Author Topic: The USA desperately needs to lose world reserve currency status.  (Read 8751 times)

Toothpick

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The sooner, the better.  The world is off balance.

Quote
The United States has had the world’s reserve currency for the better part of the past century, which makes its trade balance a bit unique compared to other countries.

Most oil around the world has been priced in dollars for decades. Even when the United States is not involved in the transaction, they still usually price it in dollars.

When countries or companies make loans into emerging markets, they often do so in dollars rather than that country’s local currency.

In addition, central banks of various countries buy U.S. dollars and treasuries and hold them as foreign-exchange reserves so that they can defend the value of their currency if needed.

This gives the United States a big privilege because it creates almost endless demand for dollars, and gives the United States the rare ability to print money to pay for hard commodities.

However, it also trigger’s Triffin’s Dilemma.  Economist Robert Triffin noted back in the 1950’s that having (and maintaining) the reserve currency means you have to supply enough dollars to the world to use the currency.  The world can’t use Swiss Francs for the reserve currency, for example, because there simply aren’t enough of them.  It has to be a big country, and that country generally needs to run a persistent current account deficit, so that it supplies the rest of the world with its currency and they supply it with goods and services.  This works for a time but eventually undermines the economy of the country that has the reserve currency.

So, a reserve currency gives the country tremendous power, but also essentially places a curse on it and guarantees that such a position cannot last forever.
https://www.lynalden.com/trade-deficit/#dollar

Since I began looking at this (over a decade ago), my view has been that the current international monetary system is inherently unsustainable.  Looking at the shrinking US percentage of World GDP, and the declining US Net International Investment Position, I think this situation could come to a head sooner rather than later.  Eventually, the world will be in balance again. 

I welcome your thoughts.

« Last Edit: October 21, 2019, 11:25:38 PM by Toothpick »

Linea_Norway

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #1 on: October 22, 2019, 03:08:39 AM »
I had expected the euro to take the place of the dollar for part of those transactions. Some of the middle east countries don't like to trade in $ (because of their dislike of the US), but in the past they had to. I had expected them to change to euros.

bwall

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #2 on: October 22, 2019, 06:14:23 AM »
Reserve currency status is a boon to the USA and something that all Americans should support.

Something that most people don't realize is that dollars remain dollars. Just because oil price transactions are in dollars doesn't mean that it benefits the USA and harms the other parties in the transactions. It's a complete wash transaction as the USD are simply sold upon receipt to pay bills locally.
Other countries would love to price goods in their local currency, but they don't trust their own people enough to do so. What's to prevent Russia from selling oil to China on 3, 5 or ten year contracts prices in Russian Rubles? Nothing. They could do so if they want to, but they have a lingering fear of future hyperinflation which would mean that at some point in the future they'd be selling their oil at below-market prices if hyperinflation occurred. By pricing in Rubles, the best case scenario is that they can get market price, worse case scenario is that they are giving away their wares. Much better to just price in USD and not worry.

What's to prevent the Chinese from only buying oil in Chinese Yuan? Nothing. Except that no oil exporter will accept Chinese Yuan as payment. Why not? Better ask them why they won't accept a currency that is not allowed to be traded outside of the country that issues it. That's right, you cannot trade Chinese Yuan outside of China. It's valueless scrip for an entire nation. You can trade Mexican Peso, South African Rand and Turkish Lira outside these countries, but not Chinese Yuan. You cannot sell more than $50,000 USD per year of Chinese Yuan without the approval of the Chinese government. So, a simple $1m transaction would take 20 years to get your money back without government interference.

The USD does benefit when currency is held in reserve by governments. I think that currently there are 6.6 Trillion (!) USD held in reserves overseas. With inflation at 1% annually, this means there is an annual wealth transfer of 66 billion USD to the US taxpayer. With inflation at 1.5%, the wealth transfer borders on $100 billion. 

bwall

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #3 on: October 22, 2019, 07:01:21 AM »
In the 1950's, the UK's currency lost reserve currency status. The process was painful economically and lead to lower standards of living. The same would occur in the USA if the USD is no longer the reserve currency of the world.

The introduction here briefly explains some of the history of the pound sterling as a reserve currency.

https://sites.hks.harvard.edu/fs/jfrankel/EuroVs$-IFdebateFeb2008.pdf



SwordGuy

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #4 on: October 22, 2019, 10:32:40 AM »
Thanks @bwall , you are spot on.

If you think it's hard to get the US government to fund what you want it to fund, wait until interest rates to the US skyrocket because we aren't the world's reserve currency.   That will be a painful reckoning day.

bwall

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #5 on: October 22, 2019, 12:42:45 PM »
Thanks @bwall , you are spot on.

If you think it's hard to get the US government to fund what you want it to fund, wait until interest rates to the US skyrocket because we aren't the world's reserve currency.   That will be a painful reckoning day.

This is exactly what happened in the UK. All the Sterling come back home to be spent regardless of the interest rate the British central bank charged or the exchange rate. As a result there was a decoupling, a loss of power for the Bank of England to control the business cycle. The phrase 'The Gnomes of Zurich' was coined by bitter politicians who recognized their helplessness and flailed against it.

If the US loses reserve currency status, the same will happen here.

ctuser1

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #6 on: October 22, 2019, 02:00:57 PM »
In the 1950's, the UK's currency lost reserve currency status. The process was painful economically and lead to lower standards of living. The same would occur in the USA if the USD is no longer the reserve currency of the world.

The introduction here briefly explains some of the history of the pound sterling as a reserve currency.

https://sites.hks.harvard.edu/fs/jfrankel/EuroVs$-IFdebateFeb2008.pdf

UK economy was far more trade-dependent at that time than US economy is today.

Don't you think this will result in significant differences in how this will play out in the US?

I don't expect the USD to lose reserve currency status anytime soon. But if it was to - then I'm trying to think exactly how that will impact US Domestic economy.

There is almost 1.7Trillion in currency notes in circulation, presumable a large chunk outside the US. Much of this is likely used for illegal activities.

Worst case, let's assume all 1.7Trillion is outside and comes back to the US. How exactly will it come back? US has to export something that outsiders will buy and give us cash. If so - there will be an increase in exports and decrease in imports. Disruptive - sure. Will it be as bad as the UK? I don't think so.

The other mechanism for dollar to come back is USD denominated assets - bonds, t-bills etc. The primary impact they will have is on the asset bubble. There is a real possibility that we will get another episode of the too-big-to-fail and asset losses are socialized if this does happen.

Any other mechanism it will impact the US economy?
« Last Edit: October 22, 2019, 02:09:08 PM by ctuser1 »

marty998

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #7 on: October 22, 2019, 02:14:41 PM »
Since I began looking at this (over a decade ago), my view has been that the current international monetary system is inherently unsustainable.  Looking at the shrinking US percentage of World GDP, and the declining US Net International Investment Position, I think this situation could come to a head sooner rather than later. Eventually, the world will be in balance again. 

Two points here:

1) The US may be a shrinking proportion, but it's still growing in absolute terms. It's just that other countries are lower on the development curve and have more to grow in terms of standard of living and population. They will hit their limiting growth rates soon enough.

