Author Topic: The USA desperately needs to lose world reserve currency status.  (Read 8695 times)

Paul der Krake

  • Magnum Stache
  • ******
  • Posts: 4729
  • Age: 12
  • Location: UTC-10:00
Re: The USA desperately needs to lose world reserve currency status.
« Reply #50 on: November 06, 2019, 10:14:38 PM »
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.
Stock buybacks work because the buyer, usually the company buying its own shares, destroys them immediately after.

That's not what happens when individuals die though.

Toothpick

  • 5 O'Clock Shadow
  • *
  • Posts: 19
Re: The USA desperately needs to lose world reserve currency status.
« Reply #51 on: November 06, 2019, 10:17:09 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.

Apparently bwall is also unaware of the Great Depression, or the recent Great Recession, occurring under the watchful eye and careful guidance of the all-knowing Fed.  But I'm sure there will be perfectly logical excuse for that as well.  A lack of understanding of the root causes of recessions is the fundamental problem here.
https://mises.org/wire/feds-endless-boom-bust-cycle

"Nothing like a recession being induced by the inability to dig a metal out of the ground"
Interesting.  We're getting sidetracked here, but was that really the initial, root cause of recessions?  It really doesn't make any sense to me.  Real economic growth would be unaffected, in my view. 

Toothpick

  • 5 O'Clock Shadow
  • *
  • Posts: 19
Re: The USA desperately needs to lose world reserve currency status.
« Reply #52 on: November 06, 2019, 10:39:02 PM »
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

"And I'd say that a gold bug hasn't paid attention to the world price of gold from 1980-2000."
Sure, and that would be a permanent gold bug.  The government and Fed were also reasonably responsible during that time.

"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"
The US government's level of financial responsibility has everything to do with the price of gold in USD terms.  Unfortunately, as the topic suggests, the USA has been subsidized, if not outright pushed, into some of this irresponsible behavior.  But I became very bullish on gold in March 2003, and unfortunately the level of government responsibility hasn't changed much since then.

"Large value amounts cannot be easily carried or transported."
I agree, and there's definitely a reason that gold was stored in vaults and people traded paper currency backed by gold.  Then the paper currency itself became "good enough."

"Gold doesn't earn interest or produce anything. "
https://www.bloomberg.com/graphics/negative-yield-bonds/

bwall

  • Pencil Stache
  • ****
  • Posts: 668
Re: The USA desperately needs to lose world reserve currency status.
« Reply #53 on: November 06, 2019, 10:58:14 PM »
Apparently bwall is also unaware of the Great Depression, or the recent Great Recession, occurring under the watchful eye and careful guidance of the all-knowing Fed.  But I'm sure there will be perfectly logical excuse for that as well.  A lack of understanding of the root causes of recessions is the fundamental problem here.
https://mises.org/wire/feds-endless-boom-bust-cycle

"Nothing like a recession being induced by the inability to dig a metal out of the ground"
Interesting.  We're getting sidetracked here, but was that really the initial, root cause of recessions?  It really doesn't make any sense to me.  Real economic growth would be unaffected, in my view.

Economic depressions were commonplace in the USA before the creation of the Fed. There was one in 1907, a doozy in 1893 that lasted until 1897 and one in 1873. In fact, the Great Depression was called such because there'd been so many of them previously, this was had a special adjective to distinguish it from all the other previously. Just as the Great Recession is called such as there were many, many previous recessions that came before it. So, before the creation of the Fed, we were averaging one depression every 10-15 years. In the 90 years since, only one. I do believe that correlation is causality in this case. YMMV.

Most people who think gold is preferable to fiat do not understand the link between money supply growth and economic growth. It is a difficult concept that is not easily explained. I'll try and make a simple analogy. If you have a gold standard, then the amount of currency in circulation is limited (which is exactly what the libertarians see as a virtue). Think of this as, say, an apple pie. Or a keg of beer. The total population shares the apple pie, (or the keg of beer). What happens, over time, as the population doubles, but the money supply doesn't, because you can't dig any shiny metal from the ground? Now, everyone gets half as much pie (or beer) to share. This is what a recession (or depression) looks like--no economic activity occurring because there isn't any money. Literally. The bank can't lend any more money (serve slices of apple pie, or pints of beer), because it's limited--'sold out' so to speak. And to get more you have to dig in the dirt until you find a metal that shines in the proper way. So, houses are not built, cars are not ordered, airplanes not delivered, etc. not because the people don't want them, or don't have perfect credit, but because there isn't enough gold in a vault somewhere.

While some people do yearn for a return to a gold standard, it's not because they want to see increasing standards of living and improved lifestyles, as these would not be the result of a return to the gold standard.

bwall

  • Pencil Stache
  • ****
  • Posts: 668
Re: The USA desperately needs to lose world reserve currency status.
« Reply #54 on: November 06, 2019, 10:59:45 PM »
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.
Stock buybacks work because the buyer, usually the company buying its own shares, destroys them immediately after.

That's not what happens when individuals die though.

You're quite right. A bit of gallows humor on my end.

Toothpick

  • 5 O'Clock Shadow
  • *
  • Posts: 19
Re: The USA desperately needs to lose world reserve currency status.
« Reply #55 on: November 06, 2019, 11:55:02 PM »
Apparently bwall is also unaware of the Great Depression, or the recent Great Recession, occurring under the watchful eye and careful guidance of the all-knowing Fed.  But I'm sure there will be perfectly logical excuse for that as well.  A lack of understanding of the root causes of recessions is the fundamental problem here.
https://mises.org/wire/feds-endless-boom-bust-cycle

"Nothing like a recession being induced by the inability to dig a metal out of the ground"
Interesting.  We're getting sidetracked here, but was that really the initial, root cause of recessions?  It really doesn't make any sense to me.  Real economic growth would be unaffected, in my view.

Economic depressions were commonplace in the USA before the creation of the Fed. There was one in 1907, a doozy in 1893 that lasted until 1897 and one in 1873. In fact, the Great Depression was called such because there'd been so many of them previously, this was had a special adjective to distinguish it from all the other previously. Just as the Great Recession is called such as there were many, many previous recessions that came before it. So, before the creation of the Fed, we were averaging one depression every 10-15 years. In the 90 years since, only one. I do believe that correlation is causality in this case. YMMV.

Most people who think gold is preferable to fiat do not understand the link between money supply growth and economic growth. It is a difficult concept that is not easily explained. I'll try and make a simple analogy. If you have a gold standard, then the amount of currency in circulation is limited (which is exactly what the libertarians see as a virtue). Think of this as, say, an apple pie. Or a keg of beer. The total population shares the apple pie, (or the keg of beer). What happens, over time, as the population doubles, but the money supply doesn't, because you can't dig any shiny metal from the ground? Now, everyone gets half as much pie (or beer) to share. This is what a recession (or depression) looks like--no economic activity occurring because there isn't any money. Literally. The bank can't lend any more money (serve slices of apple pie, or pints of beer), because it's limited--'sold out' so to speak. And to get more you have to dig in the dirt until you find a metal that shines in the proper way. So, houses are not built, cars are not ordered, airplanes not delivered, etc. not because the people don't want them, or don't have perfect credit, but because there isn't enough gold in a vault somewhere.

While some people do yearn for a return to a gold standard, it's not because they want to see increasing standards of living and improved lifestyles, as these would not be the result of a return to the gold standard.

"So, houses are not built, cars are not ordered, airplanes not delivered, etc. not because the people don't want them, or don't have perfect credit, but because there isn't enough gold in a vault somewhere."

I'm curious.  What, in your view, caused the Great Recession?

ctuser1

  • Pencil Stache
  • ****
  • Posts: 502
Re: The USA desperately needs to lose world reserve currency status.
« Reply #56 on: November 07, 2019, 04:00:48 AM »
I'm curious.  What, in your view, caused the Great Recession?

I’m curious too!

What do you think caused the Great Depression? We had gold standard back then!! I’m being told that is supposed to be some sort of economic cure-all, no?

And 1907? And 1893? And 1872? And ....., it goes on?

