The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: Toothpick on October 21, 2019, 11:23:24 PM
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The sooner, the better. The world is off balance.
The United States has had the world’s reserve currency for the better part of the past century, which makes its trade balance a bit unique compared to other countries.
Most oil around the world has been priced in dollars for decades. Even when the United States is not involved in the transaction, they still usually price it in dollars.
When countries or companies make loans into emerging markets, they often do so in dollars rather than that country’s local currency.
In addition, central banks of various countries buy U.S. dollars and treasuries and hold them as foreign-exchange reserves so that they can defend the value of their currency if needed.
This gives the United States a big privilege because it creates almost endless demand for dollars, and gives the United States the rare ability to print money to pay for hard commodities.
However, it also trigger’s Triffin’s Dilemma. Economist Robert Triffin noted back in the 1950’s that having (and maintaining) the reserve currency means you have to supply enough dollars to the world to use the currency. The world can’t use Swiss Francs for the reserve currency, for example, because there simply aren’t enough of them. It has to be a big country, and that country generally needs to run a persistent current account deficit, so that it supplies the rest of the world with its currency and they supply it with goods and services. This works for a time but eventually undermines the economy of the country that has the reserve currency.
So, a reserve currency gives the country tremendous power, but also essentially places a curse on it and guarantees that such a position cannot last forever.
https://www.lynalden.com/trade-deficit/#dollar (https://www.lynalden.com/trade-deficit/#dollar)
Since I began looking at this (over a decade ago), my view has been that the current international monetary system is inherently unsustainable. Looking at the shrinking US percentage of World GDP, and the declining US Net International Investment Position, I think this situation could come to a head sooner rather than later. Eventually, the world will be in balance again.
I welcome your thoughts.
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I had expected the euro to take the place of the dollar for part of those transactions. Some of the middle east countries don't like to trade in $ (because of their dislike of the US), but in the past they had to. I had expected them to change to euros.
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Reserve currency status is a boon to the USA and something that all Americans should support.
Something that most people don't realize is that dollars remain dollars. Just because oil price transactions are in dollars doesn't mean that it benefits the USA and harms the other parties in the transactions. It's a complete wash transaction as the USD are simply sold upon receipt to pay bills locally.
Other countries would love to price goods in their local currency, but they don't trust their own people enough to do so. What's to prevent Russia from selling oil to China on 3, 5 or ten year contracts prices in Russian Rubles? Nothing. They could do so if they want to, but they have a lingering fear of future hyperinflation which would mean that at some point in the future they'd be selling their oil at below-market prices if hyperinflation occurred. By pricing in Rubles, the best case scenario is that they can get market price, worse case scenario is that they are giving away their wares. Much better to just price in USD and not worry.
What's to prevent the Chinese from only buying oil in Chinese Yuan? Nothing. Except that no oil exporter will accept Chinese Yuan as payment. Why not? Better ask them why they won't accept a currency that is not allowed to be traded outside of the country that issues it. That's right, you cannot trade Chinese Yuan outside of China. It's valueless scrip for an entire nation. You can trade Mexican Peso, South African Rand and Turkish Lira outside these countries, but not Chinese Yuan. You cannot sell more than $50,000 USD per year of Chinese Yuan without the approval of the Chinese government. So, a simple $1m transaction would take 20 years to get your money back without government interference.
The USD does benefit when currency is held in reserve by governments. I think that currently there are 6.6 Trillion (!) USD held in reserves overseas. With inflation at 1% annually, this means there is an annual wealth transfer of 66 billion USD to the US taxpayer. With inflation at 1.5%, the wealth transfer borders on $100 billion.
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In the 1950's, the UK's currency lost reserve currency status. The process was painful economically and lead to lower standards of living. The same would occur in the USA if the USD is no longer the reserve currency of the world.
The introduction here briefly explains some of the history of the pound sterling as a reserve currency.
https://sites.hks.harvard.edu/fs/jfrankel/EuroVs$-IFdebateFeb2008.pdf (https://sites.hks.harvard.edu/fs/jfrankel/EuroVs$-IFdebateFeb2008.pdf)
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Thanks @bwall , you are spot on.
If you think it's hard to get the US government to fund what you want it to fund, wait until interest rates to the US skyrocket because we aren't the world's reserve currency. That will be a painful reckoning day.
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Thanks @bwall , you are spot on.
If you think it's hard to get the US government to fund what you want it to fund, wait until interest rates to the US skyrocket because we aren't the world's reserve currency. That will be a painful reckoning day.
This is exactly what happened in the UK. All the Sterling come back home to be spent regardless of the interest rate the British central bank charged or the exchange rate. As a result there was a decoupling, a loss of power for the Bank of England to control the business cycle. The phrase 'The Gnomes of Zurich' was coined by bitter politicians who recognized their helplessness and flailed against it.
If the US loses reserve currency status, the same will happen here.
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In the 1950's, the UK's currency lost reserve currency status. The process was painful economically and lead to lower standards of living. The same would occur in the USA if the USD is no longer the reserve currency of the world.
The introduction here briefly explains some of the history of the pound sterling as a reserve currency.
https://sites.hks.harvard.edu/fs/jfrankel/EuroVs$-IFdebateFeb2008.pdf (https://sites.hks.harvard.edu/fs/jfrankel/EuroVs$-IFdebateFeb2008.pdf)
UK economy was far more trade-dependent at that time than US economy is today.
Don't you think this will result in significant differences in how this will play out in the US?
I don't expect the USD to lose reserve currency status anytime soon. But if it was to - then I'm trying to think exactly how that will impact US Domestic economy.
There is almost 1.7Trillion in currency notes in circulation, presumable a large chunk outside the US. Much of this is likely used for illegal activities.
Worst case, let's assume all 1.7Trillion is outside and comes back to the US. How exactly will it come back? US has to export something that outsiders will buy and give us cash. If so - there will be an increase in exports and decrease in imports. Disruptive - sure. Will it be as bad as the UK? I don't think so.
The other mechanism for dollar to come back is USD denominated assets - bonds, t-bills etc. The primary impact they will have is on the asset bubble. There is a real possibility that we will get another episode of the too-big-to-fail and asset losses are socialized if this does happen.
Any other mechanism it will impact the US economy?
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Since I began looking at this (over a decade ago), my view has been that the current international monetary system is inherently unsustainable. Looking at the shrinking US percentage of World GDP, and the declining US Net International Investment Position, I think this situation could come to a head sooner rather than later. Eventually, the world will be in balance again.