2) Curious to know which currency you think will replace the USD. As already discussed, for various reasons it isn't going to be the Chinese Yuan, and the Pound and Eurozone economies are not exactly cactus, but not performing well enough to warrant enough faith in them.

Would guess the Japanese are quite happy for it not to be the Yen.

Who does that leave as the potential replacement candidates?

Buffaloski Boris

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #8 on: October 22, 2019, 03:04:13 PM »
I really like Lyn Alden’s stuff. I happen to disagree with her that the US Dollar losing its reserve Currency status would be a good thing either for the US or for the world as a whole.

Just as a thought experiment, let’s assume that ending the US Dollar reserve status were a good thing, and we wanted to do that. Let’s think ahead a few steps. So what’s next? What replaces the US dollar? I see two currencies that have any chance whatsoever of replacing the dollar: the Euro and the Yuan. The problem with the Yuan is that it’s not tradable in any quantity outside of China, and in the unlikely event the Chinese do allow for their currency to be freely traded, would they be willing to deal with the obvious ramifications of their currency being much more valuable? Theirs is an export driven economy, and that doesn’t work real well when your currency is expensive. So I suppose that leaves the Euro. Those negative interest rates are very chic! And with the Euro zone going mostly cashless, the ECB will be able to implement capital controls whenever they want. Might want to ask the Greeks about those.

So what are the other choices? Crypto? Some magical basket of currencies? Bretton Woods II?

bwall

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #9 on: October 22, 2019, 05:26:58 PM »
In the 1950's, the UK's currency lost reserve currency status. The process was painful economically and lead to lower standards of living. The same would occur in the USA if the USD is no longer the reserve currency of the world.

The introduction here briefly explains some of the history of the pound sterling as a reserve currency.

https://sites.hks.harvard.edu/fs/jfrankel/EuroVs$-IFdebateFeb2008.pdf

UK economy was far more trade-dependent at that time than US economy is today.

Don't you think this will result in significant differences in how this will play out in the US?

I don't expect the USD to lose reserve currency status anytime soon. But if it was to - then I'm trying to think exactly how that will impact US Domestic economy.

There is almost 1.7Trillion in currency notes in circulation, presumable a large chunk outside the US. Much of this is likely used for illegal activities.

Worst case, let's assume all 1.7Trillion is outside and comes back to the US. How exactly will it come back? US has to export something that outsiders will buy and give us cash. If so - there will be an increase in exports and decrease in imports. Disruptive - sure. Will it be as bad as the UK? I don't think so.

The other mechanism for dollar to come back is USD denominated assets - bonds, t-bills etc. The primary impact they will have is on the asset bubble. There is a real possibility that we will get another episode of the too-big-to-fail and asset losses are socialized if this does happen.

Any other mechanism it will impact the US economy?

Good reply. Yes, you are correct that the UK is more dependent on trade than the USA.

It's hard impossible to know exactly what choices USD holders in the future will make when they change their USD for other assets. But it's a good thought exercise to come up with a laundry list of items they liquidate and items they purchase to 'cash out' of USD.

Governments: Presumably will no longer wish to hold US debt or currency as a reserve. This means the value of the USD will drop as they sell current holdings and avoid creating new holdings. USD will drop vis a vis the currency they are swapping into. EUR? JPY? CNH/CNY? Gold? (don't laugh, there're gold bugs here).
The US government will not get the funding they need as old lines of credit are not rolled over, so in order to compensate and attract new money, they will have to raise interest rates, cut spending or raise taxes just to keep operating, irregardless of where we are in the business cycle. Most likely it will be a combination of all three. This will be extremely painful--think stagflation of the '70's type of pain- as the pain of higher taxes is exacerbated by less government spending; higher interest rates attract capital but squeeze out marginal businesses. These type of changes would most certainly bring about a recession. In theory, any recession would be mitigated at the USD return home to roost, as @ctuser1 correctly suggests. This is the mechanism through the pain of readjustment and realignment will ripple through the economy.

The drop in the USD will make goods produced in the USA cheaper vs. rest of world and thus more attractive. Potential items overseas buyers could scoop up at fire sale prices with a newly depreciated dollar:
1) Real estate (either providing a price support or driving new prices higher), presumably both commercial and residential
2) Stocks (of world class companies that rely on exports, not the domestic market) or even companies swallowed whole. If there's a recession, the value will be even greater, but then if the economy is going through structural change some companies might no longer be viable.
3) Manufactured items (cars, computers, expensive man-toys, etc)
4) Vacations in the USA (hotel stays, restaurants, typical tourist stuff)
5) Educations: If we still have world class universities, selling seats in class rooms will continue to be a lucrative business that attracts hundreds of thousands (millions?) of foreign university students annually.
6) Other tradable goods? MMM type forums and websites? :)

If they're spending USD that they've held for awhile then the exchange rate will be meaningless to them. It will be mainly about liquidating dollars for another asset that they can then take home with them. If the USD falls far enough, it would attract new buyers into the market. The question is would it be enough to offset the outgoing capital of foreign governments and I believe the answer here is 'no'. YMMV.

maizeman

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #10 on: October 22, 2019, 09:05:25 PM »
The drop in the USD will make goods produced in the USA cheaper vs. rest of world and thus more attractive. Potential items overseas buyers could scoop up at fire sale prices with a newly depreciated dollar:
1) Real estate (either providing a price support or driving new prices higher), presumably both commercial and residential
2) Stocks (of world class companies that rely on exports, not the domestic market) or even companies swallowed whole. If there's a recession, the value will be even greater, but then if the economy is going through structural change some companies might no longer be viable.
3) Manufactured items (cars, computers, expensive man-toys, etc)
4) Vacations in the USA (hotel stays, restaurants, typical tourist stuff)
5) Educations: If we still have world class universities, selling seats in class rooms will continue to be a lucrative business that attracts hundreds of thousands (millions?) of foreign university students annually.
6) Other tradable goods? MMM type forums and websites? :)

1) China's been buying up agricultural land in both Africa and eastern Europe, so productive farmland in the USA seems a good bet for something folks might buy when trying to use up depreciating dollars.

4) Seems likely we'd see more of this, but it'd depend on social stability in the USA. It doesn't take a lot of events like the shooting in Kansas City a couple of years ago to convince people that maybe the USA isn't a place they want to vacation.

5) 1.1 million international university students right now. Probably $10-40 billion a year in tuition? However, at my school new freshman enrollment from China dropped 30-40% this year. At the graduate level, the stats were possibly similar. Several people I knew recruited grad students from China who were going to come, where then advised by someone in China not to, and ended up taking positions in Australia or the EU instead.

6) I'd predict a big exodus of art and other collectables.

Paul der Krake

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #11 on: October 22, 2019, 09:48:19 PM »
The dollar isn't losing its special status any time soon.