Travis

  • Magnum Stache
  • ******
  • Posts: 2713
  • Location: South Korea
Re: The USA desperately needs to lose world reserve currency status.
« Reply #57 on: November 07, 2019, 07:07:11 AM »

We're getting sidetracked here, but was that really the initial, root cause of recessions?  It really doesn't make any sense to me.  Real economic growth would be unaffected, in my view.

Credit and debt make the world go 'round. The events listed by Bwall can be referenced as "The Panic of..."  They occurred throughout the 1800s and were largely created by poor monetary policy, precious metal depreciation, tightened credit from gold/commodity availability, etc.  Not all of these Panics were home-grown. In 1873, Germany decided to stop using silver which crashed our large supply of it (which was used as currency). We came off silver ourselves as a result and credit dried up with less precious metal to back it up.  A couple times Britain had gold problems which rippled back to us.  Disconnecting our currency from the whims of metal availability didn't make recessions go away, but they seem to have eliminated a factor that caused them to be frequent in the 19th Century.

nereo

  • Senior Mustachian
  • ********
  • Posts: 11451
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: The USA desperately needs to lose world reserve currency status.
« Reply #58 on: November 07, 2019, 09:29:55 AM »
if recessions and depressions occurred while we were on the gold standard, and if they have become less frequent/severe since leaving it, what remains of the argument that we ought to go back to that standard, and if the price of gold has become increadibly volatile in the last few decades?  Asking because I am really not understanding the arguments being made for returning to the gold standard

ctuser1

  • Pencil Stache
  • ****
  • Posts: 502
Re: The USA desperately needs to lose world reserve currency status.
« Reply #59 on: November 07, 2019, 10:36:19 AM »
My hunch (not backed by any serious economic research that I know of) is that the stagflation of 1970’s was caused at least partially by us moving off the gold standard.

If so, it was a heavy, but necessary price to pay. I shudder to think what would have happened if USD was pegged to gold during 2008. You don’t have to guess, just look at Greece, and see the economic contraction there when they have no fiscal tools available to tackle the crisis facing them.

There *is* serious economic research showing how gold standard harmed the economy and limited the policy choices in the face of serious credit availability crisis in the Main Street during the Great Depression.

Going back to gold standard will likely be equally painful as 70s (hunch, not backed by research) just without any long term benefits.

bwall

  • Pencil Stache
  • ****
  • Posts: 668
Re: The USA desperately needs to lose world reserve currency status.
« Reply #60 on: November 07, 2019, 11:13:56 AM »
Apparently bwall is also unaware of the Great Depression, or the recent Great Recession, occurring under the watchful eye and careful guidance of the all-knowing Fed.  But I'm sure there will be perfectly logical excuse for that as well.  A lack of understanding of the root causes of recessions is the fundamental problem here.
https://mises.org/wire/feds-endless-boom-bust-cycle

"Nothing like a recession being induced by the inability to dig a metal out of the ground"
Interesting.  We're getting sidetracked here, but was that really the initial, root cause of recessions?  It really doesn't make any sense to me.  Real economic growth would be unaffected, in my view.

Economic depressions were commonplace in the USA before the creation of the Fed. There was one in 1907, a doozy in 1893 that lasted until 1897 and one in 1873. In fact, the Great Depression was called such because there'd been so many of them previously, this was had a special adjective to distinguish it from all the other previously. Just as the Great Recession is called such as there were many, many previous recessions that came before it. So, before the creation of the Fed, we were averaging one depression every 10-15 years. In the 90 years since, only one. I do believe that correlation is causality in this case. YMMV.

Most people who think gold is preferable to fiat do not understand the link between money supply growth and economic growth. It is a difficult concept that is not easily explained. I'll try and make a simple analogy. If you have a gold standard, then the amount of currency in circulation is limited (which is exactly what the libertarians see as a virtue). Think of this as, say, an apple pie. Or a keg of beer. The total population shares the apple pie, (or the keg of beer). What happens, over time, as the population doubles, but the money supply doesn't, because you can't dig any shiny metal from the ground? Now, everyone gets half as much pie (or beer) to share. This is what a recession (or depression) looks like--no economic activity occurring because there isn't any money. Literally. The bank can't lend any more money (serve slices of apple pie, or pints of beer), because it's limited--'sold out' so to speak. And to get more you have to dig in the dirt until you find a metal that shines in the proper way. So, houses are not built, cars are not ordered, airplanes not delivered, etc. not because the people don't want them, or don't have perfect credit, but because there isn't enough gold in a vault somewhere.

While some people do yearn for a return to a gold standard, it's not because they want to see increasing standards of living and improved lifestyles, as these would not be the result of a return to the gold standard.

"So, houses are not built, cars are not ordered, airplanes not delivered, etc. not because the people don't want them, or don't have perfect credit, but because there isn't enough gold in a vault somewhere."

I'm curious.  What, in your view, caused the Great Recession?

I believe that the Great Recession was caused by banking deregulation, policy errors by the Fed, unchecked greed on Wall St coupled with mania on Main St.

To understand more about the root causes of the Great Recession, I would encourage you to read "The Big Short" by Michael Lewis
https://www.amazon.com/Big-Short-Inside-Doomsday-Machine/dp/0393338827/ref=sr_1_1?crid=17BS7IFL9TTXE&keywords=michael+lewis+big+short&qid=1573150138&s=books&sprefix=michael+lewis+big%2Caps%2C202&sr=1-1

Keep in mind that other countries had (even bigger!) housing booms at the same time as the USA. Their regulators and regulations prevented a bust.

talltexan

  • Magnum Stache
  • ******
  • Posts: 2952
Re: The USA desperately needs to lose world reserve currency status.
« Reply #61 on: November 07, 2019, 12:02:07 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.

Frankly, I don't think Powell has the imagination to do the things you're talking about Bernanke doing. Ben had spent decades studying what went wrong with the Great Depression. Powell's background was as an attorney.

talltexan

  • Magnum Stache
  • ******
  • Posts: 2952
Re: The USA desperately needs to lose world reserve currency status.
« Reply #62 on: November 07, 2019, 12:08:55 PM »
I'm curious.  What, in your view, caused the Great Recession?

I’m curious too!

What do you think caused the Great Depression? We had gold standard back then!! I’m being told that is supposed to be some sort of economic cure-all, no?

And 1907? And 1893? And 1872? And ....., it goes on?

This question got answered elsewhere about the recession of 2007-2009 (I'd be fine calling that the "Lesser Depression").

Regarding the "Great Depression" of 1929-1933, I'll throw out some causes:

  • Financial panic and collapse of banks
  • Poor Fiscal Policy of the Hoover Administration
  • Dust Bowl hitting agricultural produce
  • Natural retrenchments after a decade of easy credit
  • Smoot-Hawley tariffs
  • Global stagnation

What sets 1929 and 2008 apart from other US downturns--and they were more severe than the standard recession we've seen periodically since 1945--is that they were global. All major national economies showed stagnation in both periods.

robartsd

  • Magnum Stache
  • ******
  • Posts: 2804
  • Location: Sacramento, CA
Re: The USA desperately needs to lose world reserve currency status.
« Reply #63 on: November 12, 2019, 01:27:14 PM »
One doesn't have to argue that the US should return to the gold standard to argue that other countries of the world ought to seek reserves that are not based on US fiat currency. I think a standard basket of a handful of different precious metals would make a fine reference of value that the currencies of various countries could be compared too and each country could hold reserves of these metals to use in their monetary policy. For the US, losing the privileged status of controlling the world reserve currency would likely be painful (possibly similar to the pain of the 70's in response to leaving the last of the gold standard).

talltexan

  • Magnum Stache
  • ******
  • Posts: 2952
Re: The USA desperately needs to lose world reserve currency status.
« Reply #64 on: November 12, 2019, 01:36:30 PM »
Central banks typically hold gold and currencies to enable their market-making functions and support their own currency.

Many private banks in smaller countries have dollar-denominated debts, and that's not likely to change rapidly.