Two points here:
1) The US may be a shrinking proportion, but it's still growing in absolute terms. It's just that other countries are lower on the development curve and have more to grow in terms of standard of living and population. They will hit their limiting growth rates soon enough.
2) Curious to know which currency you think will replace the USD. As already discussed, for various reasons it isn't going to be the Chinese Yuan, and the Pound and Eurozone economies are not exactly cactus, but not performing well enough to warrant enough faith in them.
Would guess the Japanese are quite happy for it not to be the Yen.
Who does that leave as the potential replacement candidates?
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I really like Lyn Alden’s stuff. I happen to disagree with her that the US Dollar losing its reserve Currency status would be a good thing either for the US or for the world as a whole.
Just as a thought experiment, let’s assume that ending the US Dollar reserve status were a good thing, and we wanted to do that. Let’s think ahead a few steps. So what’s next? What replaces the US dollar? I see two currencies that have any chance whatsoever of replacing the dollar: the Euro and the Yuan. The problem with the Yuan is that it’s not tradable in any quantity outside of China, and in the unlikely event the Chinese do allow for their currency to be freely traded, would they be willing to deal with the obvious ramifications of their currency being much more valuable? Theirs is an export driven economy, and that doesn’t work real well when your currency is expensive. So I suppose that leaves the Euro. Those negative interest rates are very chic! And with the Euro zone going mostly cashless, the ECB will be able to implement capital controls whenever they want. Might want to ask the Greeks about those.
So what are the other choices? Crypto? Some magical basket of currencies? Bretton Woods II?
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In the 1950's, the UK's currency lost reserve currency status. The process was painful economically and lead to lower standards of living. The same would occur in the USA if the USD is no longer the reserve currency of the world.
The introduction here briefly explains some of the history of the pound sterling as a reserve currency.
https://sites.hks.harvard.edu/fs/jfrankel/EuroVs$-IFdebateFeb2008.pdf (https://sites.hks.harvard.edu/fs/jfrankel/EuroVs$-IFdebateFeb2008.pdf)
UK economy was far more trade-dependent at that time than US economy is today.
Don't you think this will result in significant differences in how this will play out in the US?
I don't expect the USD to lose reserve currency status anytime soon. But if it was to - then I'm trying to think exactly how that will impact US Domestic economy.
There is almost 1.7Trillion in currency notes in circulation, presumable a large chunk outside the US. Much of this is likely used for illegal activities.
Worst case, let's assume all 1.7Trillion is outside and comes back to the US. How exactly will it come back? US has to export something that outsiders will buy and give us cash. If so - there will be an increase in exports and decrease in imports. Disruptive - sure. Will it be as bad as the UK? I don't think so.
The other mechanism for dollar to come back is USD denominated assets - bonds, t-bills etc. The primary impact they will have is on the asset bubble. There is a real possibility that we will get another episode of the too-big-to-fail and asset losses are socialized if this does happen.
Any other mechanism it will impact the US economy?
Good reply. Yes, you are correct that the UK is more dependent on trade than the USA.
It's hard impossible to know exactly what choices USD holders in the future will make when they change their USD for other assets. But it's a good thought exercise to come up with a laundry list of items they liquidate and items they purchase to 'cash out' of USD.
Governments: Presumably will no longer wish to hold US debt or currency as a reserve. This means the value of the USD will drop as they sell current holdings and avoid creating new holdings. USD will drop vis a vis the currency they are swapping into. EUR? JPY? CNH/CNY? Gold? (don't laugh, there're gold bugs here).
The US government will not get the funding they need as old lines of credit are not rolled over, so in order to compensate and attract new money, they will have to raise interest rates, cut spending or raise taxes just to keep operating, irregardless of where we are in the business cycle. Most likely it will be a combination of all three. This will be extremely painful--think stagflation of the '70's type of pain- as the pain of higher taxes is exacerbated by less government spending; higher interest rates attract capital but squeeze out marginal businesses. These type of changes would most certainly bring about a recession. In theory, any recession would be mitigated at the USD return home to roost, as @ctuser1 correctly suggests. This is the mechanism through the pain of readjustment and realignment will ripple through the economy.
The drop in the USD will make goods produced in the USA cheaper vs. rest of world and thus more attractive. Potential items overseas buyers could scoop up at fire sale prices with a newly depreciated dollar:
1) Real estate (either providing a price support or driving new prices higher), presumably both commercial and residential
2) Stocks (of world class companies that rely on exports, not the domestic market) or even companies swallowed whole. If there's a recession, the value will be even greater, but then if the economy is going through structural change some companies might no longer be viable.
3) Manufactured items (cars, computers, expensive man-toys, etc)
4) Vacations in the USA (hotel stays, restaurants, typical tourist stuff)
5) Educations: If we still have world class universities, selling seats in class rooms will continue to be a lucrative business that attracts hundreds of thousands (millions?) of foreign university students annually.
6) Other tradable goods? MMM type forums and websites? :)
If they're spending USD that they've held for awhile then the exchange rate will be meaningless to them. It will be mainly about liquidating dollars for another asset that they can then take home with them. If the USD falls far enough, it would attract new buyers into the market. The question is would it be enough to offset the outgoing capital of foreign governments and I believe the answer here is 'no'. YMMV.
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The drop in the USD will make goods produced in the USA cheaper vs. rest of world and thus more attractive. Potential items overseas buyers could scoop up at fire sale prices with a newly depreciated dollar:
1) Real estate (either providing a price support or driving new prices higher), presumably both commercial and residential
2) Stocks (of world class companies that rely on exports, not the domestic market) or even companies swallowed whole. If there's a recession, the value will be even greater, but then if the economy is going through structural change some companies might no longer be viable.
3) Manufactured items (cars, computers, expensive man-toys, etc)
4) Vacations in the USA (hotel stays, restaurants, typical tourist stuff)
5) Educations: If we still have world class universities, selling seats in class rooms will continue to be a lucrative business that attracts hundreds of thousands (millions?) of foreign university students annually.
6) Other tradable goods? MMM type forums and websites? :)
1) China's been buying up agricultural land in both Africa and eastern Europe, so productive farmland in the USA seems a good bet for something folks might buy when trying to use up depreciating dollars.
4) Seems likely we'd see more of this, but it'd depend on social stability in the USA. It doesn't take a lot of events like the shooting in Kansas City a couple of years ago (https://en.wikipedia.org/wiki/2017_Olathe,_Kansas_shooting) to convince people that maybe the USA isn't a place they want to vacation.
