. Strangely, interest rates are even lower today than they were when that was done.

maizefolk

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #109 on: January 06, 2020, 02:56:31 PM »
Yeah, I did not remember Weimer Germany. That one was likely not caused by an economic crisis.

Your point, however, seems to further strengthen the point I was hoping to arrive at. Let me explain:

Paul990 said "A gold standard prevents currency crises" and then explained why he things gold standard is better.

Weimar Germany lived in an era of gold standards, and was indeed was on gold standard itself (https://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic - "To pay for the large costs of the ongoing First World War, Germany suspended the gold standard (the convertibility of its currency to gold) when the war broke out").
 
Isn't it then logical to conclude that:
1. Gold standard did not prevent the currency crisis. Wiemar Germany could also have defaulted on it's debt, which they apparently thought was worse than abandoning the gold standard.
2. Not only that, Gold Standard actually exacerbated the currency crisis - because they were the only ones who had to abandon it while others were on Gold Standard.

I think you may in interpreting as disagreement a post I intended simply as brainstorming situations that met one or both criteria.

With your new points I am going to disagree slightly:

1) Weimar Germany did, in fact, ultimately default on their debt to the allied powers. In response the French army marched across the border occupied and imposed martial law on a big industrialized and resource rich portion of Germany and started operating the mines and factories to ship resources directly back to France. This made what had then become an economic crisis in addition to a currency crisis even worse. So I think they were really in a zero win scenario at the time regardless of what order they choose to default on their debt or end gold convertibility.

2) I don't think it is fair to say that the gold standard exacerbated hyperinflation in Germany. I think the gold standard is besides the point. Take away gold standards in other european nations and you still have the imbalance that Germany was having to meet a big mismatch between government revenue and government expenses and having to make up the difference with printed money and other countries were not. Germany would have been in just as much, if not more, trouble at that point in time if its war debt was denominated in british pounds or french francs rather than in pounds of gold.

Which is not to say I'm arguing a gold standard is a good thing, I just don't think Germany would have been any better off after world war I if England and France were off a gold standard than it was at the time with both those countries on the gold standard. If we look at it the other way, what if Germany was still on the gold standard, the outcome is also bad. The government simply didn't have the revenue to meet its nonnegotiable obligations (war debt enforced on penalty of invasion). The country and government would have collapsed, just as what actually happened in Weimar Germany, although perhaps it would have happened several years earlier than it did with Germany off the gold standard.

ctuser1

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #110 on: January 06, 2020, 04:22:43 PM »
Yeah, I did not remember Weimer Germany. That one was likely not caused by an economic crisis.

Your point, however, seems to further strengthen the point I was hoping to arrive at. Let me explain:

Paul990 said "A gold standard prevents currency crises" and then explained why he things gold standard is better.

Weimar Germany lived in an era of gold standards, and was indeed was on gold standard itself (https://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic - "To pay for the large costs of the ongoing First World War, Germany suspended the gold standard (the convertibility of its currency to gold) when the war broke out").
 
Isn't it then logical to conclude that:
1. Gold standard did not prevent the currency crisis. Wiemar Germany could also have defaulted on it's debt, which they apparently thought was worse than abandoning the gold standard.
2. Not only that, Gold Standard actually exacerbated the currency crisis - because they were the only ones who had to abandon it while others were on Gold Standard.

I think you may in interpreting as disagreement a post I intended simply as brainstorming situations that met one or both criteria.

With your new points I am going to disagree slightly:

1) Weimar Germany did, in fact, ultimately default on their debt to the allied powers. In response the French army marched across the border occupied and imposed martial law on a big industrialized and resource rich portion of Germany and started operating the mines and factories to ship resources directly back to France. This made what had then become an economic crisis in addition to a currency crisis even worse. So I think they were really in a zero win scenario at the time regardless of what order they choose to default on their debt or end gold convertibility.

2) I don't think it is fair to say that the gold standard exacerbated hyperinflation in Germany. I think the gold standard is besides the point. Take away gold standards in other european nations and you still have the imbalance that Germany was having to meet a big mismatch between government revenue and government expenses and having to make up the difference with printed money and other countries were not. Germany would have been in just as much, if not more, trouble at that point in time if its war debt was denominated in british pounds or french francs rather than in pounds of gold.