Toothpick

  • 5 O'Clock Shadow
  • *
  • Posts: 19
Re: The USA desperately needs to lose world reserve currency status.
« Reply #65 on: November 13, 2019, 07:49:53 PM »
One doesn't have to argue that the US should return to the gold standard to argue that other countries of the world ought to seek reserves that are not based on US fiat currency.  I think a standard basket of a handful of different precious metals would make a fine reference of value that the currencies of various countries could be compared too and each country could hold reserves of these metals to use in their monetary policy. For the US, losing the privileged status of controlling the world reserve currency would likely be painful (possibly similar to the pain of the 70's in response to leaving the last of the gold standard).

One of the best posts in the thread. 

I don't advocate for a return to a gold standard.  A return to responsible monetary policy would be a good idea, however. 

And it's hard to have a responsible monetary policy when the rest of the world needs your currency to operate their own economies successfully.  It's a fundamental conflict, and it certainly will change at some point. 

Toothpick

  • 5 O'Clock Shadow
  • *
  • Posts: 19
Re: The USA desperately needs to lose world reserve currency status.
« Reply #66 on: November 13, 2019, 08:15:16 PM »
Apparently bwall is also unaware of the Great Depression, or the recent Great Recession, occurring under the watchful eye and careful guidance of the all-knowing Fed.  But I'm sure there will be perfectly logical excuse for that as well.  A lack of understanding of the root causes of recessions is the fundamental problem here.
https://mises.org/wire/feds-endless-boom-bust-cycle

"Nothing like a recession being induced by the inability to dig a metal out of the ground"
Interesting.  We're getting sidetracked here, but was that really the initial, root cause of recessions?  It really doesn't make any sense to me.  Real economic growth would be unaffected, in my view.

Economic depressions were commonplace in the USA before the creation of the Fed. There was one in 1907, a doozy in 1893 that lasted until 1897 and one in 1873. In fact, the Great Depression was called such because there'd been so many of them previously, this was had a special adjective to distinguish it from all the other previously. Just as the Great Recession is called such as there were many, many previous recessions that came before it. So, before the creation of the Fed, we were averaging one depression every 10-15 years. In the 90 years since, only one. I do believe that correlation is causality in this case. YMMV.

Most people who think gold is preferable to fiat do not understand the link between money supply growth and economic growth. It is a difficult concept that is not easily explained. I'll try and make a simple analogy. If you have a gold standard, then the amount of currency in circulation is limited (which is exactly what the libertarians see as a virtue). Think of this as, say, an apple pie. Or a keg of beer. The total population shares the apple pie, (or the keg of beer). What happens, over time, as the population doubles, but the money supply doesn't, because you can't dig any shiny metal from the ground? Now, everyone gets half as much pie (or beer) to share. This is what a recession (or depression) looks like--no economic activity occurring because there isn't any money. Literally. The bank can't lend any more money (serve slices of apple pie, or pints of beer), because it's limited--'sold out' so to speak. And to get more you have to dig in the dirt until you find a metal that shines in the proper way. So, houses are not built, cars are not ordered, airplanes not delivered, etc. not because the people don't want them, or don't have perfect credit, but because there isn't enough gold in a vault somewhere.

While some people do yearn for a return to a gold standard, it's not because they want to see increasing standards of living and improved lifestyles, as these would not be the result of a return to the gold standard.

"So, houses are not built, cars are not ordered, airplanes not delivered, etc. not because the people don't want them, or don't have perfect credit, but because there isn't enough gold in a vault somewhere."

I'm curious.  What, in your view, caused the Great Recession?

I believe that the Great Recession was caused by banking deregulation, policy errors by the Fed, unchecked greed on Wall St coupled with mania on Main St.

To understand more about the root causes of the Great Recession, I would encourage you to read "The Big Short" by Michael Lewis
https://www.amazon.com/Big-Short-Inside-Doomsday-Machine/dp/0393338827/ref=sr_1_1?crid=17BS7IFL9TTXE&keywords=michael+lewis+big+short&qid=1573150138&s=books&sprefix=michael+lewis+big%2Caps%2C202&sr=1-1

Keep in mind that other countries had (even bigger!) housing booms at the same time as the USA. Their regulators and regulations prevented a bust.

I agree with the guys in the Big Short to an extent, and I was also shorting the market in 2008.

Ultimately, the Federal Reserve setting interest rates too low for too long caused the housing bubble, the fallout of which caused the Great Recession.  In economics, there's no free lunch.  Not in the long run.

"unchecked greed on Wall St coupled with mania on Main St. "
Greed is a constant.  And the mania was a symptom of the cheap money disease, rather than a cause.

ctuser1

  • Pencil Stache
  • ****
  • Posts: 502
Re: The USA desperately needs to lose world reserve currency status.
« Reply #67 on: November 13, 2019, 09:06:28 PM »
And it's hard to have a responsible monetary policy when the rest of the world needs your currency to operate their own economies successfully.  It's a fundamental conflict, and it certainly will change at some point.

Yupp. That's called Triffin Dialemma.
https://en.wikipedia.org/wiki/Triffin_dilemma

US *is* able to withstand this conflict till now because it is such a large part of the global economy.

It will be interesting to see how that works 30 years down when China and India is a much bigger part, and yet needs USD for trade.

It becomes even more interesting if you try to contemplate what would replace USD. Gold? Crypto? Euro?

Maybe all countries will turn insular and stop trading with one another - eh? That may not be so much worse than either of these three as reserve currency. I was joking of course! But still..



bwall

  • Pencil Stache
  • ****
  • Posts: 668
Re: The USA desperately needs to lose world reserve currency status.
« Reply #68 on: November 14, 2019, 05:09:33 AM »
One doesn't have to argue that the US should return to the gold standard to argue that other countries of the world ought to seek reserves that are not based on US fiat currency.  I think a standard basket of a handful of different precious metals would make a fine reference of value that the currencies of various countries could be compared too and each country could hold reserves of these metals to use in their monetary policy. For the US, losing the privileged status of controlling the world reserve currency would likely be painful (possibly similar to the pain of the 70's in response to leaving the last of the gold standard).

One of the best posts in the thread. 

I don't advocate for a return to a gold standard.  A return to responsible monetary policy would be a good idea, however. 

And it's hard to have a responsible monetary policy when the rest of the world needs your currency to operate their own economies successfully.  It's a fundamental conflict, and it certainly will change at some point.

This suggestion resembles to me the Bretton Woods agreements, where the USD was coupled to an arbitrary dollar price of gold and then other currencies coupled to the USD. It worked fine for almost 30 years. Until Nixon. But at some point it had to go because the entire system (as the one suggested above) is predicated on balance and equilibrium--all economies and metals have to stay in their relative positions, or else it doesn't work.

Compared in 1972 when Bretton Woods was disbanded, the Chinese economy has risen enormously, USA and Germany have grown appreciably, the Japanese, Italian and UK economies have stagnated. Under either of the above theoretical currency systems, the Chinese Yuan could not appreciate and the other currencies could not depreciate, without specie entering (or leaving) their vaults. How silly is that?

I'm not saying that the current system we have is perfect. I am saying that it's better than any alternative using base metals.

talltexan

  • Magnum Stache
  • ******
  • Posts: 2952
Re: The USA desperately needs to lose world reserve currency status.
« Reply #69 on: November 14, 2019, 07:43:30 AM »
I think the third FRB rate cut was unnecessary.

If the rest of the world looks at Trump's heavy lobbying of the Fed to cut rates and gets nervous, I would understand them wanting a different reserve currency.

But they will still get dollars whenever they sell to the US. And a lot of them like selling to the US.

Toothpick

  • 5 O'Clock Shadow
  • *
  • Posts: 19
Re: The USA desperately needs to lose world reserve currency status.
« Reply #70 on: November 15, 2019, 01:47:13 AM »
One doesn't have to argue that the US should return to the gold standard to argue that other countries of the world ought to seek reserves that are not based on US fiat currency.  I think a standard basket of a handful of different precious metals would make a fine reference of value that the currencies of various countries could be compared too and each country could hold reserves of these metals to use in their monetary policy. For the US, losing the privileged status of controlling the world reserve currency would likely be painful (possibly similar to the pain of the 70's in response to leaving the last of the gold standard).