The EU is two or three bad elections away from implosion.
The UK is two or three bad days away from implosion.
Nobody trusts the Chinese legal system.

cerat0n1a

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #12 on: October 23, 2019, 04:51:22 AM »
The world trades goods and services using little green pieces of paper. The USA gets to make more of those little green pieces of paper any time it chooses and the rest of the world happily delivers goods and services in return for them. You've had around five decades of consuming more than you earn as a result. I really, really struggle to see how this situation changing could be good economically for the US. Strongly suggest no-one makes a program on Fox that makes your current president believe it would be a good idea.

bwall

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #13 on: October 23, 2019, 10:06:40 AM »
@maizeman ;

Good points.

I was just guesstimating the number of international students in the USA. If their average annual spend is $30k (incl. tuition, room, board, travel by them and visiting relatives) then that's $33 billion every year. Also, due to the diverse nature of higher education, it's should be very evenly spread out across the entire country.

Art and collectables; I'd forgotten that, but you're exactly right. High end art, collectable cars, yachts, airplanes, high end jewelry, etc. would all be leaving the country.

Bernard

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #14 on: October 23, 2019, 08:28:51 PM »
The dollar isn't losing its special status any time soon.

The EU is two or three bad elections away from implosion.
The UK is two or three bad days away from implosion.
Nobody trusts the Chinese legal system.

That. Hits. The. Nail. On. The. Head!

I have a large amount of Euros in a German bank account. Got some stuff over at 1.35-to-1.
Years later more at 1.18-to-1.
Then I hesitated at 1.17, 1.16, waited for the tide to turn.
All the predictions point at less than 1-to-1 by 2023, so I pulled the trigger again at 1.10, just a week ago.
There is no currency that will replace the dollar anytime soon.

Travis

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #15 on: October 23, 2019, 09:54:00 PM »
Wasn't it about a decade ago that the Euro was all the rage and would beat out the Dollar and take over the world? And then Greece nearly went under and everyone realized the Eurozone isn't all that stable and it would be insane to print enough Euros for the world to run on it.  Whatever faults the Dollar, our economy,and our monetary system may have, our status isn't going anywhere because there are no other options.

Paul der Krake

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #16 on: October 23, 2019, 10:32:09 PM »
Being a "strong" currency has nothing to do with being a reserve currency.

Buffaloski Boris

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #17 on: October 24, 2019, 09:51:57 AM »
Being a "strong" currency has nothing to do with being a reserve currency.

It has a lot to do with it. The US dollar is a reserve currency not only because of the size and scope of the US economy but because it’s perceived as a good store of wealth. Rightly or wrongly. And strength is often a relative concept. The dollar is a whole lot stronger than many currencies in Latin America and other developing countries. Although maybe not as strong as say the Swiss Franc. Even the slang in Mexico refers to pesos as “silver” and dollars as “gold.”

bwall

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #18 on: October 24, 2019, 11:18:48 AM »
Being a "strong" currency has nothing to do with being a reserve currency.

+1.

Strong currency = lots of buying power (Norwegian Krone, Swiss Franc, etc). You know it's a strong currency b/c whenever you go there the prices are ridiculously high.

Hard currency = exchange rate moves in line with market fundamentals and you can exchange as much as you want at any time on the open market.

Soft currency = unconvertible currency; former communist block and developing countries.

Pegged currency = exchange rate is managed by the government by keeping it within a fixed range of a basket of currencies. Hong Kong Dollar, Chinese Yuan, Egyptian Pound, Argentinian Peso (off and on), Brazilian Real (off and on), and perhaps Taiwanese Yuan and Singapore Dollar.

Reserve currency;
1945- present USD.
1800-1940 (GBP)
1700-1800 (Dutch Guilder)
1500-1700 (Spanish Piece o' Eight)



SeattleCPA

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #19 on: October 24, 2019, 05:20:42 PM »
Being a "strong" currency has nothing to do with being a reserve currency.

+1.

Strong currency = lots of buying power (Norwegian Krone, Swiss Franc, etc). You know it's a strong currency b/c whenever you go there the prices are ridiculously high.

Hard currency = exchange rate moves in line with market fundamentals and you can exchange as much as you want at any time on the open market.

Soft currency = unconvertible currency; former communist block and developing countries.

Pegged currency = exchange rate is managed by the government by keeping it within a fixed range of a basket of currencies. Hong Kong Dollar, Chinese Yuan, Egyptian Pound, Argentinian Peso (off and on), Brazilian Real (off and on), and perhaps Taiwanese Yuan and Singapore Dollar.

Reserve currency;
1945- present USD.
1800-1940 (GBP)
1700-1800 (Dutch Guilder)
1500-1700 (Spanish Piece o' Eight)

+1 to this comment from bwall and his/her other insightful comments in this thread. Thank you bwall.

nereo

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #20 on: October 24, 2019, 06:46:57 PM »
Wonderful post by @bwall, with some good follow up comments by others.
Me wonders if the OP will return to this thread, or if was just lobbed for S&G.

ctuser1

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #21 on: October 24, 2019, 06:47:58 PM »
I think the consensus that USD is not going to lose it's reserve status anytime soon is a little too sanguine.

I had posted about the 2008 crisis in another thread. It was entirely possible that USD would have lost the reserve currency status had the 2008 crisis worked out slightly differently.

One of my earlier posts (one of many in that thread):
Banking system was much closer to collapsing than most people realized.

Banks were levered up to 30X.

What does it mean? Well, they only had $1 in capital for every $30 in obligations they had outstanding!! Much of this leverage was hidden from everyone, in complex derivatives that are impossible to properly mark, in obscure SPVs that did not show up in their yearly financial reports! If there was a run on these highly levered banks - they would collapse in no time!!

Net result - nobody knew which of the big banks were dancing naked all this time!!

Right after Lehman collapsed, banks stopped lending to one another. This is a big problem!! Much of the money in the world economic system is no longer based on anything physical!! If everyone lost "trust" on the institutions - the so called "money" would disappear overnight.

Yes, there is an alternative where we would be living in a bartering-based economy today.

2008 was NOT a vanilla recession! Systemic crisis of this kind are a different beast from the run-of-the-mill recessions that repeat every decade or so.

I'm not quite as sanguine as most people in this thread that the events similar to 2008 can't really recur anytime soon.

ctuser1

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #22 on: October 24, 2019, 06:56:19 PM »
The only thing arguably negative about being a reserve currency is that the country with the reserve currency will have to run a deficit.

No deficit => no extra currency floating outside => no reserve currency status.

Conversely, reserve currency status => outsiders want to sell you stuff for your currency, cheaper if necessary than otherwise necessary => you run a deficit.

Any thoughts @bwall or anyone else, whether persistent deficits has any downside(s) at all?

To me, it seems to be kosher except in a situation where everyone suddenly lost all faith in US economy. Were that to happen, I think, that would be accompanied by such a massive crisis that the negative effects of losing the reserve currency status won't even register as a problem.

So I don't quite see any real downside at all to reserve currency status (and the consequent deficits). 

nereo

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #23 on: October 24, 2019, 06:58:34 PM »
I think the consensus that USD is not going to lose it's reserve status anytime soon is a little too sanguine.

I had posted about the 2008 crisis in another thread. It was entirely possible that USD would have lost the reserve currency status had the 2008 crisis worked out slightly differently.