Which is not to say I'm arguing a gold standard is a good thing, I just don't think Germany would have been any better off after world war I if England and France were off a gold standard than it was at the time with both those countries on the gold standard. If we look at it the other way, what if Germany was still on the gold standard, the outcome is also bad. The government simply didn't have the revenue to meet its nonnegotiable obligations (war debt enforced on penalty of invasion). The country and government would have collapsed, just as what actually happened in Weimar Germany, although perhaps it would have happened several years earlier than it did with Germany off the gold standard.

Yeah that makes sense.

I can't find anything to nitpick in your logic or conclusions.

It is probably a stretch to argue gold standard had "any" effect at all in that situation - good or bad. It did not prevent a currency or financial crisis, but neither would the end result be any different if England and France was off from gold standard. 

Wrenchturner

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #111 on: April 26, 2020, 02:14:34 AM »
Buuuuuuuuuuump.

Raoul Pal just had a great twitter thread on this:

https://threadreaderapp.com/thread/1254110879479746562.html


I don't have anything to contribute at this time.

Buffaloski Boris

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #112 on: April 26, 2020, 07:19:06 AM »
Buuuuuuuuuuump.

Raoul Pal just had a great twitter thread on this:

https://threadreaderapp.com/thread/1254110879479746562.html


I don't have anything to contribute at this time.

I read it.  I'm not a chart person, and I think a lot of others aren't, so please explain what we're seeing.  I do get that relatively speaking, the US dollar appears to be increasing against other world currencies.  Which to me seems like a fair time to buy other currencies or other currency denominated assets to hedge exposure to the dollar.

maizefolk

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #113 on: April 26, 2020, 07:41:43 AM »
So the fed is printing a lot of money, which we know. But because the velocity of money has dropped so much, even with more dollars circulating, we're seeing signs of deflation, not inflation. And the dollar is appreciating against other currencies in the world. A lot of the charts seem to be arguments for further increases in the dollar's value relative to other currencies.

Raoul argues that this shows that the Fed printing money both directly and via dollar swap lines with other countries around the world is doing nothing. It's not clear to me how he's distinguishing "doing nothing" from "reducing the deflation/dollar appreciation that would otherwise be caused by a slowing velocity of money, but not all the way." Did someone else catch the reasoning there?

He also argues for further appreciation of bitcoin/gold type assets going forward.

Wrenchturner

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #114 on: April 26, 2020, 02:13:42 PM »
I'm going to give this a college try.

He starts out with technical analysis saying that the dollar is bullish when looking back, from the early 80s, or the 2000s depending on which chart you look at.  He points out a 15 year top in Asian currencies.  Emerging market forex has been falling against the USD for ten years.  Fed has been printing but velocity remains low over the same time frame of ten years.  Huge swathes of currencies have fallen against the USD in the past year despite easing.

"slowing growth causes the dollar to rise, which causes slower growth, which causes the dollar to rise, as all borrowers play musical chairs to get access to the dollar to service debts"

"swap lines cant help the weakest sovereign borrowers as they have no reserves."

"The global system is just not set up to deal with this. It is an UGLY situation with almost zero options without a change in the entire system. No printing of money will solve this. It is structural."

He is bullish on gold and says bitcoin will play a role but hasn't made any moves relative to this problem yet.

This is an observation of the debt deflation cycle and he says bonds will create the next signal when yields go negative.

"that will be the signal to sell equities and the INSOLVENCY phase will begin."

I read it.  I'm not a chart person, and I think a lot of others aren't, so please explain what we're seeing.  I do get that relatively speaking, the US dollar appears to be increasing against other world currencies.  Which to me seems like a fair time to buy other currencies or other currency denominated assets to hedge exposure to the dollar.

I think what he is saying is that you can't really hedge against the USD since other world currencies are behaving like they are relatively fixed against the USD.  And that this situation can't be resolved by other countries since they don't have reserves or growth, and the US can't resolve it since the US is struggling with growth and cannot maintain a perpetual $ deficit to keep up with demand for USD.