One of the best posts in the thread. 

I don't advocate for a return to a gold standard.  A return to responsible monetary policy would be a good idea, however. 

And it's hard to have a responsible monetary policy when the rest of the world needs your currency to operate their own economies successfully.  It's a fundamental conflict, and it certainly will change at some point.

This suggestion resembles to me the Bretton Woods agreements, where the USD was coupled to an arbitrary dollar price of gold and then other currencies coupled to the USD. It worked fine for almost 30 years. Until Nixon. But at some point it had to go because the entire system (as the one suggested above) is predicated on balance and equilibrium--all economies and metals have to stay in their relative positions, or else it doesn't work.

Compared in 1972 when Bretton Woods was disbanded, the Chinese economy has risen enormously, USA and Germany have grown appreciably, the Japanese, Italian and UK economies have stagnated. Under either of the above theoretical currency systems, the Chinese Yuan could not appreciate and the other currencies could not depreciate, without specie entering (or leaving) their vaults. How silly is that?

I'm not saying that the current system we have is perfect. I am saying that it's better than any alternative using base metals.


"This suggestion resembles to me the Bretton Woods agreements, where the USD was coupled to an arbitrary dollar price of gold and then other currencies coupled to the USD."

Except that's not the suggestion at all.  We already know that doesn't work.  The fact that the ROW trusted the USD to be tied to an arbitrary price of gold was a tragic error destined for failure.  The USD was "as good as gold" and fixed in price.  Bad idea.  Ultimately, inflationary monetary policies and the Vietnam War debt brought the situation to a head with the Nixon Shock.  The dollar had inflated and the ROW knew it, and demanded their gold instead.

The lesson?  Don't ever hold any country's fiat currency as your "reserve currency."  You're holding their debt, and trusting them not to inflate.  That trust will probably blow up in your face eventually...see Nixon Shock above.  Instead, every country should be holding an actual asset in reserves.  As suggested, some basket of precious metals could reasonably serve this purpose.  This system should also be self-balancing as the different currency values fluctuate, and subsequently bring world trade naturally into balance.  We certainly would not have the severe, persistent imbalances that we see today.  Personally, I think the world should tackle the issue before a crisis erupts.

bwall

  • Pencil Stache
  • ****
  • Posts: 668
Re: The USA desperately needs to lose world reserve currency status.
« Reply #71 on: November 15, 2019, 06:28:38 AM »
This suggestion resembles to me the Bretton Woods agreements, where the USD was coupled to an arbitrary dollar price of gold and then other currencies coupled to the USD. It worked fine for almost 30 years. Until Nixon. But at some point it had to go because the entire system (as the one suggested above) is predicated on balance and equilibrium--all economies and metals have to stay in their relative positions, or else it doesn't work.

Compared in 1972 when Bretton Woods was disbanded, the Chinese economy has risen enormously, USA and Germany have grown appreciably, the Japanese, Italian and UK economies have stagnated. Under either of the above theoretical currency systems, the Chinese Yuan could not appreciate and the other currencies could not depreciate, without specie entering (or leaving) their vaults. How silly is that?

I'm not saying that the current system we have is perfect. I am saying that it's better than any alternative using base metals.


"This suggestion resembles to me the Bretton Woods agreements, where the USD was coupled to an arbitrary dollar price of gold and then other currencies coupled to the USD."

Except that's not the suggestion at all.  We already know that doesn't work.  The fact that the ROW trusted the USD to be tied to an arbitrary price of gold was a tragic error destined for failure.  The USD was "as good as gold" and fixed in price.  Bad idea.  Ultimately, inflationary monetary policies and the Vietnam War debt brought the situation to a head with the Nixon Shock.  The dollar had inflated and the ROW knew it, and demanded their gold instead.

The lesson?  Don't ever hold any country's fiat currency as your "reserve currency."  You're holding their debt, and trusting them not to inflate.  That trust will probably blow up in your face eventually...see Nixon Shock above.  Instead, every country should be holding an actual asset in reserves.  As suggested, some basket of precious metals could reasonably serve this purpose.  This system should also be self-balancing as the different currency values fluctuate, and subsequently bring world trade naturally into balance.  We certainly would not have the severe, persistent imbalances that we see today.  Personally, I think the world should tackle the issue before a crisis erupts.

Clearly you didn't read my comment closely. I said it resembles Bretton Woods, not that it replicates Bretton Woods.

With your suggestion you'd still have all the drawbacks of Bretton Woods (fixed rates of exchange) with none of the benefit: a single reference currency.
How should the proposed system be self-balancing if it's based on specie? Should we really be moving specie between vaults as currencies rise and fall?

Digging shiny metals out of the ground will not magically bring world trade into balance, no matter how much people want it to.

As mentioned up thread, the system you propose does not allow for monetary expansion without an increase in the ownership of base metals. This is severely restrictive in the face of population growth and economic growth, with no clear advantage in any regard other than limiting prosperity. Which is why the world hasn't adopted such a system.

ctuser1

  • Pencil Stache
  • ****
  • Posts: 502
Re: The USA desperately needs to lose world reserve currency status.
« Reply #72 on: November 15, 2019, 08:01:36 AM »
The lesson?  Don't ever hold any country's fiat currency as your "reserve currency."  You're holding their debt, and trusting them not to inflate.  That trust will probably blow up in your face eventually...see Nixon Shock above.  Instead, every country should be holding an actual asset in reserves.  As suggested, some basket of precious metals could reasonably serve this purpose.  This system should also be self-balancing as the different currency values fluctuate, and subsequently bring world trade naturally into balance. We certainly would not have the severe, persistent imbalances that we see today.  Personally, I think the world should tackle the issue before a crisis erupts.

Interesting conjecture...
"That trust will probably blow up in your face eventually"
...
"..and subsequently bring world trade naturally into balance.."

Except that is not how things played out historically whenever there was *no* reserve currency, and indeed nothing and no entity to trust.

Did you happen to know that the erosion of "trust" in roman economy (another way of saying "fall of Roman Empire") killed off 90% of the population of Rome?
https://books.google.com/books?id=6q_PXA6nXwcC&pg=PA42&lpg=PA42

Yes, that *did* achieve some sort of "balance" - a balance where regular culling of a third of the population here and a fourth there solely due to economic factors (like famine) was common. Thank you for that offer, but no thanks!!

I think most people who never worked in banking do not realize just how much a role "trust" in a "central authority" plays in the entire economic system. You like cash coming out of the ATM, or some money in bank? Well - you better thank the interbank lending for keeping that machine oiled and keep bank runs from happening. That machine was about to seize up in 2008 after Lehman bankruptcy - that would have realized your dream of "trust"less economy, thank god it actually did not.

An economy without any "trust" in central authority (something you rail against) = an economy based solely on bartering. Do some research on human history since the stone ages. Any time trust build up - you had version of "Pax Romana" playing out. Whenever that eroded, that resulted in disasters (like the culling of 90% of the population I referenced above)!!

 

robartsd

  • Magnum Stache
  • ******
  • Posts: 2804
  • Location: Sacramento, CA
Re: The USA desperately needs to lose world reserve currency status.
« Reply #73 on: November 15, 2019, 09:09:36 AM »
With your suggestion you'd still have all the drawbacks of Bretton Woods (fixed rates of exchange) with none of the benefit: a single reference currency.
How should the proposed system be self-balancing if it's based on specie? Should we really be moving specie between vaults as currencies rise and fall?

Digging shiny metals out of the ground will not magically bring world trade into balance, no matter how much people want it to.