5) 1.1 million international university students right now. Probably $10-40 billion a year in tuition? However, at my school new freshman enrollment from China dropped 30-40% this year. At the graduate level, the stats were possibly similar. Several people I knew recruited grad students from China who were going to come, where then advised by someone in China not to, and ended up taking positions in Australia or the EU instead.
6) I'd predict a big exodus of art and other collectables.
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The dollar isn't losing its special status any time soon.
The EU is two or three bad elections away from implosion.
The UK is two or three bad days away from implosion.
Nobody trusts the Chinese legal system.
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The world trades goods and services using little green pieces of paper. The USA gets to make more of those little green pieces of paper any time it chooses and the rest of the world happily delivers goods and services in return for them. You've had around five decades of consuming more than you earn as a result. I really, really struggle to see how this situation changing could be good economically for the US. Strongly suggest no-one makes a program on Fox that makes your current president believe it would be a good idea.
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@maizeman ;
Good points.
I was just guesstimating the number of international students in the USA. If their average annual spend is $30k (incl. tuition, room, board, travel by them and visiting relatives) then that's $33 billion every year. Also, due to the diverse nature of higher education, it's should be very evenly spread out across the entire country.
Art and collectables; I'd forgotten that, but you're exactly right. High end art, collectable cars, yachts, airplanes, high end jewelry, etc. would all be leaving the country.
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The dollar isn't losing its special status any time soon.
The EU is two or three bad elections away from implosion.
The UK is two or three bad days away from implosion.
Nobody trusts the Chinese legal system.
That. Hits. The. Nail. On. The. Head!
I have a large amount of Euros in a German bank account. Got some stuff over at 1.35-to-1.
Years later more at 1.18-to-1.
Then I hesitated at 1.17, 1.16, waited for the tide to turn.
All the predictions point at less than 1-to-1 by 2023, so I pulled the trigger again at 1.10, just a week ago.
There is no currency that will replace the dollar anytime soon.
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Wasn't it about a decade ago that the Euro was all the rage and would beat out the Dollar and take over the world? And then Greece nearly went under and everyone realized the Eurozone isn't all that stable and it would be insane to print enough Euros for the world to run on it. Whatever faults the Dollar, our economy,and our monetary system may have, our status isn't going anywhere because there are no other options.
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Being a "strong" currency has nothing to do with being a reserve currency.
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Being a "strong" currency has nothing to do with being a reserve currency.
It has a lot to do with it. The US dollar is a reserve currency not only because of the size and scope of the US economy but because it’s perceived as a good store of wealth. Rightly or wrongly. And strength is often a relative concept. The dollar is a whole lot stronger than many currencies in Latin America and other developing countries. Although maybe not as strong as say the Swiss Franc. Even the slang in Mexico refers to pesos as “silver” and dollars as “gold.”
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Being a "strong" currency has nothing to do with being a reserve currency.
+1.
Strong currency = lots of buying power (Norwegian Krone, Swiss Franc, etc). You know it's a strong currency b/c whenever you go there the prices are ridiculously high.
Hard currency = exchange rate moves in line with market fundamentals and you can exchange as much as you want at any time on the open market.
Soft currency = unconvertible currency; former communist block and developing countries.
Pegged currency = exchange rate is managed by the government by keeping it within a fixed range of a basket of currencies. Hong Kong Dollar, Chinese Yuan, Egyptian Pound, Argentinian Peso (off and on), Brazilian Real (off and on), and perhaps Taiwanese Yuan and Singapore Dollar.
Reserve currency;
1945- present USD.
1800-1940 (GBP)
1700-1800 (Dutch Guilder)
1500-1700 (Spanish Piece o' Eight)
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Being a "strong" currency has nothing to do with being a reserve currency.
+1.
Strong currency = lots of buying power (Norwegian Krone, Swiss Franc, etc). You know it's a strong currency b/c whenever you go there the prices are ridiculously high.
Hard currency = exchange rate moves in line with market fundamentals and you can exchange as much as you want at any time on the open market.
Soft currency = unconvertible currency; former communist block and developing countries.
Pegged currency = exchange rate is managed by the government by keeping it within a fixed range of a basket of currencies. Hong Kong Dollar, Chinese Yuan, Egyptian Pound, Argentinian Peso (off and on), Brazilian Real (off and on), and perhaps Taiwanese Yuan and Singapore Dollar.
Reserve currency;
1945- present USD.
1800-1940 (GBP)
1700-1800 (Dutch Guilder)
1500-1700 (Spanish Piece o' Eight)
+1 to this comment from bwall and his/her other insightful comments in this thread. Thank you bwall.
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Wonderful post by @bwall, with some good follow up comments by others.
Me wonders if the OP will return to this thread, or if was just lobbed for S&G.
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I think the consensus that USD is not going to lose it's reserve status anytime soon is a little too sanguine.
I had posted about the 2008 crisis in another thread. It was entirely possible that USD would have lost the reserve currency status had the 2008 crisis worked out slightly differently.
One of my earlier posts (one of many in that thread):
Banking system was much closer to collapsing than most people realized.
Banks were levered up to 30X.
What does it mean? Well, they only had $1 in capital for every $30 in obligations they had outstanding!! Much of this leverage was hidden from everyone, in complex derivatives that are impossible to properly mark, in obscure SPVs that did not show up in their yearly financial reports! If there was a run on these highly levered banks - they would collapse in no time!!
Net result - nobody knew which of the big banks were dancing naked all this time!!
Right after Lehman collapsed, banks stopped lending to one another. This is a big problem!! Much of the money in the world economic system is no longer based on anything physical!! If everyone lost "trust" on the institutions - the so called "money" would disappear overnight.
Yes, there is an alternative where we would be living in a bartering-based economy today.
2008 was NOT a vanilla recession! Systemic crisis of this kind are a different beast from the run-of-the-mill recessions that repeat every decade or so.
I'm not quite as sanguine as most people in this thread that the events similar to 2008 can't really recur anytime soon.
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The only thing arguably negative about being a reserve currency is that the country with the reserve currency will have to run a deficit.
No deficit => no extra currency floating outside => no reserve currency status.
Conversely, reserve currency status => outsiders want to sell you stuff for your currency, cheaper if necessary than otherwise necessary => you run a deficit.
Any thoughts @bwall or anyone else, whether persistent deficits has any downside(s) at all?
To me, it seems to be kosher except in a situation where everyone suddenly lost all faith in US economy. Were that to happen, I think, that would be accompanied by such a massive crisis that the negative effects of losing the reserve currency status won't even register as a problem.
So I don't quite see any real downside at all to reserve currency status (and the consequent deficits).