So the fed is printing a lot of money, which we know. But because the velocity of money has dropped so much, even with more dollars circulating, we're seeing signs of deflation, not inflation. And the dollar is appreciating against other currencies in the world. A lot of the charts seem to be arguments for further increases in the dollar's value relative to other currencies.

Raoul argues that this shows that the Fed printing money both directly and via dollar swap lines with other countries around the world is doing nothing. It's not clear to me how he's distinguishing "doing nothing" from "reducing the deflation/dollar appreciation that would otherwise be caused by a slowing velocity of money, but not all the way." Did someone else catch the reasoning there?

He also argues for further appreciation of bitcoin/gold type assets going forward.

The thread starts with a rebuttal of the idea that fed easing in the US will be inflationary, then points out the deflationary landscape at play more globally and more historically, then says we don't really have a path out of this.  He's arguing we are already in a debt deflation trap and the USD continuing as a reserve isn't going to resolve it.

Edit: I believe he's also expecting an equities market sell-off due to this as well.  Peter Schiff commented further down the thread, you can read the twitter thread here:

https://twitter.com/RaoulGMI/status/1254110879479746562

Schiff: "The primary reason the dollar didn't collapse because of past ZIRP and QE is that the Fed fooled markets into believing that the policies were temporary and that it had an exit strategy. The realization that both are permanent and exit is impossible should seal the dollar's fate."
« Last Edit: April 26, 2020, 02:18:13 PM by Wrenchturner »

Buffaloski Boris

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #115 on: April 26, 2020, 04:22:11 PM »
@maizeman and @Wrenchturner : thanks to both of you for taking the time to explain. Something to think about and digest.

ChpBstrd

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #116 on: April 26, 2020, 08:49:29 PM »
Schiff: "The primary reason the dollar didn't collapse because of past ZIRP and QE is that the Fed fooled markets me into believing that the policies were temporary and that it had an exit strategy more than enough to offset demographic disinflation. The realization that both are permanent and exit is impossible should seal the dollar's fate help prevent a deflationary spiral by boosting inflationary expectations?"

There, I fixed that for Mr. Schiff so that it doesn't seem to contradict over a decade of market outcomes in the U.S, 3 decades of market outcomes in Japan, and most economic thought over the past two generations.

Wrenchturner

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #117 on: April 26, 2020, 09:33:37 PM »
There, I fixed that for Mr. Schiff so that it doesn't seem to contradict over a decade of market outcomes in the U.S, 3 decades of market outcomes in Japan, and most economic thought over the past two generations.
Just to be clear, you're saying that deflation remains the big risk although you are attributing it moreso to demographics?

MustacheAndaHalf

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #118 on: April 26, 2020, 10:29:08 PM »
Right now the U.S. economy is shut down and China's economy is opening.  The U.S. and China are arguing about how COVID-19 started.  What if China picks this time to make a move?

The U.S. Fed is buying junk bonds while the U.S. economy is mostly under lock down.  After COVID-19, the U.S. will need to figure out who's bankrupt and who isn't.  It could be a mess...

So what if China picks this time frame to insist on transactions being denominated in Chinese Yuan?  China already had the #2 economy in the world, behind the #1 U.S. economy.  But given current circumstances, shouldn't China be the #1 economy right now?

I expect that move would fail right now, so China probably won't try it.  China has restricted the outflow of it's currency for some time - you can't take much Chinese money out of China.  The government there clearly covered up details of the outbreak in Wuhan, and refuses to allow other countries to investigate it.  There's transparency issues in the government and economy - it's hard to trust them.

I think the U.S. will retain reserve status despite U.S. President Donald Trump, who most of Europe hates.  Even hating the leadership, Europe still trusts the U.S. Fed will remain stable and trustworthy.  I'm not saying they should hate Trump or not - I'm saying even places that hate the leader of the U.S. have trust in the Federal Reserve.

Maybe that ignores the Euro as a possible reserve currency.  Italy narrowly avoided it's bonds being rated as "junk bonds", or too dangerous for institutional investors.  Greece was in that position before Italy.  The countries that nearly go bankrupt, but must use the Euro, presents a problem.  Right now, with UK exiting, isn't the strength of the Euro mostly down to Germany and France?  Seems like too many uncertainties to make this the reserve currency for all transactions.