As mentioned up thread, the system you propose does not allow for monetary expansion without an increase in the ownership of base metals. This is severely restrictive in the face of population growth and economic growth, with no clear advantage in any regard other than limiting prosperity. Which is why the world hasn't adopted such a system.
The central banks of the world choosing to hold shiny metals instead of USD to serve as a reserve with which they can buy back their currency would not change their power to create fiat currency. It also would not necessarily mean that USD would stop being the reference currency in published currency exchange rates. However, it would likely mean that the FED would have more difficulty shoring up the value of the USD while the overall US trade deficit persists.

bwall

  • Pencil Stache
  • ****
  • Posts: 668
Re: The USA desperately needs to lose world reserve currency status.
« Reply #74 on: November 15, 2019, 09:39:24 AM »
With your suggestion you'd still have all the drawbacks of Bretton Woods (fixed rates of exchange) with none of the benefit: a single reference currency.
How should the proposed system be self-balancing if it's based on specie? Should we really be moving specie between vaults as currencies rise and fall?

Digging shiny metals out of the ground will not magically bring world trade into balance, no matter how much people want it to.

As mentioned up thread, the system you propose does not allow for monetary expansion without an increase in the ownership of base metals. This is severely restrictive in the face of population growth and economic growth, with no clear advantage in any regard other than limiting prosperity. Which is why the world hasn't adopted such a system.
The central banks of the world choosing to hold shiny metals instead of USD to serve as a reserve with which they can buy back their currency would not change their power to create fiat currency. It also would not necessarily mean that USD would stop being the reference currency in published currency exchange rates. However, it would likely mean that the FED would have more difficulty shoring up the value of the USD while the overall US trade deficit persists.

It'd also mean a lot of other difficulties:
How do you propose that they buy back their currency? Air freight the gold from Frankfurt, London, Tokyo or Beijing to the USA? Or the other way around? You have to pay for transport, security, confirmation of weight & purity, etc. What about a dispute? Courts to arbitrate the dispute? What if there is a heist? Or the plane crashes into the ocean/mountain/gets blown up by Putin (Malaysian Air in Ukraine in 2014)? Who bears the risk of loss? The buyer or the sender? Who bears the cost of insurance? 

As it is now, currency can be bought back effortlessly without any of the above transaction costs and waste/slippage. At the click of a button, billions can be sent across the globe safely and securely. The same cannot be said for any specie-based system. Which is why it doesn't exist now and it's re-emergence would be a disaster for the entire world as @ctuser1 correctly describes upthread.

bwall

  • Pencil Stache
  • ****
  • Posts: 668
Re: The USA desperately needs to lose world reserve currency status.
« Reply #75 on: November 15, 2019, 10:44:04 AM »
Just saw today that Serbia upped their gold reserves by 30%, to 1.3b. EUR

https://finance.yahoo.com/news/serbia-buys-nine-tons-gold-141157286.html

They could have spent those 400m EUR on productive assets, like bridges, roads, ports, anti-corruption committees, EU accession goals, strengthening tax collection authorities, courts, universities, research, etc. But, instead they choose to hoard metal in a vault somewhere. Presumably it will make someone somewhere sleep better knowing that they chose to park shiny metal in the basement instead of improving institutions and infrastructure that make prosperity possible. 

Mercantilism is not a path to prosperity.

Perhaps @Toothpick can explain to me why Serbia is better off with 400m EUR more gold in their vaults than 400m EUR in spending on the above list of institutions and infrastructure?


robartsd

  • Magnum Stache
  • ******
  • Posts: 2804
  • Location: Sacramento, CA
Re: The USA desperately needs to lose world reserve currency status.
« Reply #76 on: November 15, 2019, 12:10:37 PM »
Perhaps @Toothpick can explain to me why Serbia is better off with 400m EUR more gold in their vaults than 400m EUR in spending on the above list of institutions and infrastructure?
While I agree that the choice to add to reserves vs. spend on infrastructure is worthy of debate; the amount of reserves to hold is a completely different debate than what should make up the reserves.

robartsd

  • Magnum Stache
  • ******
  • Posts: 2804
  • Location: Sacramento, CA
Re: The USA desperately needs to lose world reserve currency status.
« Reply #77 on: November 15, 2019, 12:30:17 PM »
Gold is currently valued at about $47/gram. US paper currency is about 1 gram per note, so assuming $100 bills (largest denomination in production) physical transfer is only about twice the weight with gold than with dollar bills. I'm not sure if verifying gold bars or verifying bundles of $100 bills is easier.

bwall

  • Pencil Stache
  • ****
  • Posts: 668
Re: The USA desperately needs to lose world reserve currency status.
« Reply #78 on: November 15, 2019, 12:46:35 PM »
Gold is currently valued at about $47/gram. US paper currency is about 1 gram per note, so assuming $100 bills (largest denomination in production) physical transfer is only about twice the weight with gold than with dollar bills. I'm not sure if verifying gold bars or verifying bundles of $100 bills is easier.

Verifying $100 bills is much easier. Banks have these counting machines that also verify if the currency is real or counterfeit at the same time as they count the bills. Neat, huh? Ask them the next time you're at a branch. However, I can't tell by looking how many carats there are in a gold bar. Or if it's real gold or just painted to look like gold. Or if it's just gold poured around a lead ingot. I'd be such an easy mark for a sophisticated thief!

Keep in mind: you suggested buying back currency with gold, which means physical transport of the actual gold. Right now, if a country wishes to buy back some of it's currency in exchange for currency reserves, it can be done digitally via the banking system. A billion dollars (or EUR, YEN, GBP, Russian roubles, Turkish Lira, Aussie/NZ dollar, etc)  can be sent across the globe via the SWIFT banking network for very little money. No need to verify if the money is real if it's coming via the SWIFT system, or concern about how much it weighs.


robartsd

  • Magnum Stache
  • ******
  • Posts: 2804
  • Location: Sacramento, CA
Re: The USA desperately needs to lose world reserve currency status.
« Reply #79 on: November 15, 2019, 01:12:04 PM »
Keep in mind: you suggested buying back currency with gold, which means physical transport of the actual gold. Right now, if a country wishes to buy back some of it's currency in exchange for currency reserves, it can be done digitally via the banking system. A billion dollars (or EUR, YEN, GBP, Russian roubles, Turkish Lira, Aussie/NZ dollar, etc)  can be sent across the globe via the SWIFT banking network for very little money. No need to verify if the money is real if it's coming via the SWIFT system, or concern about how much it weighs.
If gold or a basket of precious metals were generally adopted a reserve currency, I'm sure the banking system would easily add it to the SWIFT system. I'm sure even the SWIFT system requires physical transfers occasionally to balance things out. The only crypto-currencies (though I'm not going to argue that they actually are currencies) never require a physical transfer.

ctuser1

  • Pencil Stache
  • ****
  • Posts: 502
Re: The USA desperately needs to lose world reserve currency status.
« Reply #80 on: November 15, 2019, 01:31:30 PM »
I'm sure the banking system would easily add it to the SWIFT system.

Look up LME - London Metals Exchange.

It has a warrant system to deal with traders who don't want to take physical deliveries. That system still has ALL the "downsides" you and other gold-bugs have cited regarding the fiat currency, on this thread and elsewhere, and then some more.

You can't have friction-and-cost-less transaction with physical metals. It is a contradiction in terms. The world tried it for a few thousand years - with disastrous results!

bwall

  • Pencil Stache
  • ****
  • Posts: 668
Re: The USA desperately needs to lose world reserve currency status.
« Reply #81 on: November 15, 2019, 01:42:36 PM »
Keep in mind: you suggested buying back currency with gold, which means physical transport of the actual gold. Right now, if a country wishes to buy back some of it's currency in exchange for currency reserves, it can be done digitally via the banking system. A billion dollars (or EUR, YEN, GBP, Russian roubles, Turkish Lira, Aussie/NZ dollar, etc)  can be sent across the globe via the SWIFT banking network for very little money. No need to verify if the money is real if it's coming via the SWIFT system, or concern about how much it weighs.
If gold or a basket of precious metals were generally adopted a reserve currency, I'm sure the banking system would easily add it to the SWIFT system. I'm sure even the SWIFT system requires physical transfers occasionally to balance things out. The only crypto-currencies (though I'm not going to argue that they actually are currencies) never require a physical transfer.

No, it doesn't.

Just the comment alone shows me that you have no idea about how banks reconcile accounts, capital flows, international trade, reserves or reserve currency.