One of my earlier posts (one of many in that thread):
Banking system was much closer to collapsing than most people realized.

Banks were levered up to 30X.

What does it mean? Well, they only had $1 in capital for every $30 in obligations they had outstanding!! Much of this leverage was hidden from everyone, in complex derivatives that are impossible to properly mark, in obscure SPVs that did not show up in their yearly financial reports! If there was a run on these highly levered banks - they would collapse in no time!!

Net result - nobody knew which of the big banks were dancing naked all this time!!

Right after Lehman collapsed, banks stopped lending to one another. This is a big problem!! Much of the money in the world economic system is no longer based on anything physical!! If everyone lost "trust" on the institutions - the so called "money" would disappear overnight.

Yes, there is an alternative where we would be living in a bartering-based economy today.

2008 was NOT a vanilla recession! Systemic crisis of this kind are a different beast from the run-of-the-mill recessions that repeat every decade or so.

I'm not quite as sanguine as most people in this thread that the events similar to 2008 can't really recur anytime soon.

There’s two questions here.  The first is whether it would be beneficial for the US to lose it’s reserve-currency status, and is the question posed by the OP.  To that there seems to be a resounding “no”.  As to whether it could happen - well there is certainly that possibility *if* things went a bit differently, but so far it hasn’t.  As others have mentioned the pound-sterling was once a reserve currency, and the euro held that promise in the early 2000s.  Certainly much can change in a decade or two, and its entirely possible another country may emerge as a decent alternative.

Until that point... (and to echo bwall’s largely question): what currency *could* replace the dollar right now? It’s not the Yuan, it doesn’t appear to be the Euro, and it hasn’t been the pound in some time.  Possibly the Yen?  Or...?

Buffaloski Boris

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #24 on: October 24, 2019, 07:08:39 PM »
The only thing arguably negative about being a reserve currency is that the country with the reserve currency will have to run a deficit.

No deficit => no extra currency floating outside => no reserve currency status.

Conversely, reserve currency status => outsiders want to sell you stuff for your currency, cheaper if necessary than otherwise necessary => you run a deficit.

Any thoughts @bwall or anyone else, whether persistent deficits has any downside(s) at all?

To me, it seems to be kosher except in a situation where everyone suddenly lost all faith in US economy. Were that to happen, I think, that would be accompanied by such a massive crisis that the negative effects of losing the reserve currency status won't even register as a problem.

So I don't quite see any real downside at all to reserve currency status (and the consequent deficits).

For all the political chatter about running deficits, I don’t see that it’s a problem unless it gets to lunatic extremes.  In the end deficits are a debt that will never be repaid. People who are responsible and used to paying their debts are aghast at the idea that a government can run up a deficit that will never be repaid. That’s the long and short of it, though. The US has been running deficits since, well, forever and the end result hasn’t been apocalyptic or even demonstrably negative. In my view, the bigger question is where the excess spending is going. Infrastructure? Things that will increase wealth and freedom in the long run? Or is it going to line the pockets of political cronies?

ctuser1

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #25 on: October 24, 2019, 07:09:12 PM »
Until that point... (and to echo bwall’s largely question): what currency *could* replace the dollar right now? It’s not the Yuan, it doesn’t appear to be the Euro, and it hasn’t been the pound in some time.  Possibly the Yen?  Or...?

What about gold, or crypto?

I know it sounds crazy today. It won't if USD were to sound crazier!

Imagine an alternate history where the crisis of faith in 2008 infected PIIGS and reached all the way to loss of faith in US government's ability to contain the contagion!!

I don't think the scenario is plausible, but it certainly is possible.

maizeman

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #26 on: October 24, 2019, 07:10:28 PM »
I had posted about the 2008 crisis in another thread. It was entirely possible that USD would have lost the reserve currency status had the 2008 crisis worked out slightly differently.

What's fascinating about the 2008 crisis is that, given the way it did work out, the Fed probably reinforced the status of the USD in the world economy rather than weakening it.

European banks were even more heavily leveraged than US banks. The central banks in those european banks home countries could create infinite amounts of pounds or euros or francs out of thin air, but a lot of the failing over leveraged banks debt was denominated in dollars.

Through swap lines with the central banks in the UK, Switzerland, the European Central Bank (as well as Canada and Japan) the Fed created the dollars that allowed banks around the world to avoid defaulting on their dollar denominated debts (about $600B). In contrast, at the same time the Fed was creating hundreds of billions of dollars for banks all over the world the European Central Bank was caught up in a political mess about what its mandate actually was or wasn't even for euro denominated debt.

Whether you see keeping banks from defaulting and collapsing as a good thing or a bad thing, you have to admit from a banker's perspective it's a good thing. The Fed's ability and willingness to act independently and on a huge scale to keep the dollar denominated economy from breaking down -- and the European Central Bank's reluctance to do the same -- is big item in the dollar's favor if you're a banker sitting in some random country that is neither the USA or part of Europe and considering how much of your financial future to entangle with dollars or with euros.

Paul der Krake

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #27 on: October 24, 2019, 07:28:52 PM »
Whether you see keeping banks from defaulting and collapsing as a good thing or a bad thing, you have to admit from a banker's perspective it's a good thing. The Fed's ability and willingness to act independently and on a huge scale to keep the dollar denominated economy from breaking down -- and the European Central Bank's reluctance to do the same -- is big item in the dollar's favor if you're a banker sitting in some random country that is neither the USA or part of Europe and considering how much of your financial future to entangle with dollars or with euros.
This is a bit of an oversimplification. US regulators had to spend every shred of political capital they had to convince Congress to go along with their plans, and there was no guarantee that it would. Bernanke has the full backing of Bush, then Obama. What would have happened if it had been Trump and Powell instead?

In hindsight, Trichet underestimated the problem and was later excoriated for the ECB's lackluster response. That mistake will not be made again. The charitable explanation is that the EU is still in its infancy and it doesn't do anything fast. Bernanke could call up Bush and the top members of Congress and set up meetings on the hill in a matter of hours. The ECB is still not clear about their mandates and what they can or cannot do. Do they call up Merkel? Macron? How about the president of Estonia?

This is where institutional structures matter.

maizeman

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #28 on: October 24, 2019, 07:39:58 PM »
Whether you see keeping banks from defaulting and collapsing as a good thing or a bad thing, you have to admit from a banker's perspective it's a good thing. The Fed's ability and willingness to act independently and on a huge scale to keep the dollar denominated economy from breaking down -- and the European Central Bank's reluctance to do the same -- is big item in the dollar's favor if you're a banker sitting in some random country that is neither the USA or part of Europe and considering how much of your financial future to entangle with dollars or with euros.
This is a bit of an oversimplification. US regulators had to spend every shred of political capital they had to convince Congress to go along with their plans, and there was no guarantee that it would. Bernanke has the full backing of Bush, then Obama. What would have happened if it had been Trump and Powell instead?

For the US banks yes there was a huge amount of political capital burned, and I don't have confidence Trump and Powell would pull off what Bush/Obama and Bernanke did.

