Author Topic: The USA desperately needs to lose world reserve currency status.  (Read 8725 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?

maizeman

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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".



maizeman

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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.

maizeman

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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.