You are welcome to an opinion on this topic, but please do not be think it is an improvement on anything the world has seen since the end of Mercantilism in the late 18th Century.

talltexan

  • Magnum Stache
  • ******
  • Posts: 2952
Re: The USA desperately needs to lose world reserve currency status.
« Reply #82 on: November 22, 2019, 09:14:17 AM »
Just saw today that Serbia upped their gold reserves by 30%, to 1.3b. EUR

https://finance.yahoo.com/news/serbia-buys-nine-tons-gold-141157286.html

They could have spent those 400m EUR on productive assets, like bridges, roads, ports, anti-corruption committees, EU accession goals, strengthening tax collection authorities, courts, universities, research, etc. But, instead they choose to hoard metal in a vault somewhere. Presumably it will make someone somewhere sleep better knowing that they chose to park shiny metal in the basement instead of improving institutions and infrastructure that make prosperity possible. 

Mercantilism is not a path to prosperity.

Perhaps @Toothpick can explain to me why Serbia is better off with 400m EUR more gold in their vaults than 400m EUR in spending on the above list of institutions and infrastructure?

It may not matter for a country as small as Serbia--for example if their banks owe a lot of debts in Euro--but they are a sovereign currency authority (Serbian Dinar). I'd be curious as to what monetary conditions were before this. 400 million Euros to shore up your domestic banks may or may not be a large expense.

bwall

  • Pencil Stache
  • ****
  • Posts: 668
Re: The USA desperately needs to lose world reserve currency status.
« Reply #83 on: November 22, 2019, 10:16:56 AM »
Just saw today that Serbia upped their gold reserves by 30%, to 1.3b. EUR

https://finance.yahoo.com/news/serbia-buys-nine-tons-gold-141157286.html

They could have spent those 400m EUR on productive assets, like bridges, roads, ports, anti-corruption committees, EU accession goals, strengthening tax collection authorities, courts, universities, research, etc. But, instead they choose to hoard metal in a vault somewhere. Presumably it will make someone somewhere sleep better knowing that they chose to park shiny metal in the basement instead of improving institutions and infrastructure that make prosperity possible. 

Mercantilism is not a path to prosperity.

Perhaps @Toothpick can explain to me why Serbia is better off with 400m EUR more gold in their vaults than 400m EUR in spending on the above list of institutions and infrastructure?

It may not matter for a country as small as Serbia--for example if their banks owe a lot of debts in Euro--but they are a sovereign currency authority (Serbian Dinar). I'd be curious as to what monetary conditions were before this. 400 million Euros to shore up your domestic banks may or may not be a large expense.

I'm not sure I understand the above in bold.

Could someone help me understand how the gold purchase by the (government controlled) central bank of Serbia shores up privately owned domestic banks that lend in their own currency? In what way do the domestic banks have access to the gold?

For example, here in the USA in the depths of the financial crisis, there was never any talk of breaking into Fort Knox to sell gold to shore up Bank of America, Wells Fargo, JPMorgan Chase, etc. Nor did any other country do it or even talk about doing it.
 

ChpBstrd

  • Handlebar Stache
  • *****
  • Posts: 1737
Re: The USA desperately needs to lose world reserve currency status.
« Reply #84 on: November 28, 2019, 07:03:02 AM »
Yuan could displace the dollar in 10 years:

https://apple.news/AGtXfebLER2yAztL_JYdANQ

bwall

  • Pencil Stache
  • ****
  • Posts: 668
Re: The USA desperately needs to lose world reserve currency status.
« Reply #85 on: November 28, 2019, 05:08:28 PM »
Yuan could displace the dollar in 10 years:

https://apple.news/AGtXfebLER2yAztL_JYdANQ

@ChpBstrd ; You're smarter than this! :)

In the second head line it says 'lack of convertibility an issue'.

How could non-convertible scrip displace any other currency? It might displace water in a toilet bowl, but that's about it.

ChpBstrd

  • Handlebar Stache
  • *****
  • Posts: 1737
Re: The USA desperately needs to lose world reserve currency status.
« Reply #86 on: November 29, 2019, 08:03:13 AM »
Yuan could displace the dollar in 10 years:

https://apple.news/AGtXfebLER2yAztL_JYdANQ

@ChpBstrd ; You're smarter than this! :)

In the second head line it says 'lack of convertibility an issue'.

How could non-convertible scrip displace any other currency? It might displace water in a toilet bowl, but that's about it.

How long does a change in government policy take?

maizeman

  • Magnum Stache
  • ******
  • Posts: 4105
Re: The USA desperately needs to lose world reserve currency status.
« Reply #87 on: November 29, 2019, 08:13:57 AM »
Yuan could displace the dollar in 10 years:

https://apple.news/AGtXfebLER2yAztL_JYdANQ

@ChpBstrd ; You're smarter than this! :)

In the second head line it says 'lack of convertibility an issue'.

How could non-convertible scrip displace any other currency? It might displace water in a toilet bowl, but that's about it.

How long does a change in government policy take?

When that change policy would set up a rush of money out of China and a collapse in the exchange rate? .... a very VERY long time.

I have personal experience trying to get money out of China as both an individual and as part of a company. Even if it's money you're allowed to withdraw (for example chinese subsidiary paying a US subsidiary for services rendered) the process is long and cumbersome, and half the time it doesn't work and you have to start over.

Right now chinese citizens are allowed to convert up to $50,000/year from RMB into foreign currencies like dollars, and there is a thriving black market for this service with business people or government officials getting their children, mistresses, mistresses families, and employees to each convert the maximum amount each year to get it out of the country and into "safer" assets (like Vancouver real estate).

If the Chinese government allowed free convertibility of RMB into other currencies that flood would turn into a tsunami.

ChpBstrd

  • Handlebar Stache
  • *****
  • Posts: 1737
Re: The USA desperately needs to lose world reserve currency status.
« Reply #88 on: November 29, 2019, 10:15:36 AM »
Yuan could displace the dollar in 10 years:

https://apple.news/AGtXfebLER2yAztL_JYdANQ

@ChpBstrd ; You're smarter than this! :)

In the second head line it says 'lack of convertibility an issue'.

How could non-convertible scrip displace any other currency? It might displace water in a toilet bowl, but that's about it.

How long does a change in government policy take?

When that change policy would set up a rush of money out of China and a collapse in the exchange rate? .... a very VERY long time.

I have personal experience trying to get money out of China as both an individual and as part of a company. Even if it's money you're allowed to withdraw (for example chinese subsidiary paying a US subsidiary for services rendered) the process is long and cumbersome, and half the time it doesn't work and you have to start over.

Right now chinese citizens are allowed to convert up to $50,000/year from RMB into foreign currencies like dollars, and there is a thriving black market for this service with business people or government officials getting their children, mistresses, mistresses families, and employees to each convert the maximum amount each year to get it out of the country and into "safer" assets (like Vancouver real estate).

If the Chinese government allowed free convertibility of RMB into other currencies that flood would turn into a tsunami.

IDK. Perhaps the current desperation has something to do with the lack of a convertibility. In an open trading regime, support for the yuan would come from the fact that you can buy a whole lot of stuff in the world’s largest economy - most of the world’s manufactured goods, rare earth elements, the labor of a billion people... Oh, and you can also sell your raw materials, energy, and financial services into a economy with apparently bottomless demand.

maizeman

  • Magnum Stache
  • ******
  • Posts: 4105
Re: The USA desperately needs to lose world reserve currency status.
« Reply #89 on: November 29, 2019, 01:09:58 PM »
If the Chinese government allowed free convertibility of RMB into other currencies that flood would turn into a tsunami.

IDK. Perhaps the current desperation has something to do with the lack of a convertibility. In an open trading regime, support for the yuan would come from the fact that you can buy a whole lot of stuff in the world’s largest economy - most of the world’s manufactured goods, rare earth elements, the labor of a billion people... Oh, and you can also sell your raw materials, energy, and financial services into a economy with apparently bottomless demand.