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I think the consensus that USD is not going to lose it's reserve status anytime soon is a little too sanguine.
I had posted about the 2008 crisis in another thread. It was entirely possible that USD would have lost the reserve currency status had the 2008 crisis worked out slightly differently.
One of my earlier posts (one of many in that thread):
Banking system was much closer to collapsing than most people realized.
Banks were levered up to 30X.
What does it mean? Well, they only had $1 in capital for every $30 in obligations they had outstanding!! Much of this leverage was hidden from everyone, in complex derivatives that are impossible to properly mark, in obscure SPVs that did not show up in their yearly financial reports! If there was a run on these highly levered banks - they would collapse in no time!!
Net result - nobody knew which of the big banks were dancing naked all this time!!
Right after Lehman collapsed, banks stopped lending to one another. This is a big problem!! Much of the money in the world economic system is no longer based on anything physical!! If everyone lost "trust" on the institutions - the so called "money" would disappear overnight.
Yes, there is an alternative where we would be living in a bartering-based economy today.
2008 was NOT a vanilla recession! Systemic crisis of this kind are a different beast from the run-of-the-mill recessions that repeat every decade or so.
I'm not quite as sanguine as most people in this thread that the events similar to 2008 can't really recur anytime soon.
There’s two questions here. The first is whether it would be beneficial for the US to lose it’s reserve-currency status, and is the question posed by the OP. To that there seems to be a resounding “no”. As to whether it could happen - well there is certainly that possibility *if* things went a bit differently, but so far it hasn’t. As others have mentioned the pound-sterling was once a reserve currency, and the euro held that promise in the early 2000s. Certainly much can change in a decade or two, and its entirely possible another country may emerge as a decent alternative.
Until that point... (and to echo bwall’s largely question): what currency *could* replace the dollar right now? It’s not the Yuan, it doesn’t appear to be the Euro, and it hasn’t been the pound in some time. Possibly the Yen? Or...?
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The only thing arguably negative about being a reserve currency is that the country with the reserve currency will have to run a deficit.
No deficit => no extra currency floating outside => no reserve currency status.
Conversely, reserve currency status => outsiders want to sell you stuff for your currency, cheaper if necessary than otherwise necessary => you run a deficit.
Any thoughts @bwall or anyone else, whether persistent deficits has any downside(s) at all?
To me, it seems to be kosher except in a situation where everyone suddenly lost all faith in US economy. Were that to happen, I think, that would be accompanied by such a massive crisis that the negative effects of losing the reserve currency status won't even register as a problem.
So I don't quite see any real downside at all to reserve currency status (and the consequent deficits).
For all the political chatter about running deficits, I don’t see that it’s a problem unless it gets to lunatic extremes. In the end deficits are a debt that will never be repaid. People who are responsible and used to paying their debts are aghast at the idea that a government can run up a deficit that will never be repaid. That’s the long and short of it, though. The US has been running deficits since, well, forever and the end result hasn’t been apocalyptic or even demonstrably negative. In my view, the bigger question is where the excess spending is going. Infrastructure? Things that will increase wealth and freedom in the long run? Or is it going to line the pockets of political cronies?
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Until that point... (and to echo bwall’s largely question): what currency *could* replace the dollar right now? It’s not the Yuan, it doesn’t appear to be the Euro, and it hasn’t been the pound in some time. Possibly the Yen? Or...?
What about gold, or crypto?
I know it sounds crazy today. It won't if USD were to sound crazier!
Imagine an alternate history where the crisis of faith in 2008 infected PIIGS and reached all the way to loss of faith in US government's ability to contain the contagion!!
I don't think the scenario is plausible, but it certainly is possible.
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I had posted about the 2008 crisis in another thread. It was entirely possible that USD would have lost the reserve currency status had the 2008 crisis worked out slightly differently.
What's fascinating about the 2008 crisis is that, given the way it did work out, the Fed probably reinforced the status of the USD in the world economy rather than weakening it.
European banks were even more heavily leveraged than US banks. The central banks in those european banks home countries could create infinite amounts of pounds or euros or francs out of thin air, but a lot of the failing over leveraged banks debt was denominated in dollars.
Through swap lines with the central banks in the UK, Switzerland, the European Central Bank (as well as Canada and Japan) the Fed created the dollars that allowed banks around the world to avoid defaulting on their dollar denominated debts (about $600B). In contrast, at the same time the Fed was creating hundreds of billions of dollars for banks all over the world the European Central Bank was caught up in a political mess about what its mandate actually was or wasn't even for euro denominated debt.
Whether you see keeping banks from defaulting and collapsing as a good thing or a bad thing, you have to admit from a banker's perspective it's a good thing. The Fed's ability and willingness to act independently and on a huge scale to keep the dollar denominated economy from breaking down -- and the European Central Bank's reluctance to do the same -- is big item in the dollar's favor if you're a banker sitting in some random country that is neither the USA or part of Europe and considering how much of your financial future to entangle with dollars or with euros.
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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.
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Whether you see keeping banks from defaulting and collapsing as a good thing or a bad thing, you have to admit from a banker's perspective it's a good thing. The Fed's ability and willingness to act independently and on a huge scale to keep the dollar denominated economy from breaking down -- and the European Central Bank's reluctance to do the same -- is big item in the dollar's favor if you're a banker sitting in some random country that is neither the USA or part of Europe and considering how much of your financial future to entangle with dollars or with euros.
This is a bit of an oversimplification. US regulators had to spend every shred of political capital they had to convince Congress to go along with their plans, and there was no guarantee that it would. Bernanke has the full backing of Bush, then Obama. What would have happened if it had been Trump and Powell instead?
For the US banks yes there was a huge amount of political capital burned, and I don't have confidence Trump and Powell would pull off what Bush/Obama and Bernanke did.
However, for the swap lines that put dollars into european and other international banks, I don't think the fed got permission from anyone or even announced it was taking place, did they? I didn't even learn that it had happened until years after the fact.
The charitable explanation is that the EU is still in its infancy and it doesn't do anything fast. Bernanke could call up Bush and the top members of Congress and set up meetings on the hill in a matter of hours. The ECB is still not clear about their mandates and what they can or cannot do. Do they call up Merkel? Macron? How about the president of Estonia?
This is where institutional structures matter.
I agree completely. I didn't mean to imply this was incompetence at the ECB or anything like that. As you say, the institutions structures are just very different and many of them hadn't been stress tested before. They may change in the future or they may not.