I don't know, but I don't see a good contender for next reserve currency.

ChpBstrd

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #119 on: April 26, 2020, 10:48:14 PM »
There, I fixed that for Mr. Schiff so that it doesn't seem to contradict over a decade of market outcomes in the U.S, 3 decades of market outcomes in Japan, and most economic thought over the past two generations.
Just to be clear, you're saying that deflation remains the big risk although you are attributing it moreso to demographics?
Yes.

hodedofome

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #120 on: April 27, 2020, 05:32:06 AM »
We can throw out anything Peter Schiff says. A broken clock is right twice a day, and he might be right about once a decade. I figured out his flaws about 10 years ago.

bwall

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #121 on: April 27, 2020, 06:30:28 AM »
There, I fixed that for Mr. Schiff so that it doesn't seem to contradict over a decade of market outcomes in the U.S, 3 decades of market outcomes in Japan, and most economic thought over the past two generations.
Just to be clear, you're saying that deflation remains the big risk although you are attributing it moreso to demographics?
Yes.
@ChpBstrd is closer to the truth on this one that Schiff is. Demographics are bigger drivers than most people realize. They change slowly and insipidly, never front page news.

Aging populations across the rich world, less children and less immigration mean that there will be less demand for goods and services relative to the 1960's, 70's or even 80's. Therefore, less inflation.

maizefolk

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #122 on: April 27, 2020, 07:43:57 AM »
I think the U.S. will retain reserve status despite U.S. President Donald Trump, who most of Europe hates.  Even hating the leadership, Europe still trusts the U.S. Fed will remain stable and trustworthy.  I'm not saying they should hate Trump or not - I'm saying even places that hate the leader of the U.S. have trust in the Federal Reserve.

Maybe that ignores the Euro as a possible reserve currency.  Italy narrowly avoided it's bonds being rated as "junk bonds", or too dangerous for institutional investors.  Greece was in that position before Italy.  The countries that nearly go bankrupt, but must use the Euro, presents a problem.  Right now, with UK exiting, isn't the strength of the Euro mostly down to Germany and France?  Seems like too many uncertainties to make this the reserve currency for all transactions.

I don't know, but I don't see a good contender for next reserve currency.

I think the big advantage that the dollar has relative to the euro is exactly that confidence in the Fed's decision making.

European Union/Eurozone central bankers (the ECB) seem to have much less freedom to act. Or maybe they have the freedom but choose to exercise it less? Part of this could simply be that the Federal Reserve board of governors seems to have a more cohesive view of their duties and goals, while the ECB, at least back during the great recession and subsequent eurozone debt crisis, seemed to have widely conflicting views of what their mission even was.

During the global financial crisis the US fed was creating trillions of dollars out of thin air to not only keep the US economy afloat, but also to keep European and Asian banks from collapsing under the weight of US dollar denominated debts (via swap lines). Are Japanese, Korean, and US banks confident that if they had owed large amounts of euro denominated debt during the last crisis, the ECB have been as willing to print Euros to save them?

BicycleB

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #123 on: April 27, 2020, 02:11:49 PM »
This discussion is definitely expanding my mind!

Buffaloski Boris

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #124 on: April 27, 2020, 03:16:14 PM »
Iím thinking that a move away from the US dollar need not be all that dramatic to have some serious impact. Does there even need to be a ďglobal reserve currency?ĒThere is nothing that Iím aware of to prevent settlement in other currencies if companies/ countries wish to do so.

My understanding of the reasons behind the primacy of the dollar was due to the need to use it to buy oil. Oil is available on the cheap right now and I suppose currencies are very negotiable. So If say China wants to make a deal for oil using the Yuan, I doubt oil sellers are going to turn up their nose.

bwall

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #125 on: April 27, 2020, 03:40:14 PM »
Iím thinking that a move away from the US dollar need not be all that dramatic to have some serious impact. Does there even need to be a ďglobal reserve currency?ĒThere is nothing that Iím aware of to prevent settlement in other currencies if companies/ countries wish to do so.

My understanding of the reasons behind the primacy of the dollar was due to the need to use it to buy oil. Oil is available on the cheap right now and I suppose currencies are very negotiable. So If say China wants to make a deal for oil using the Yuan, I doubt oil sellers are going to turn up their nose.