You can already buy anything you want from China (in dollars or RMB or most other currencies). You can sell most anything to China (and folks will be happy to pay you RMB and more than willing to pay in other internationally convertible currencies). The lack of convertibility is an effect of the Chinese government trying to stem the rush of money, not a cause.

How much have you actually interacted with the Chinese economy? Or people trying to get money out of China?

People are scared. Corporate debt is extremely high, a lot of it is to government sponsored entities. The viability of huge amounts of debt are predicated on an economy that is growing at 7% per year and dragging corporate profits and revenue along on the same growth trajectory. There are giant empty "ghost cities" built around many tier 3 and tier 4 cities because real estate prices have been increasing so rapidly many people assume that just buying apartments and holding on to them, unoccupied, will eventually make them money and/or fear that if they wait to buy apartments for their children until those children are able to live independently they won't be able to afford to buy anything. 

Before Xi Jinping, usually having wealth (and spending some of it on building and maintaining good relationships with local government officials) was good protection against losing everything, but now anyone in the public or private sectors could be the target of anti-corruption prosecution. Government officials are worried about being seen eating at too nice of restaurants, and always make a point of ordering take home packaging for any leftover food, even if they're not going to have the chance to eat it, to avoid seeming wasteful (leading to wasteful use of packaging, but that's another story).

People are afraid to use domestically produced baby formula because of contamination issue. If you're traveling to China and know someone who recently had children, US made formula or baby food will usually be an enthusiastically well received gift.

There is an impulse in some from the US to build China up into this unstoppable monolith. And what they're doing over there is indeed quite impressive. But don't make the mistake of seeing only the strengths and not the weaknesses.

There is a really significant reason China doesn't make their currency freely convertible and it's not something that they can change simply by changing government policy. It would (it will) take years of reform to give everyday and wealthy chinese people confidence in the soundness of the chinese legal system and economy before a freely convertible currency would not be a recipe for a run on the RMB.
« Last Edit: November 30, 2019, 03:47:47 PM by maizeman »

bwall

  • Pencil Stache
  • ****
  • Posts: 668
Re: The USA desperately needs to lose world reserve currency status.
« Reply #90 on: November 30, 2019, 02:41:25 PM »
@maizeman ; +1 to all of the above posts.

I also do a lot of business with China and I can enthusiastically confirm every point you make. China is a mess. After a business trip to Mexico and China in 2014, I made the mental note that as a society/country, Mexico had solved problems that China hadn't.

ChpBstrd

  • Handlebar Stache
  • *****
  • Posts: 1737
Re: The USA desperately needs to lose world reserve currency status.
« Reply #91 on: November 30, 2019, 06:38:40 PM »
If the Chinese government allowed free convertibility of RMB into other currencies that flood would turn into a tsunami.

IDK. Perhaps the current desperation has something to do with the lack of a convertibility. In an open trading regime, support for the yuan would come from the fact that you can buy a whole lot of stuff in the world’s largest economy - most of the world’s manufactured goods, rare earth elements, the labor of a billion people... Oh, and you can also sell your raw materials, energy, and financial services into a economy with apparently bottomless demand.

You can already buy anything you want from China (in dollars or RMB or most other currencies). You can sell most anything to China (and folks will be happy to pay you RMB and more than willing to pay in other internationally convertible currencies). The lack of convertibility is an effect of the Chinese government trying to stem the rush of money, not a cause.

How much have you actually interacted with the Chinese economy? Or people trying to get money out of China?

People are scared. Corporate debt is extremely high, a lot of it is to government sponsored entities. The viability of huge amounts of debt are predicated on an economy that is growing at 7% per year and dragging corporate profits and revenue along on the same growth trajectory. There are giant empty "ghost cities" built around many tier 3 and tier 4 cities because real estate prices have been increasing so rapidly many people assume that just buying apartments and holding on to them, unoccupied, will eventually make them money and/or fear that if they wait to buy apartments for their children until those children are able to live independently they won't be able to afford to buy anything. 

Before Xi Jinping, usually having wealth (and spending some of it on building and maintaining good relationships with local government officials) was good protection against losing everything, but now anyone in the public or private sectors could be the target of anti-corruption prosecution. Government officials are worried about being seen eating at too nice of restaurants, and always make a point of ordering take home packaging for any leftover food, even if they're not going to have the chance to eat it, to avoid seeming wasteful (leading to wasteful use of packaging, but that's another story).

People are afraid to use domestically produced baby formula because of contamination issue. If you're traveling to China and know someone who recently had children, US made formula or baby food will usually be an enthusiastically well received gift.

There is an impulse in some from the US to build China up into this unstoppable monolith. And what they're doing over there is indeed quite impressive. But don't make the mistake of seeing only the strengths and not the weaknesses.

There is a really significant reason China doesn't make their currency freely convertible and it's not something that they can change simply by changing government policy. It would (it will) take years of reform to give everyday and wealthy chinese people confidence in the soundness of the chinese legal system and economy before a freely convertible currency would not be a recipe for a run on the RMB.

There is also an impulse in some from the US to think China's problems are intractable and the way things are today is the same as they will be in 20 years. Let's assume they're right. Would that prevent China from loosening capital controls someday? How perfect does a country need to be in order to float its currency? Here's a list of market-based currencies:

https://www.b2bpay.co/fully-convertible-currencies

Kenya made the list.

Kenya.

South Africa, the UAE, and Kuwait have also overcome whatever obstacles the Chinese are facing.

scottish

  • Handlebar Stache
  • *****
  • Posts: 1523
  • Location: Ottawa
Re: The USA desperately needs to lose world reserve currency status.
« Reply #92 on: November 30, 2019, 08:02:40 PM »
I see several suggestions about using crypto "currencies" as a reserve currency.     I think there are some attributes that the existing generation of crypto currencies is missing:

1.   No government will accept them in payment of taxes.
2.   The crypto-systems are illiquid and support total transaction rates on the order of a few transactions per second.
3.   Crypto-currencies are much too volatile to be considered a hard currency.
4.   The long list of security problems (Mt Gox, the bitcoin fork,  Quadriga and so on) suggest that the 'crypto' part of the crypto-currencies aren't actually providing much security

These limitations seem to be pretty inherent in the technology.     Do you see some concrete means that can be used to overcome them?

maizeman

  • Magnum Stache
  • ******
  • Posts: 4105
Re: The USA desperately needs to lose world reserve currency status.
« Reply #93 on: November 30, 2019, 10:59:03 PM »
There is also an impulse in some from the US to think China's problems are intractable and the way things are today is the same as they will be in 20 years. Let's assume they're right. Would that prevent China from loosening capital controls someday? How perfect does a country need to be in order to float its currency? Here's a list of market-based currencies:

https://www.b2bpay.co/fully-convertible-currencies

Kenya made the list.

Kenya.

South Africa, the UAE, and Kuwait have also overcome whatever obstacles the Chinese are facing.

Ah, I see the fundamental disconnect going on here. If China had always had a freely exchangeable currency, yes there would be no problem. The problem arrises because Chinese citizens haven't been able to exchange RMB for dollars freely for decades. So there's a lot of built up desire to move money out of the country. If people had always been able to move money, that would have been reflected in a modest amount of capital flight and some downward pressure on exchange rates (plus upward pressure on interest rates inside of china) each year. Now, lumping decades of accumulated desire to get money out of China together means a freely convertible currency would to terrible things to the RMB's exchange rate (which is already falling pretty fast against the dollar) and spike interest rates to the point a lot of large and heavily indebted GSEs might go bankrupt and the chinese property bubble might burst. So currency controls are like riding on a tiger's back for the Chinese government: not particularly comfortable, but infinitely preferable to trying to get off the tiger once you've started.

In a lot of ways it's analogous to the situation the USA finds ourselves in with regard to being a world reserve country (which started this thread). Plenty of countries aren't global reserve countries and they are fine. The US spent many decades being a perfectly happy and functioning country and economy in the absence of any sort of role as a world reserve currency. But now that we've played the role for the better part of a century the imbalances that would be created by losing that role would be, ahem, extremely unpleasant for everyone living in the US for quite a while.