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However, for the swap lines that put dollars into european and other international banks, I don't think the fed got permission from anyone or even announced it was taking place, did they? I didn't even learn that it had happened until years after the fact.
They definitely announced it. The announcing is just as important as the doing when trying to calm markets down. :)
https://www.federalreserve.gov/newsevents/pressreleases/monetary20080929a.htm
It doesn't need permission from Congress because the swap lines are backed by collateral, so it's not "spending".
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The dollar isn't losing its special status any time soon.
The EU is two or three bad elections away from implosion.
The UK is two or three bad days away from implosion.
Nobody trusts the Chinese legal system.
As this observation and subsequent comments reveal, it is quality of governance that bestows reserve status on a currency and a language. For decades, the US had the world’s fairest judicial system, a politically independent federal reserve that yielded the world’s best outcomes, the world’s most stable large political system, and of course capitalism itself. Therefore, international business was transacted in English and dollars.
If the US were to lose any of the above advantages, the reserve currency status would be called into question. So for example something implausible would have to happen like a US President slowly turning the country into a Russian-style hyper-corrupt oligarchy with crony judges and a federal reserve that was constantly under political pressure to juice the economy. Yea right. Could never happen. If that happened people would be so terrified they’d probably invent their own currencies on the internet or something. /sarcasm
Secondly, computers, the internet, and deep futures markets make transactions between currencies a lot easier than ever before in world history. I just paid in dollars for an ebay item sold by someone in Britain and priced in Canadian loonies. The website just made it happen seamlessly. Why couldn’t I buy a few thousand barrels of oil this way?
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The only thing arguably negative about being a reserve currency is that the country with the reserve currency will have to run a deficit.
No deficit => no extra currency floating outside => no reserve currency status.
Conversely, reserve currency status => outsiders want to sell you stuff for your currency, cheaper if necessary than otherwise necessary => you run a deficit.
Any thoughts @bwall or anyone else, whether persistent deficits has any downside(s) at all?
There are two types of deficits; trade deficits and government deficits and they are generally not directly linked.
A trade deficit is an outdated concept of harm. We no longer live in a zero-sum mercantilist society where my accumulation of gold and silver is at your expense. For example, I have an acute, chronic financial deficit with my local grocery store. The money only flows in one direction and it's likely to persist until the day I die. But, it's not a real concern.
I can say the same thing of my employees. I give them massive amounts of money on a consistent basis and if there is ever a change in this pattern, it's likely in their favor in the form of a raise or bonus. But, my banker doesn't ask me to try and balance out this trade deficit by selling them, say, vegetables that I grew at home (thus decreasing my trade deficits on two fronts).
No newsman ever really seems to care about these trade deficits, presumably because it wouldn't sell. The trade deficit/surplus on a macro level is nothing more than the aggregate of all the micro trade deficit/surplus. In the case of the American trade deficit with China, does China represent the grocery store or the employee?
Government deficits are only a problem if the spending is going to a demographic group that you do not like. In this case, politicians will rail against deficit spending as an excuse to cut spending to that (unwanted) demographic. In other words, it's a canard.
Governments can easily raise revenue by raising taxes, but in the USA they have chosen not to do this. Companies and individuals do not have the luxury of raising taxes
Germany, for example, has had a government spending surplus for about five years now. They do not need to borrow money (!) and when they do, they have to pay back less than they borrowed (negative yield). Yet, they are not lowering taxes, increasing benefits, or building more infrastructure to ensure future economic growth. Presumably is it more virtuous to not owe money than to increase the standard of living of your countrymen.
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Secondly, computers, the internet, and deep futures markets make transactions between currencies a lot easier than ever before in world history. I just paid in dollars for an ebay item sold by someone in Britain and priced in Canadian loonies. The website just made it happen seamlessly. Why couldn’t I buy a few thousand barrels of oil this way?
Anyone certainly could buy oil in this manner and it's wouldn't affect the status of the USD as a reserve currency, because that's not what makes it a reserve currency. In an oil transaction, the USD are sold by the recipient for their local currency to pay their bills. Thus, the USD purchased for the transaction by the oil buyer today are dumped tomorrow by the oil seller, just like you bought CAD today for your eBay item (thus strengthening the CAD) and the CAD will be dumped tomorrow by the ebay vendor in exchange for GBP (thus weakening the CAD by the same amount), because that's where they live and have bills to pay. It's a wash transaction.
No reserve status accrues to the USD by oil transactions being denominated in USD.
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Secondly, computers, the internet, and deep futures markets make transactions between currencies a lot easier than ever before in world history. I just paid in dollars for an ebay item sold by someone in Britain and priced in Canadian loonies. The website just made it happen seamlessly. Why couldn’t I buy a few thousand barrels of oil this way?
Anyone certainly could buy oil in this manner and it's wouldn't affect the status of the USD as a reserve currency, because that's not what makes it a reserve currency. In an oil transaction, the USD are sold by the recipient for their local currency to pay their bills. Thus, the USD purchased for the transaction by the oil buyer today are dumped tomorrow by the oil seller, just like you bought CAD today for your eBay item (thus strengthening the CAD) and the CAD will be dumped tomorrow by the ebay vendor in exchange for GBP (thus weakening the CAD by the same amount), because that's where they live and have bills to pay. It's a wash transaction.
No reserve status accrues to the USD by oil transactions being denominated in USD.
Perhaps an eBay employee could clarify the process, but it looks like the software simply computed my price in USD based on the exchange rate with Canadian dollars or British pound, and then did a quick exchange of USD to GBP. I.e. “If seller was happy with $10 CAD, they’ll also be happy with $X USD because that translates to the same amount of GBP.” So I don’t think any CAD were actually traded in a transaction between foreigners that was priced in CAD. There was no need to go through the extra motion. Because the transaction was instantaneous (I.e. no risk of FX moves between the buy decision and payment time), the only major problem to be solved was price calculation.
Replace CAD with USD, and eBay item with traded goods, and you have a computer enabled international trading system that does not even require exchange of the reserve currency (which might better be called the reference currency).
If someone in India wants to buy copper from Chile, software should be able to do the exchange rate math, provide local currency quotes to each side, and perform the currency exchange itself in less than a second without ever having to transact in USD and going through an extra layer of commissions and bid ask spreads. To the extent this doesn’t already happen, it is an inefficiency that will soon be eliminated in the marketplace.
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If someone in India wants to buy copper from Chile, software should be able to do the exchange rate math, provide local currency quotes to each side, and perform the currency exchange itself in less than a second without ever having to transact in USD and going through an extra layer of commissions and bid ask spreads. To the extent this doesn’t already happen, it is an inefficiency that will soon be eliminated in the marketplace.