However, for the swap lines that put dollars into european and other international banks, I don't think the fed got permission from anyone or even announced it was taking place, did they? I didn't even learn that it had happened until years after the fact.

The charitable explanation is that the EU is still in its infancy and it doesn't do anything fast. Bernanke could call up Bush and the top members of Congress and set up meetings on the hill in a matter of hours. The ECB is still not clear about their mandates and what they can or cannot do. Do they call up Merkel? Macron? How about the president of Estonia?

This is where institutional structures matter.

I agree completely. I didn't mean to imply this was incompetence at the ECB or anything like that. As you say, the institutions structures are just very different and many of them hadn't been stress tested before. They may change in the future or they may not.
« Last Edit: October 24, 2019, 07:46:08 PM by maizeman »

Paul der Krake

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #29 on: October 24, 2019, 08:17:39 PM »
However, for the swap lines that put dollars into european and other international banks, I don't think the fed got permission from anyone or even announced it was taking place, did they? I didn't even learn that it had happened until years after the fact.
They definitely announced it. The announcing is just as important as the doing when trying to calm markets down. :)

https://www.federalreserve.gov/newsevents/pressreleases/monetary20080929a.htm

It doesn't need permission from Congress because the swap lines are backed by collateral, so it's not "spending".

ChpBstrd

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #30 on: October 25, 2019, 09:55:02 AM »
The dollar isn't losing its special status any time soon.

The EU is two or three bad elections away from implosion.
The UK is two or three bad days away from implosion.
Nobody trusts the Chinese legal system.

As this observation and subsequent comments reveal, it is quality of governance that bestows reserve status on a currency and a language. For decades, the US had the world’s fairest judicial system, a politically independent federal reserve that yielded the world’s best outcomes, the world’s most stable large political system, and of course capitalism itself. Therefore, international business was transacted in English and dollars.

If the US were to lose any of the above advantages, the reserve currency status would be called into question. So for example something implausible would have to happen like a US President slowly turning the country into a Russian-style hyper-corrupt oligarchy with crony judges and a federal reserve that was constantly under political pressure to juice the economy. Yea right. Could never happen. If that happened people would be so terrified they’d probably invent their own currencies on the internet or something. /sarcasm

Secondly, computers, the internet, and deep futures markets make transactions between currencies a lot easier than ever before in world history. I just paid in dollars for an ebay item sold by someone in Britain and priced in Canadian loonies. The website just made it happen seamlessly. Why couldn’t I buy a few thousand barrels of oil this way?

bwall

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #31 on: October 25, 2019, 09:56:09 AM »
The only thing arguably negative about being a reserve currency is that the country with the reserve currency will have to run a deficit.

No deficit => no extra currency floating outside => no reserve currency status.

Conversely, reserve currency status => outsiders want to sell you stuff for your currency, cheaper if necessary than otherwise necessary => you run a deficit.

Any thoughts @bwall or anyone else, whether persistent deficits has any downside(s) at all?
There are two types of deficits; trade deficits and government deficits and they are generally not directly linked.

A trade deficit is an outdated concept of harm. We no longer live in a zero-sum mercantilist society where my accumulation of gold and silver is at your expense. For example, I have an acute, chronic financial deficit with my local grocery store. The money only flows in one direction and it's likely to persist until the day I die. But, it's not a real concern.
I can say the same thing of my employees. I give them massive amounts of money on a consistent basis and if there is ever a change in this pattern, it's likely in their favor in the form of a raise or bonus. But, my banker doesn't ask me to try and balance out this trade deficit by selling them, say, vegetables that I grew at home (thus decreasing my trade deficits on two fronts).
No newsman ever really seems to care about these trade deficits, presumably because it wouldn't sell. The trade deficit/surplus on a macro level is nothing more than the aggregate of all the micro trade deficit/surplus.  In the case of the American trade deficit with China, does China represent the grocery store or the employee?

Government deficits are only a problem if the spending is going to a demographic group that you do not like. In this case, politicians will rail against deficit spending as an excuse to cut spending to that (unwanted) demographic. In other words, it's a canard.
Governments can easily raise revenue by raising taxes, but in the USA they have chosen not to do this. Companies and individuals do not have the luxury of raising taxes
Germany, for example, has had a government spending surplus for about five years now. They do not need to borrow money (!) and when they do, they have to pay back less than they borrowed (negative yield). Yet, they are not lowering taxes, increasing benefits, or building more infrastructure to ensure future economic growth. Presumably is it more virtuous to not owe money than to increase the standard of living of your countrymen.

bwall

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #32 on: October 25, 2019, 10:03:13 AM »
Secondly, computers, the internet, and deep futures markets make transactions between currencies a lot easier than ever before in world history. I just paid in dollars for an ebay item sold by someone in Britain and priced in Canadian loonies. The website just made it happen seamlessly. Why couldn’t I buy a few thousand barrels of oil this way?

Anyone certainly could buy oil in this manner and it's wouldn't affect the status of the USD as a reserve currency, because that's not what makes it a reserve currency. In an oil transaction, the USD are sold by the recipient for their local currency to pay their bills. Thus, the USD purchased for the transaction by the oil buyer today are dumped tomorrow by the oil seller, just like you bought CAD today for your eBay item (thus strengthening the CAD) and the CAD will be dumped tomorrow by the ebay vendor in exchange for GBP (thus weakening the CAD by the same amount), because that's where they live and have bills to pay.  It's a wash transaction.

No reserve status accrues to the USD by oil transactions being denominated in USD.

ChpBstrd

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #33 on: October 25, 2019, 12:24:04 PM »
Secondly, computers, the internet, and deep futures markets make transactions between currencies a lot easier than ever before in world history. I just paid in dollars for an ebay item sold by someone in Britain and priced in Canadian loonies. The website just made it happen seamlessly. Why couldn’t I buy a few thousand barrels of oil this way?

Anyone certainly could buy oil in this manner and it's wouldn't affect the status of the USD as a reserve currency, because that's not what makes it a reserve currency. In an oil transaction, the USD are sold by the recipient for their local currency to pay their bills. Thus, the USD purchased for the transaction by the oil buyer today are dumped tomorrow by the oil seller, just like you bought CAD today for your eBay item (thus strengthening the CAD) and the CAD will be dumped tomorrow by the ebay vendor in exchange for GBP (thus weakening the CAD by the same amount), because that's where they live and have bills to pay.  It's a wash transaction.

No reserve status accrues to the USD by oil transactions being denominated in USD.

Perhaps an eBay employee could clarify the process, but it looks like the software simply computed my price in USD based on the exchange rate with Canadian dollars or British pound, and then did a quick exchange of USD to GBP. I.e. “If seller was happy with $10 CAD, they’ll also be happy with $X USD because that translates to the same amount of GBP.” So I don’t think any CAD were actually traded in a transaction between foreigners that was priced in CAD. There was no need to go through the extra motion. Because the transaction was instantaneous (I.e. no risk of FX moves between the buy decision and payment time), the only major problem to be solved was price calculation.

Replace CAD with USD, and eBay item with traded goods, and you have a computer enabled international trading system that does not even require exchange of the reserve currency (which might better be called the reference currency).