Actually lots of economic decisions are like that: easy to start a little at a time, but over time harder and harder to get out of without significant pain and suffering.

Consider Argentina's peg of the peso to the US dollar. Created a lot of benefits, for many years, but ultimately it became more and more unsustainable to maintain. The problem is that there is no way out of a dollar peg without rapidly incurring an awful lot of pain, so the government held out on going back to a floating exchange rate as long as possible, even knowing they were making the ultimate pain worse. Ending the peg meant the value of savings and salaries in the country were cut by 75%, the economy shrunk by 20%, and more than a quarter of Argentinians lost their jobs. There wasn't anything fundamentally weaker or more broken about the Argentine economy than the economy of Kenya. Yet because one had operating under a fixed exchange rate for years, the shift to a floating exchange rate was only made when there were zero alternatives left, and also inflicted a lot of pain and suffering on a lot of people.

Sure someday in the future China may be in a position to make its currency freely convertible without major economic collatoral damage. But a lot of things would have to change between then and now. It is not a simply matter of changing a government policy, which is what you originally asserted.

MustacheAndaHalf

  • Handlebar Stache
  • *****
  • Posts: 1956
Re: The USA desperately needs to lose world reserve currency status.
« Reply #94 on: December 01, 2019, 01:25:22 AM »
Just to refresh the collective memory of 2008, leverage and fraud caused the collapse.  Some big investment firms created pools of mortgages... then they created leverage that multiplied those mortgages... and then they even used leverage on the already leveraged securities.  That's how one mortgage failing can have 1000x the monetary impact.

People with no verifiable income were able to buy multiple properties.  That hardly makes sense, unless you know it's part of the fraud.  To expand the leveraged securities, you need more mortgages.  That was the input to the fraud.

Another key piece was gaming the S&P formula for the highest rated bonds.  Despite S&P being unable to understand the securities, they evaluated them as having the highest credit rating... despite being a leveraged bet on someone with no income being able to make their mortgage payments.

I point this out because the refrain of a "real estate" crash is common, but 99% wrong.  When real estate prices drop, worldwide stocks do not collapse.  I suppose "synthetic credit default swaps" is too big a mouthful, but it's more accurate and captures the key cause of the collapse: fraudulent S&P ratings combined with 1000:1 leverage.

bwall

  • Pencil Stache
  • ****
  • Posts: 668
Re: The USA desperately needs to lose world reserve currency status.
« Reply #95 on: December 01, 2019, 06:21:34 AM »
There is also an impulse in some from the US to think China's problems are intractable and the way things are today is the same as they will be in 20 years. Let's assume they're right. Would that prevent China from loosening capital controls someday? How perfect does a country need to be in order to float its currency? Here's a list of market-based currencies:

https://www.b2bpay.co/fully-convertible-currencies

Kenya made the list.

Kenya.

South Africa, the UAE, and Kuwait have also overcome whatever obstacles the Chinese are facing.

If I read this correctly, the Chinese currency by one measure is worse than Kenya, South Africa or the UAE.

Which is why it is preposterous to suggest that it will be used as a reserve currency in ten years time.

talltexan

  • Magnum Stache
  • ******
  • Posts: 2952
Re: The USA desperately needs to lose world reserve currency status.
« Reply #96 on: December 10, 2019, 08:12:07 AM »
Just to refresh the collective memory of 2008, leverage and fraud caused the collapse.  Some big investment firms created pools of mortgages... then they created leverage that multiplied those mortgages... and then they even used leverage on the already leveraged securities.  That's how one mortgage failing can have 1000x the monetary impact.

People with no verifiable income were able to buy multiple properties.  That hardly makes sense, unless you know it's part of the fraud.  To expand the leveraged securities, you need more mortgages.  That was the input to the fraud.

Another key piece was gaming the S&P formula for the highest rated bonds.  Despite S&P being unable to understand the securities, they evaluated them as having the highest credit rating... despite being a leveraged bet on someone with no income being able to make their mortgage payments.

I point this out because the refrain of a "real estate" crash is common, but 99% wrong.  When real estate prices drop, worldwide stocks do not collapse.  I suppose "synthetic credit default swaps" is too big a mouthful, but it's more accurate and captures the key cause of the collapse: fraudulent S&P ratings combined with 1000:1 leverage.

I'll sign on to all of this, but you have to add: Banks treated these mortgage-based products as assets on their balance sheets. When their value suddenly evaporated, banks were so under threat of insolvency that their ability to lend to businesses looked in question. Those businesses faced very real issues with having access to money to keep their lights on and make payroll. If the banks were to go under, many individual households would have seen their access to savings tested, as the FDIC supposedly insures it, but with the banks all going bankrupt, no healthy banks would have been available to pay into the FDIC pool.

talltexan

  • Magnum Stache
  • ******
  • Posts: 2952
Re: The USA desperately needs to lose world reserve currency status.
« Reply #97 on: December 10, 2019, 08:13:55 AM »
Just saw today that Serbia upped their gold reserves by 30%, to 1.3b. EUR

https://finance.yahoo.com/news/serbia-buys-nine-tons-gold-141157286.html

They could have spent those 400m EUR on productive assets, like bridges, roads, ports, anti-corruption committees, EU accession goals, strengthening tax collection authorities, courts, universities, research, etc. But, instead they choose to hoard metal in a vault somewhere. Presumably it will make someone somewhere sleep better knowing that they chose to park shiny metal in the basement instead of improving institutions and infrastructure that make prosperity possible. 

Mercantilism is not a path to prosperity.

Perhaps @Toothpick can explain to me why Serbia is better off with 400m EUR more gold in their vaults than 400m EUR in spending on the above list of institutions and infrastructure?

It may not matter for a country as small as Serbia--for example if their banks owe a lot of debts in Euro--but they are a sovereign currency authority (Serbian Dinar). I'd be curious as to what monetary conditions were before this. 400 million Euros to shore up your domestic banks may or may not be a large expense.

I'm not sure I understand the above in bold.

Could someone help me understand how the gold purchase by the (government controlled) central bank of Serbia shores up privately owned domestic banks that lend in their own currency? In what way do the domestic banks have access to the gold?

For example, here in the USA in the depths of the financial crisis, there was never any talk of breaking into Fort Knox to sell gold to shore up Bank of America, Wells Fargo, JPMorgan Chase, etc. Nor did any other country do it or even talk about doing it.

Having access to the gold would put the Serbian central bank into a position where it could bail out their banks, should the banks suddenly be unable to stay current on their loan payments (which are probably in Dollars or Euros since Serbia is such a small country). Having reserves in the Serbian currency wouldn't help in this case. Sorry for the delayed reply!

Paul990

  • 5 O'Clock Shadow
  • *
  • Posts: 39
Re: The USA desperately needs to lose world reserve currency status.
« Reply #98 on: December 10, 2019, 09:20:25 AM »
Economic depressions were commonplace in the USA before the creation of the Fed. There was ...

Most people who think gold is preferable to fiat do not understand the link between money supply growth and economic growth.
@bwall
I think you haven't understood yet the point of a gold standard.
A gold standard is not there in order to avoid economic crises.
You are putting things in the mouth of your counterparts.

A gold standard prevents currency crises.
There is a difference between a currency and an economic crises.
During the Gold Standard, even if there was inflation/deflation, there was never a currency crises as in the dramatic lost of confidence in money.
The purchasing power of your savings disappearing.

This is what a gold standard as opposed to a fiat money standard prevents.

maizeman

  • Magnum Stache
  • ******
  • Posts: 4105
Re: The USA desperately needs to lose world reserve currency status.
« Reply #99 on: December 10, 2019, 09:23:09 AM »
A gold standard prevents currency crises.
There is a difference between a currency and an economic crises.
During the Gold Standard, even if there was inflation/deflation, there was never a currency crises as in the dramatic lost of confidence in money.
The purchasing power of your savings disappearing.

This is what a gold standard as opposed to a fiat money standard prevents.

This is only true if your savings are in dollars (or assets like CDs/bonds). A currency crisis is worse for people who save money. An economic crisis is worse for people who invest in stocks/real estate.