People often quote oil pricing in USD as a source of primacy for the USD. I see this as a common misconception and ungrounded in reality. I view the USD merely as a unit of account in the oil market. Please allow me to explain my thought process:

Oil producing country X has a local currency in which all bills must be settled. Oil producing company X can be either state owned or private, but in either case they must pay their local employees in the local currency, be it kroner, rial, peso, kwanza, ruble or dinar, all bills of that oil company have to be settled in the local currency, profits taxed and remitted to the treasury in the local currency, etc. So, the USD proceeds of the sale are then sold on the international market and the local currency is purchased and the bills are settled. In fact, the effect on the local currency is so strong, that there the terms 'petro-dollar' and 'Dutch disease' have been coined to explain how the local currency strength due to USD selling and local currency buying negatively affect the local currency and/or economy.

It's a wash transaction in accounting terms. No benefit for the USD as a reserve currency.

To your other point, yes, China would be estatic is any country would accept Yuan to settle their oil transactions. Their ecstasy would be due to the fact that the Yuan is not traceable internationally. You read that correctly, outside of the country it's as worthless as a three dollar bill, or perhaps an East German Mark would be a more appropriate analogy. China forbids the possession of Yuan outside it's borders, so..... it's really tough for an oil seller to hold a bank account denominated in Yuan. In effect, China's own laws prevent it's currency ever being used outside it's borders. One day this might change, but this will most likely take decades to change.

BicycleB

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #126 on: April 27, 2020, 04:16:58 PM »
China's own laws prevent it's currency ever being used outside it's borders. One day this might change, but this will most likely take decades to change.

Never heard that before. Googling "is it legal to hold yuan outside China" brought up articles saying that:

China has been internationalizing the yuan since 2004-2008
https://en.wikipedia.org/wiki/Internationalization_of_the_renminbi

and there is both an "onshore" and "offshore" yuan, where the offshore yuan is for international use by all actors outside China (I think), and China exercises influence over pricing in different ways for the two yuan.
https://www.cnbc.com/2019/08/28/china-economy-how-pboc-controls-the-yuan-rmb-amid-trade-war.html

They're both more than six months old, though. Did something change?

Or, is the rule you're discussing one that applies to Chinese nationals, and applies to the onshore yuan?

Fwiw, Googling "cnh vs cny" brings up a shorter, more basic discussion of the two yuan:
https://www.neatcommerce.com/blog/cny-vs-cnh-differences-chinese-renminbi
« Last Edit: April 27, 2020, 04:25:04 PM by BicycleB »

maizefolk

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #127 on: April 27, 2020, 04:38:36 PM »
As far as I know it is not illegal to take RMB (yuan) out of China. It's really hard to get them back in though, so their value may be limited outside the country. A colleague was "fired" by his US bank for making too many RMB cash deposits.*

*He had a second position inside of China and at the end of each visit there he would withdraw a big chunk of his pay in cash and carry it into the USA because of how next to impossible it is for a non-Chinese citizen to wire money out of China. If I remember right, even Chinese citizens are limited to the equivalent of $50k or so in money they can send out of the country each year.

Paul der Krake

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #128 on: April 27, 2020, 05:11:17 PM »
At the risk of repeating myself: the US dollar is the world reserve currency because the world wants to buy goods priced in US dollars. There is a lot of goods and services produced or sold by American companies that the rest of the world wants to purchase. It's that simple.

In theory there's nothing stopping companies from doing business in other currencies. Just like there is nothing preventing companies from using other than Microsoft Office, or incorporating outside of Delaware.

In practice, nobody wants to deviate from the well established, well understood, norm. It's a virtuous circle. It doesn't matter what the original reason for doing X was. Now that everybody is doing it, moving away is hard.

MustacheAndaHalf

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #129 on: April 27, 2020, 11:16:40 PM »
As far as I know it is not illegal to take RMB (yuan) out of China. ... next to impossible it is for a non-Chinese citizen to wire money out of China.
I wasn't referring to someone carrying a suitcase of cash out of China, but the situation where a foreign investor wants to move the money electronically, which as you mention was/is hard.