If someone in India wants to buy copper from Chile, software should be able to do the exchange rate math, provide local currency quotes to each side, and perform the currency exchange itself in less than a second without ever having to transact in USD and going through an extra layer of commissions and bid ask spreads. To the extent this doesn’t already happen, it is an inefficiency that will soon be eliminated in the marketplace.

ctuser1

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #34 on: October 25, 2019, 12:39:20 PM »
If someone in India wants to buy copper from Chile, software should be able to do the exchange rate math, provide local currency quotes to each side, and perform the currency exchange itself in less than a second without ever having to transact in USD and going through an extra layer of commissions and bid ask spreads. To the extent this doesn’t already happen, it is an inefficiency that will soon be eliminated in the marketplace.

That whole mechanism *only* works because there is a reserve currency, e.g. USD that is very liquid against all thinly traded currencies.

Currency market is a the biggest financial market out there, and yet it is a giant non-cleared mess. There is no single "market". In effect, all big banks operate their own "market" and make their own market. There is no single quote. Some providers publish quotes based on data they obtain from banks - e.g. Bloomberg 4pm EST quote is a widely used currency close quote.

(I suffer daily through the mess of obtaining the "proper" currency data for financial calcs - so I have some personal grudge against the currency market $@#%@#).

The point I am making is that the whole currency market will simply not work in the absence of a super-liquid "reserve" or "reference" currency.

If you don't have much trading happening between Chile-whatever and Indian Rupee - how do you mark the exchange rate? You have to use some reference. If you have too many different references - that opens up arbitrage opportunities that simply increases inefficiency. So it will have to be a single, or maybe two or three "reference" currencies.
« Last Edit: October 25, 2019, 12:43:19 PM by ctuser1 »

MaaS

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #35 on: October 25, 2019, 01:03:43 PM »
Disagree. Yeah, being the reserve currency comes with obligations, but it's a pretty big advantage. The world needs a reserve currency and the U.S. dollar is the only feasible option as of today. It's certainly possible for a new currency to be created based on a basket of currencies, however.

Toothpick

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #36 on: November 05, 2019, 11:24:11 PM »
The world trades goods and services using little green pieces of paper. The USA gets to make more of those little green pieces of paper any time it chooses and the rest of the world happily delivers goods and services in return for them. You've had around five decades of consuming more than you earn as a result. I really, really struggle to see how this situation changing could be good economically for the US. Strongly suggest no-one makes a program on Fox that makes your current president believe it would be a good idea.

You're correct.  It wouldn't be good economically for the US.  Not in the short-term, at least.  And that's the problem.  Everyone looks at the short-term readjustment and says "Not a good idea."

The question is, how long should the US be allowed to consume more than it produces?  Two more years?  30 more years?

It's like having an alcoholic friend.  You know it's slowly killing them, but as long as you keep buying them another drink, they seem to be doing well.  The hangover never really shows up.  Well one day, you arrive at the bar and your friend is dead.  Massive liver failure finally set in.

We shouldn't have to wait for a crisis to make a change, but that is the natural order of things.

In reality, I think the USD probably will remain king of the fiat world for quite some time.  It's going to take an unfortunate series of events to dethrone it from prominence.  And that could be many years from now.  But on the current trajectory, I agree with Lyn Alden that it's really only a question of when, not if. 
« Last Edit: November 06, 2019, 01:21:24 AM by Toothpick »

Toothpick

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #37 on: November 05, 2019, 11:34:50 PM »
I really like Lyn Alden’s stuff. I happen to disagree with her that the US Dollar losing its reserve Currency status would be a good thing either for the US or for the world as a whole.

Just as a thought experiment, let’s assume that ending the US Dollar reserve status were a good thing, and we wanted to do that. Let’s think ahead a few steps. So what’s next? What replaces the US dollar? I see two currencies that have any chance whatsoever of replacing the dollar: the Euro and the Yuan. The problem with the Yuan is that it’s not tradable in any quantity outside of China, and in the unlikely event the Chinese do allow for their currency to be freely traded, would they be willing to deal with the obvious ramifications of their currency being much more valuable? Theirs is an export driven economy, and that doesn’t work real well when your currency is expensive. So I suppose that leaves the Euro. Those negative interest rates are very chic! And with the Euro zone going mostly cashless, the ECB will be able to implement capital controls whenever they want. Might want to ask the Greeks about those.

So what are the other choices? Crypto? Some magical basket of currencies? Bretton Woods II?

I really think it's an odd idea to have any country's currency serve as the world reserve currency.  It has too many inherent long-term problems. 

"Crypto?"
So you've been following the St. Louis Fed I see.




« Last Edit: November 06, 2019, 12:01:18 AM by Toothpick »

Toothpick

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #38 on: November 05, 2019, 11:59:17 PM »
If someone in India wants to buy copper from Chile, software should be able to do the exchange rate math, provide local currency quotes to each side, and perform the currency exchange itself in less than a second without ever having to transact in USD and going through an extra layer of commissions and bid ask spreads. To the extent this doesn’t already happen, it is an inefficiency that will soon be eliminated in the marketplace.

That whole mechanism *only* works because there is a reserve currency, e.g. USD that is very liquid against all thinly traded currencies.

Currency market is a the biggest financial market out there, and yet it is a giant non-cleared mess. There is no single "market". In effect, all big banks operate their own "market" and make their own market. There is no single quote. Some providers publish quotes based on data they obtain from banks - e.g. Bloomberg 4pm EST quote is a widely used currency close quote.

(I suffer daily through the mess of obtaining the "proper" currency data for financial calcs - so I have some personal grudge against the currency market $@#%@#).

The point I am making is that the whole currency market will simply not work in the absence of a super-liquid "reserve" or "reference" currency.

If you don't have much trading happening between Chile-whatever and Indian Rupee - how do you mark the exchange rate? You have to use some reference. If you have too many different references - that opens up arbitrage opportunities that simply increases inefficiency. So it will have to be a single, or maybe two or three "reference" currencies.

Keynes, as much as I dislike many of his ideas, might have had something here.

https://en.wikipedia.org/wiki/Bancor
Bancor would not be an international currency. It would rather be a unit of account used to track international flows of assets and liabilities, which would be conducted through the International Clearing Union.

At a minimum, this type of system would seem to discourage the large imbalances that we are seeing today.  Obviously, the world went in a different direction.

Keynes was able to make his proposal the official British proposal at the Bretton Woods Conference but it was not accepted. Rather than a supranational currency, the conference adopted a system of pegged exchange rates ultimately tied to physical gold in a system managed by the World Bank and IMF. In practice, the system implicitly established the United States dollar as a reserve currency convertible to gold at a fixed price on demand by other governments. The dollar was implicitly established as the reserve by the large trade surplus and gold reserves held by the US at the time of the conference.

It would not surprise me at all if the world eventually adopts something like the Bancor idea.
« Last Edit: November 06, 2019, 12:07:22 AM by Toothpick »

Toothpick

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #39 on: November 06, 2019, 12:28:50 AM »
In the 1950's, the UK's currency lost reserve currency status. The process was painful economically and lead to lower standards of living. The same would occur in the USA if the USD is no longer the reserve currency of the world.