That whole mechanism *only* works because there is a reserve currency, e.g. USD that is very liquid against all thinly traded currencies.
Currency market is a the biggest financial market out there, and yet it is a giant non-cleared mess. There is no single "market". In effect, all big banks operate their own "market" and make their own market. There is no single quote. Some providers publish quotes based on data they obtain from banks - e.g. Bloomberg 4pm EST quote is a widely used currency close quote.
(I suffer daily through the mess of obtaining the "proper" currency data for financial calcs - so I have some personal grudge against the currency market $@#%@#).
The point I am making is that the whole currency market will simply not work in the absence of a super-liquid "reserve" or "reference" currency.
If you don't have much trading happening between Chile-whatever and Indian Rupee - how do you mark the exchange rate? You have to use some reference. If you have too many different references - that opens up arbitrage opportunities that simply increases inefficiency. So it will have to be a single, or maybe two or three "reference" currencies.
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Disagree. Yeah, being the reserve currency comes with obligations, but it's a pretty big advantage. The world needs a reserve currency and the U.S. dollar is the only feasible option as of today. It's certainly possible for a new currency to be created based on a basket of currencies, however.
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The world trades goods and services using little green pieces of paper. The USA gets to make more of those little green pieces of paper any time it chooses and the rest of the world happily delivers goods and services in return for them. You've had around five decades of consuming more than you earn as a result. I really, really struggle to see how this situation changing could be good economically for the US. Strongly suggest no-one makes a program on Fox that makes your current president believe it would be a good idea.
You're correct. It wouldn't be good economically for the US. Not in the short-term, at least. And that's the problem. Everyone looks at the short-term readjustment and says "Not a good idea."
The question is, how long should the US be allowed to consume more than it produces? Two more years? 30 more years?
It's like having an alcoholic friend. You know it's slowly killing them, but as long as you keep buying them another drink, they seem to be doing well. The hangover never really shows up. Well one day, you arrive at the bar and your friend is dead. Massive liver failure finally set in.
We shouldn't have to wait for a crisis to make a change, but that is the natural order of things.
In reality, I think the USD probably will remain king of the fiat world for quite some time. It's going to take an unfortunate series of events to dethrone it from prominence. And that could be many years from now. But on the current trajectory, I agree with Lyn Alden that it's really only a question of when, not if.
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I really like Lyn Alden’s stuff. I happen to disagree with her that the US Dollar losing its reserve Currency status would be a good thing either for the US or for the world as a whole.
Just as a thought experiment, let’s assume that ending the US Dollar reserve status were a good thing, and we wanted to do that. Let’s think ahead a few steps. So what’s next? What replaces the US dollar? I see two currencies that have any chance whatsoever of replacing the dollar: the Euro and the Yuan. The problem with the Yuan is that it’s not tradable in any quantity outside of China, and in the unlikely event the Chinese do allow for their currency to be freely traded, would they be willing to deal with the obvious ramifications of their currency being much more valuable? Theirs is an export driven economy, and that doesn’t work real well when your currency is expensive. So I suppose that leaves the Euro. Those negative interest rates are very chic! And with the Euro zone going mostly cashless, the ECB will be able to implement capital controls whenever they want. Might want to ask the Greeks about those.
So what are the other choices? Crypto? Some magical basket of currencies? Bretton Woods II?
I really think it's an odd idea to have any country's currency serve as the world reserve currency. It has too many inherent long-term problems.
"Crypto?"
So you've been following the St. Louis Fed I see.
(https://i.imgur.com/8k1TzgS.png)
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If someone in India wants to buy copper from Chile, software should be able to do the exchange rate math, provide local currency quotes to each side, and perform the currency exchange itself in less than a second without ever having to transact in USD and going through an extra layer of commissions and bid ask spreads. To the extent this doesn’t already happen, it is an inefficiency that will soon be eliminated in the marketplace.
That whole mechanism *only* works because there is a reserve currency, e.g. USD that is very liquid against all thinly traded currencies.
Currency market is a the biggest financial market out there, and yet it is a giant non-cleared mess. There is no single "market". In effect, all big banks operate their own "market" and make their own market. There is no single quote. Some providers publish quotes based on data they obtain from banks - e.g. Bloomberg 4pm EST quote is a widely used currency close quote.
(I suffer daily through the mess of obtaining the "proper" currency data for financial calcs - so I have some personal grudge against the currency market $@#%@#).
The point I am making is that the whole currency market will simply not work in the absence of a super-liquid "reserve" or "reference" currency.
If you don't have much trading happening between Chile-whatever and Indian Rupee - how do you mark the exchange rate? You have to use some reference. If you have too many different references - that opens up arbitrage opportunities that simply increases inefficiency. So it will have to be a single, or maybe two or three "reference" currencies.
Keynes, as much as I dislike many of his ideas, might have had something here.
https://en.wikipedia.org/wiki/Bancor (https://en.wikipedia.org/wiki/Bancor)
Bancor would not be an international currency. It would rather be a unit of account used to track international flows of assets and liabilities, which would be conducted through the International Clearing Union.
At a minimum, this type of system would seem to discourage the large imbalances that we are seeing today. Obviously, the world went in a different direction.
Keynes was able to make his proposal the official British proposal at the Bretton Woods Conference but it was not accepted. Rather than a supranational currency, the conference adopted a system of pegged exchange rates ultimately tied to physical gold in a system managed by the World Bank and IMF. In practice, the system implicitly established the United States dollar as a reserve currency convertible to gold at a fixed price on demand by other governments. The dollar was implicitly established as the reserve by the large trade surplus and gold reserves held by the US at the time of the conference.
It would not surprise me at all if the world eventually adopts something like the Bancor idea.
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In the 1950's, the UK's currency lost reserve currency status. The process was painful economically and lead to lower standards of living. The same would occur in the USA if the USD is no longer the reserve currency of the world.
The introduction here briefly explains some of the history of the pound sterling as a reserve currency.
https://sites.hks.harvard.edu/fs/jfrankel/EuroVs$-IFdebateFeb2008.pdf (https://sites.hks.harvard.edu/fs/jfrankel/EuroVs$-IFdebateFeb2008.pdf)
UK economy was far more trade-dependent at that time than US economy is today.
Don't you think this will result in significant differences in how this will play out in the US?
I don't expect the USD to lose reserve currency status anytime soon. But if it was to - then I'm trying to think exactly how that will impact US Domestic economy.