This article from Dec 2017 is what I meant, roughly:
"China puts US$15,000 annual personal cap on overseas bank card withdrawals"
https://www.scmp.com/news/china/economy/article/2126252/china-puts-us1500-daily-personal-cap-overseas-bank-card

I believe China is lifting restrictions this year to encourage foreign investment.  But my point is only a few years ago China was tightly controlling Chinese yuan (人民币).  One year you can withdraw a big investment, another year you can't - that's not a situation you want to be in, and favors the U.S. dollar.  U.S. Treasuries are the most liquid investment in the world, and considered the safest investment in the world.  China would need many years of consistency to approach the levels of trust the world places in the Federal Reserve and the U.S. dollar.

bwall

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #130 on: April 28, 2020, 05:29:27 AM »
Good points on CNY and CNH. I didn't want to confuse things by getting in too deep, but since you mention it.....

My company wanted to sell goods in China, but we decided not to do it because the customers in China can only pay in onshore Yuan (CNY). Nobody in China has access to offshore Yuan (CNH) any more than they have access to USD or EUR or perhaps even less so as it's not a physical currency. As a result, our company could bring in goods to China, sell them and not have a way to return the money to then purchase more goods, etc.

In other words, CNH is a hard currency and fully convertible into any other currency, yet not available in physical form. CNY is a soft currency, unconvertible and worthless outside of China, yet you can hold one in your hand.

CNH does not exist as a physical currency any more than the FinRand did. It was a 'digital' currency for financial transactions/foreign investments in South Africa under apartheid. Eventually it was phased out (!) under the new government. Not exactly the kind of track record one is looking for in currencies/reserve currencies.

Why any oil exporter would want to accept CNY is beyond me. They might be willing to accept CNH just as easily as they'd accept EUR or Swiss francs or Canadian dollars.

bwall

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #131 on: April 28, 2020, 07:23:41 AM »
As far as I know it is not illegal to take RMB (yuan) out of China. It's really hard to get them back in though, so their value may be limited outside the country. A colleague was "fired" by his US bank for making too many RMB cash deposits.*

*He had a second position inside of China and at the end of each visit there he would withdraw a big chunk of his pay in cash and carry it into the USA because of how next to impossible it is for a non-Chinese citizen to wire money out of China. If I remember right, even Chinese citizens are limited to the equivalent of $50k or so in money they can send out of the country each year.

Correct. Private citizens in China are limited to $50,000 annual currency controls. Because the Party knows what's best for you! Or some other reason. Dunno.

The above anecdote is unimaginable in any hard currency. In any other currency, the bank might give you a crappy exchange rate, or ask you to fill out forms to say where you got the money, but not close your accounts. Then again, with any other currency you'd just go to the bank and wire transfer the money to the foreign bank account (or wherever). But, in China you can't do that because the government doesn't allow it.

maizefolk

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #132 on: April 28, 2020, 07:46:20 AM »
As far as I know it is not illegal to take RMB (yuan) out of China. It's really hard to get them back in though, so their value may be limited outside the country. A colleague was "fired" by his US bank for making too many RMB cash deposits.*

*He had a second position inside of China and at the end of each visit there he would withdraw a big chunk of his pay in cash and carry it into the USA because of how next to impossible it is for a non-Chinese citizen to wire money out of China. If I remember right, even Chinese citizens are limited to the equivalent of $50k or so in money they can send out of the country each year.

Correct. Private citizens in China are limited to $50,000 annual currency controls. Because the Party knows what's best for you! Or some other reason. Dunno.

The above anecdote is unimaginable in any hard currency. In any other currency, the bank might give you a crappy exchange rate, or ask you to fill out forms to say where you got the money, but not close your accounts. Then again, with any other currency you'd just go to the bank and wire transfer the money to the foreign bank account (or wherever). But, in China you can't do that because the government doesn't allow it.

Yup. I'm not arguing that China's currency is at all viable as the basis of international trade or reserves held by international banks. Simply that the statement "China forbids the possession of Yuan outside it's borders" wasn't correct.

There's no legal problem with simply possessing RMB outside of China. Just logistical hurdles to getting much of it or using it once you have it.