The introduction here briefly explains some of the history of the pound sterling as a reserve currency.

https://sites.hks.harvard.edu/fs/jfrankel/EuroVs$-IFdebateFeb2008.pdf

UK economy was far more trade-dependent at that time than US economy is today.

Don't you think this will result in significant differences in how this will play out in the US?

I don't expect the USD to lose reserve currency status anytime soon. But if it was to - then I'm trying to think exactly how that will impact US Domestic economy.

There is almost 1.7Trillion in currency notes in circulation, presumable a large chunk outside the US. Much of this is likely used for illegal activities.

Worst case, let's assume all 1.7Trillion is outside and comes back to the US. How exactly will it come back? US has to export something that outsiders will buy and give us cash. If so - there will be an increase in exports and decrease in imports. Disruptive - sure. Will it be as bad as the UK? I don't think so.

The other mechanism for dollar to come back is USD denominated assets - bonds, t-bills etc. The primary impact they will have is on the asset bubble. There is a real possibility that we will get another episode of the too-big-to-fail and asset losses are socialized if this does happen.

Any other mechanism it will impact the US economy?

Good reply. Yes, you are correct that the UK is more dependent on trade than the USA.

It's hard impossible to know exactly what choices USD holders in the future will make when they change their USD for other assets. But it's a good thought exercise to come up with a laundry list of items they liquidate and items they purchase to 'cash out' of USD.

Governments: Presumably will no longer wish to hold US debt or currency as a reserve. This means the value of the USD will drop as they sell current holdings and avoid creating new holdings. USD will drop vis a vis the currency they are swapping into. EUR? JPY? CNH/CNY? Gold? (don't laugh, there're gold bugs here).


If anyone is laughing at gold bugs, they really should start paying attention to the world around them.

Toothpick

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #40 on: November 06, 2019, 01:32:49 AM »
Wonderful post by @bwall, with some good follow up comments by others.
Me wonders if the OP will return to this thread, or if was just lobbed for S&G.

Lol.  Well, I did intentionally wait to respond for awhile, and I didn't fully catch up here until today.  I wanted to see where the discussion would go without me pushing it in a certain direction.

I also posted basically the same thoughts on another investing forum and got exactly one reply.  I was certainly impressed by the discussion here :). 

ctuser1

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #41 on: November 06, 2019, 04:51:11 AM »
Keynes, as much as I dislike many of his ideas, might have had something here.

https://en.wikipedia.org/wiki/Bancor
Bancor would not be an international currency. It would rather be a unit of account used to track international flows of assets and liabilities, which would be conducted through the International Clearing Union.

At a minimum, this type of system would seem to discourage the large imbalances that we are seeing today.  Obviously, the world went in a different direction.

Keynes was able to make his proposal the official British proposal at the Bretton Woods Conference but it was not accepted. Rather than a supranational currency, the conference adopted a system of pegged exchange rates ultimately tied to physical gold in a system managed by the World Bank and IMF. In practice, the system implicitly established the United States dollar as a reserve currency convertible to gold at a fixed price on demand by other governments. The dollar was implicitly established as the reserve by the large trade surplus and gold reserves held by the US at the time of the conference.

It would not surprise me at all if the world eventually adopts something like the Bancor idea.

Interesting tidbit about Bancor.

When I read through it superficially, it seems to me like Gold WAS effectively the Bancor after Bretton Woods.

What's the difference?

Supranational - check. Not directly controlled by one country, at least nominally, check.

In theory, gold standard was supposed to be the system after Bretton Woods. Implicitly, USD took the role simply because it was the 800 pound gorilla everyone trusted. So when USD went off it's gold peg, others did not stick with Gold as their reference point - but rather went with USD.

Bancor would also have all the downsides of the gold, and then some more. Individuals can't hold it. So presumably FX trading was a no-go. I just don't see how Bancor wold have practically operated/fared any better than Gold.


bwall

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #42 on: November 06, 2019, 08:38:32 AM »
If anyone is laughing at gold bugs, they really should start paying attention to the world around them.

And I'd say that a gold bug hasn't paid attention to the world price of gold from 1980-2000.

Disadvantages of physical gold;

1) Large value amounts cannot be easily carried or transported. At a price of $1500 per ounce, $1m of gold would weigh 41.6 pounds (about 19 kg). If you have no internal combustion engines available, moving it is a PITA.

2) How to use small amounts? Bars of gold are not easily divided into smaller pieces without an infrastructure in place.

3) Risk of fakery/fraud. How to verify if it's real gold? Or purity level?

4) Cost of storage. How do you safely store the gold from theft (or loss)?

5) Not productive/no dividend. Gold doesn't earn interest or produce anything.

With all of these disadvantages, I think that gold is not a wise place to store money.

Advantage of gold:

1) People have used it as a means of exchange and store of value for centuries. Perhaps they will continue to do so in the future.

2) Plenty of people in China and India buy gold and keep as a store of value. As China and India rise economically, demand for gold will rise as will the price along with it. Thus, gold is just another speculative commodity like pork bellies, wheat, coffee, or sugar, but with an important caveat--it has no intrinsic value.

I would suggest that the entire rise in the price of gold since 2000 is mainly attributed to new demand from China and India--citizens and central banks alike

robartsd

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #43 on: November 06, 2019, 10:29:20 AM »
Disadvantages of physical gold;

1) Large value amounts cannot be easily carried or transported. At a price of $1500 per ounce, $1m of gold would weigh 41.6 pounds (about 19 kg). If you have no internal combustion engines available, moving it is a PITA.

2) How to use small amounts? Bars of gold are not easily divided into smaller pieces without an infrastructure in place.

3) Risk of fakery/fraud. How to verify if it's real gold? Or purity level?
Is it any harder to verify authenticity of gold than fiat currency?

4) Cost of storage. How do you safely store the gold from theft (or loss)?
Fiat currency also needs to be stored from theft (though may be slightly less bulky, but being easier to move the getaway after fiat currency theft easier).

5) Not productive/no dividend. Gold doesn't earn interest or produce anything.
Fiat currency is also not productive.

With all of these disadvantages, I think that gold is not a wise place to store money.

Advantage of gold:

1) People have used it as a means of exchange and store of value for centuries. Perhaps they will continue to do so in the future.

2) Plenty of people in China and India buy gold and keep as a store of value. As China and India rise economically, demand for gold will rise as will the price along with it. Thus, gold is just another speculative commodity like pork bellies, wheat, coffee, or sugar, but with an important caveat--it has no intrinsic value.

3) Gold is not unilaterally controlled by a single government.

I would suggest that the entire rise in the price of gold since 2000 is mainly attributed to new demand from China and India--citizens and central banks alike
I would suggest that this demand represents a decreasing trust in USD as a reserve currency.

bwall

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #44 on: November 06, 2019, 11:24:37 AM »
@robartsd ; Thank you for the reply. 

To your points:

3) Fiat authenticity can be done at any bank in the country of issuance, at no cost and in less than a minute. But, it's hard to look at gold and know if it's 10 cart, 14, 18 or 24 carat, or even gold at all.