There is almost 1.7Trillion in currency notes in circulation, presumable a large chunk outside the US. Much of this is likely used for illegal activities.
Worst case, let's assume all 1.7Trillion is outside and comes back to the US. How exactly will it come back? US has to export something that outsiders will buy and give us cash. If so - there will be an increase in exports and decrease in imports. Disruptive - sure. Will it be as bad as the UK? I don't think so.
The other mechanism for dollar to come back is USD denominated assets - bonds, t-bills etc. The primary impact they will have is on the asset bubble. There is a real possibility that we will get another episode of the too-big-to-fail and asset losses are socialized if this does happen.
Any other mechanism it will impact the US economy?
Good reply. Yes, you are correct that the UK is more dependent on trade than the USA.
It's hard impossible to know exactly what choices USD holders in the future will make when they change their USD for other assets. But it's a good thought exercise to come up with a laundry list of items they liquidate and items they purchase to 'cash out' of USD.
Governments: Presumably will no longer wish to hold US debt or currency as a reserve. This means the value of the USD will drop as they sell current holdings and avoid creating new holdings. USD will drop vis a vis the currency they are swapping into. EUR? JPY? CNH/CNY? Gold? (don't laugh, there're gold bugs here).
If anyone is laughing at gold bugs, they really should start paying attention to the world around them.
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Wonderful post by @bwall, with some good follow up comments by others.
Me wonders if the OP will return to this thread, or if was just lobbed for S&G.
Lol. Well, I did intentionally wait to respond for awhile, and I didn't fully catch up here until today. I wanted to see where the discussion would go without me pushing it in a certain direction.
I also posted basically the same thoughts on another investing forum and got exactly one reply. I was certainly impressed by the discussion here :).
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Keynes, as much as I dislike many of his ideas, might have had something here.
https://en.wikipedia.org/wiki/Bancor (https://en.wikipedia.org/wiki/Bancor)
Bancor would not be an international currency. It would rather be a unit of account used to track international flows of assets and liabilities, which would be conducted through the International Clearing Union.
At a minimum, this type of system would seem to discourage the large imbalances that we are seeing today. Obviously, the world went in a different direction.
Keynes was able to make his proposal the official British proposal at the Bretton Woods Conference but it was not accepted. Rather than a supranational currency, the conference adopted a system of pegged exchange rates ultimately tied to physical gold in a system managed by the World Bank and IMF. In practice, the system implicitly established the United States dollar as a reserve currency convertible to gold at a fixed price on demand by other governments. The dollar was implicitly established as the reserve by the large trade surplus and gold reserves held by the US at the time of the conference.
It would not surprise me at all if the world eventually adopts something like the Bancor idea.
Interesting tidbit about Bancor.
When I read through it superficially, it seems to me like Gold WAS effectively the Bancor after Bretton Woods.
What's the difference?
Supranational - check. Not directly controlled by one country, at least nominally, check.
In theory, gold standard was supposed to be the system after Bretton Woods. Implicitly, USD took the role simply because it was the 800 pound gorilla everyone trusted. So when USD went off it's gold peg, others did not stick with Gold as their reference point - but rather went with USD.
Bancor would also have all the downsides of the gold, and then some more. Individuals can't hold it. So presumably FX trading was a no-go. I just don't see how Bancor wold have practically operated/fared any better than Gold.
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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
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Disadvantages of physical gold;
1) Large value amounts cannot be easily carried or transported. At a price of $1500 per ounce, $1m of gold would weigh 41.6 pounds (about 19 kg). If you have no internal combustion engines available, moving it is a PITA.
2) How to use small amounts? Bars of gold are not easily divided into smaller pieces without an infrastructure in place.
3) Risk of fakery/fraud. How to verify if it's real gold? Or purity level?
Is it any harder to verify authenticity of gold than fiat currency?
4) Cost of storage. How do you safely store the gold from theft (or loss)?
Fiat currency also needs to be stored from theft (though may be slightly less bulky, but being easier to move the getaway after fiat currency theft easier).
5) Not productive/no dividend. Gold doesn't earn interest or produce anything.
Fiat currency is also not productive.
With all of these disadvantages, I think that gold is not a wise place to store money.
Advantage of gold:
1) People have used it as a means of exchange and store of value for centuries. Perhaps they will continue to do so in the future.
2) Plenty of people in China and India buy gold and keep as a store of value. As China and India rise economically, demand for gold will rise as will the price along with it. Thus, gold is just another speculative commodity like pork bellies, wheat, coffee, or sugar, but with an important caveat--it has no intrinsic value.
3) Gold is not unilaterally controlled by a single government.
I would suggest that the entire rise in the price of gold since 2000 is mainly attributed to new demand from China and India--citizens and central banks alike
I would suggest that this demand represents a decreasing trust in USD as a reserve currency.
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@robartsd ; Thank you for the reply.
To your points:
3) Fiat authenticity can be done at any bank in the country of issuance, at no cost and in less than a minute. But, it's hard to look at gold and know if it's 10 cart, 14, 18 or 24 carat, or even gold at all.
4) Banks store fiat for free, as much as you want them to. Usually they give you interest. And, you're insured up to $250,000 in the USA at no additional cost.
5) Banks will give you interest on fiat, but not on gold. Companies pay dividends to owners of their shares, but not on gold.
and to the advantages of gold
3) Gold is not controlled by a single government; Thank you for mentioning this. I should have listed this in the drawbacks. Nothing like a recession being induced by the inability to dig a metal out of the ground, which happened regularly until the Federal Reserve was created in 1913. There is a reason that Williams Jennings Bryan's "Cross of Gold" speech was so popular among the poor as they were suffering and the banks profiting when the USA was on the gold standard. Look it up if you don't believe me. See who agitated to end the gold standard because they were suffering--the poor or the rich.
Decreasing trust: individuals who buy gold do so for centuries' long cultural reasons that long pre-date the USA as a country, much less the USD as any store of wealth.
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The Cross of Gold speech is outstanding. If you're in a place that it won't look odd to those around you, I definitely recommend reading it aloud. There's an art to oratory that doesn't always come across perfectly on the printed page.
It's weird to realize it was given by the same guy who argued for conviction in the Scopes trial.
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Perhaps this is the smart money reason to buy cryptocurrency. If trust in the USD declines, perhaps some form of blockchain could become the banco. Gold will never do the job because it is completely impractical to trade with.
I wouldn’t bet my USD on it though. The more the FX, futures, and currency options markets evolve, the less justification there is for a banco or gold standard.