4) Banks store fiat for free, as much as you want them to. Usually they give you interest. And, you're insured up to $250,000 in the USA at no additional cost.

5) Banks will give you interest on fiat, but not on gold. Companies pay dividends to owners of their shares, but not on gold.

and to the advantages of gold

3) Gold is not controlled by a single government; Thank you for mentioning this. I should have listed this in the drawbacks. Nothing like a recession being induced by the inability to dig a metal out of the ground, which happened regularly until the Federal Reserve was created in 1913. There is a reason that Williams Jennings Bryan's  "Cross of Gold" speech was so popular among the poor as they were suffering and the banks profiting when the USA was on the gold standard. Look it up if you don't believe me. See who agitated to end the gold standard because they were suffering--the poor or the rich.

Decreasing trust: individuals who buy gold do so for centuries' long cultural reasons that long pre-date the USA as a country, much less the USD as any store of wealth.

maizeman

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #45 on: November 06, 2019, 11:41:28 AM »
The Cross of Gold speech is outstanding. If you're in a place that it won't look odd to those around you, I definitely recommend reading it aloud. There's an art to oratory that doesn't always come across perfectly on the printed page.

It's weird to realize it was given by the same guy who argued for conviction in the Scopes trial.

ChpBstrd

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #46 on: November 06, 2019, 01:46:27 PM »
Perhaps this is the smart money reason to buy cryptocurrency. If trust in the USD declines, perhaps some form of blockchain could become the banco. Gold will never do the job because it is completely impractical to trade with.

I wouldn’t bet my USD on it though. The more the FX, futures, and currency options markets evolve, the less justification there is for a banco or gold standard.

And regarding that standard theory about trust in a currency, ask why the Yen is considered a safe haven asset as “multiple lost decades” Japan mints more and more of them to cover their over-200%-of-GDP debt and is now selling negative interest rate bonds. Just saying be careful with classical economic assumptions regarding currencies, as they’ve been failing since the age of Adam Smith.

robartsd

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #47 on: November 06, 2019, 03:15:09 PM »
@robartsd ; Thank you for the reply. 

To your points:

3) Fiat authenticity can be done at any bank in the country of issuance, at no cost and in less than a minute. But, it's hard to look at gold and know if it's 10 cart, 14, 18 or 24 carat, or even gold at all.

4) Banks store fiat for free, as much as you want them to. Usually they give you interest. And, you're insured up to $250,000 in the USA at no additional cost.

5) Banks will give you interest on fiat, but not on gold. Companies pay dividends to owners of their shares, but not on gold.
I imagine that if gold were the primary currency it would be just as easy and cheap to authenticate. Bank interest is a function of fractional reserve banking, not a function of the currency. Insurance is provided by the government, not the currency. No reason a gold denominated corporate bond could not exist. None of this in inherent disadvantages of gold as money, just advantages a government has given to it's fiat currency.

and to the advantages of gold

3) Gold is not controlled by a single government; Thank you for mentioning this. I should have listed this in the drawbacks. Nothing like a recession being induced by the inability to dig a metal out of the ground, which happened regularly until the Federal Reserve was created in 1913. There is a reason that Williams Jennings Bryan's  "Cross of Gold" speech was so popular among the poor as they were suffering and the banks profiting when the USA was on the gold standard. Look it up if you don't believe me. See who agitated to end the gold standard because they were suffering--the poor or the rich.

Decreasing trust: individuals who buy gold do so for centuries' long cultural reasons that long pre-date the USA as a country, much less the USD as any store of wealth.
Yes, creating the FED in 1913 saved us from recessions; we haven't had one of those for over 100 years! /sarcasm

The USA has enjoyed a privileged position in the world since 1945. It gained this position by offering the FED's gold window at Bretton Woods. One can argue that it is primarily good monetary policy  and stable government that has allowed the USA to maintain that privilege since the FED closed the gold window; but I think the global presence of the US military is also a key factor. The previous world reserve currencies also happened to belong to leading empires of the day.

Toothpick

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #48 on: November 06, 2019, 09:41:05 PM »
Perhaps this is the smart money reason to buy cryptocurrency. If trust in the USD declines, perhaps some form of blockchain could become the banco. Gold will never do the job because it is completely impractical to trade with.

I wouldn’t bet my USD on it though. The more the FX, futures, and currency options markets evolve, the less justification there is for a banco or gold standard.

And regarding that standard theory about trust in a currency, ask why the Yen is considered a safe haven asset as “multiple lost decades” Japan mints more and more of them to cover their over-200%-of-GDP debt and is now selling negative interest rate bonds. Just saying be careful with classical economic assumptions regarding currencies, as they’ve been failing since the age of Adam Smith.

Everyone talks about Japan and their government debt, but they don't consider the big picture that Japan is not fundamentally anywhere near financial trouble.  Basically, the Japanese own their own debt.  Not only that, they have a very substantial Net International Investment Position.  At last update I can find it was over $3 trillion, or +63.8% of their GDP.   In fact, while the USA is the world's largest debtor nation, Japan is the world's largest creditor nation. 
https://en.wikipedia.org/wiki/Net_international_investment_position

That's the difference between the Yen and the USD, and it's stark.

bwall

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Re: The USA desperately needs to lose world reserve currency status.
« Reply #49 on: November 06, 2019, 10:09:27 PM »
Perhaps this is the smart money reason to buy cryptocurrency. If trust in the USD declines, perhaps some form of blockchain could become the banco. Gold will never do the job because it is completely impractical to trade with.

I wouldn’t bet my USD on it though. The more the FX, futures, and currency options markets evolve, the less justification there is for a banco or gold standard.

And regarding that standard theory about trust in a currency, ask why the Yen is considered a safe haven asset as “multiple lost decades” Japan mints more and more of them to cover their over-200%-of-GDP debt and is now selling negative interest rate bonds. Just saying be careful with classical economic assumptions regarding currencies, as they’ve been failing since the age of Adam Smith.

Everyone talks about Japan and their government debt, but they don't consider the big picture that Japan is not fundamentally anywhere near financial trouble.  Basically, the Japanese own their own debt.  Not only that, they have a very substantial Net International Investment Position.  At last update I can find it was over $3 trillion, or +63.8% of their GDP.   In fact, while the USA is the world's largest debtor nation, Japan is the world's largest creditor nation. 
https://en.wikipedia.org/wiki/Net_international_investment_position

That's the difference between the Yen and the USD, and it's stark.

It's a good thing that the Japanese own their own debt. Japan is suffering from a massive population bust. Every year since 2012 (?) there are hundreds of thousand fewer Japanese on this good earth, a total drop now of 2 million since the peak, and counting. So, in a way Japanese government debt being owned by it's citizens is like a massive stock buyback.

The good news is that this means that when there is no economic growth in Japan this year, as has been the case for the past ten or twenty years, it doesn't mean a drop in living standards--in fact it probably results in increased living standards as fewer people are able to produce the same amount of goods and services.

Japan desperately needs to import labor, but they prefer to shut down rather than accept immigrants.