And regarding that standard theory about trust in a currency, ask why the Yen is considered a safe haven asset as “multiple lost decades” Japan mints more and more of them to cover their over-200%-of-GDP debt and is now selling negative interest rate bonds. Just saying be careful with classical economic assumptions regarding currencies, as they’ve been failing since the age of Adam Smith.
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@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.
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Perhaps this is the smart money reason to buy cryptocurrency. If trust in the USD declines, perhaps some form of blockchain could become the banco. Gold will never do the job because it is completely impractical to trade with.
I wouldn’t bet my USD on it though. The more the FX, futures, and currency options markets evolve, the less justification there is for a banco or gold standard.
And regarding that standard theory about trust in a currency, ask why the Yen is considered a safe haven asset as “multiple lost decades” Japan mints more and more of them to cover their over-200%-of-GDP debt and is now selling negative interest rate bonds. Just saying be careful with classical economic assumptions regarding currencies, as they’ve been failing since the age of Adam Smith.
Everyone talks about Japan and their government debt, but they don't consider the big picture that Japan is not fundamentally anywhere near financial trouble. Basically, the Japanese own their own debt. Not only that, they have a very substantial Net International Investment Position. At last update I can find it was over $3 trillion, or +63.8% of their GDP. In fact, while the USA is the world's largest debtor nation, Japan is the world's largest creditor nation.
https://en.wikipedia.org/wiki/Net_international_investment_position (https://en.wikipedia.org/wiki/Net_international_investment_position)
That's the difference between the Yen and the USD, and it's stark.
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Perhaps this is the smart money reason to buy cryptocurrency. If trust in the USD declines, perhaps some form of blockchain could become the banco. Gold will never do the job because it is completely impractical to trade with.
I wouldn’t bet my USD on it though. The more the FX, futures, and currency options markets evolve, the less justification there is for a banco or gold standard.
And regarding that standard theory about trust in a currency, ask why the Yen is considered a safe haven asset as “multiple lost decades” Japan mints more and more of them to cover their over-200%-of-GDP debt and is now selling negative interest rate bonds. Just saying be careful with classical economic assumptions regarding currencies, as they’ve been failing since the age of Adam Smith.
Everyone talks about Japan and their government debt, but they don't consider the big picture that Japan is not fundamentally anywhere near financial trouble. Basically, the Japanese own their own debt. Not only that, they have a very substantial Net International Investment Position. At last update I can find it was over $3 trillion, or +63.8% of their GDP. In fact, while the USA is the world's largest debtor nation, Japan is the world's largest creditor nation.
https://en.wikipedia.org/wiki/Net_international_investment_position (https://en.wikipedia.org/wiki/Net_international_investment_position)
That's the difference between the Yen and the USD, and it's stark.
It's a good thing that the Japanese own their own debt. Japan is suffering from a massive population bust. Every year since 2012 (?) there are hundreds of thousand fewer Japanese on this good earth, a total drop now of 2 million since the peak, and counting. So, in a way Japanese government debt being owned by it's citizens is like a massive stock buyback.
The good news is that this means that when there is no economic growth in Japan this year, as has been the case for the past ten or twenty years, it doesn't mean a drop in living standards--in fact it probably results in increased living standards as fewer people are able to produce the same amount of goods and services.
Japan desperately needs to import labor, but they prefer to shut down rather than accept immigrants.
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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.
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@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 (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.
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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/ (https://www.bloomberg.com/graphics/negative-yield-bonds/)
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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 (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.
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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.
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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 (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?
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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?
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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.
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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
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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.
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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 (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 (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.
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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.
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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.
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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).
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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.
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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.
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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 (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 (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.
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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..
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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.
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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.
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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.
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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.
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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)!!
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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.
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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.
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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 (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?
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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.
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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.
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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.
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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.
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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!
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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.
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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 (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.
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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 (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.
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Yuan could displace the dollar in 10 years:
https://apple.news/AGtXfebLER2yAztL_JYdANQ (https://apple.news/AGtXfebLER2yAztL_JYdANQ)
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Yuan could displace the dollar in 10 years:
https://apple.news/AGtXfebLER2yAztL_JYdANQ (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.
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Yuan could displace the dollar in 10 years:
https://apple.news/AGtXfebLER2yAztL_JYdANQ (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?
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Yuan could displace the dollar in 10 years:
https://apple.news/AGtXfebLER2yAztL_JYdANQ (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.
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Yuan could displace the dollar in 10 years:
https://apple.news/AGtXfebLER2yAztL_JYdANQ (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.
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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 (https://www.insider.com/inside-chinas-ghost-cities-photos-2018-12#high-rise-apartments-and-railroads-were-built-but-the-city-failed-to-populate-in-its-early-years-7)" 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.
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@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.
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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 (https://www.insider.com/inside-chinas-ghost-cities-photos-2018-12#high-rise-apartments-and-railroads-were-built-but-the-city-failed-to-populate-in-its-early-years-7)" 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 (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.
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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?
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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 (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.
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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.
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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 (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.
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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.
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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 (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!
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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.
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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.
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Suppose all of my savings are in a bank that can be mismanaged and become insolvent.
Which type of crisis should be worrying me?
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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.
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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?
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If the currency has collapsed, then things like the bike (which is a real asset) would retain their value.
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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".
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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.
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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.
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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.
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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.
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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.
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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.
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Buuuuuuuuuuump.
Raoul Pal just had a great twitter thread on this:
https://threadreaderapp.com/thread/1254110879479746562.html
I don't have anything to contribute at this time.
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Buuuuuuuuuuump.
Raoul Pal just had a great twitter thread on this:
https://threadreaderapp.com/thread/1254110879479746562.html
I don't have anything to contribute at this time.
I read it. I'm not a chart person, and I think a lot of others aren't, so please explain what we're seeing. I do get that relatively speaking, the US dollar appears to be increasing against other world currencies. Which to me seems like a fair time to buy other currencies or other currency denominated assets to hedge exposure to the dollar.
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So the fed is printing a lot of money, which we know. But because the velocity of money has dropped so much, even with more dollars circulating, we're seeing signs of deflation, not inflation. And the dollar is appreciating against other currencies in the world. A lot of the charts seem to be arguments for further increases in the dollar's value relative to other currencies.
Raoul argues that this shows that the Fed printing money both directly and via dollar swap lines with other countries around the world is doing nothing. It's not clear to me how he's distinguishing "doing nothing" from "reducing the deflation/dollar appreciation that would otherwise be caused by a slowing velocity of money, but not all the way." Did someone else catch the reasoning there?
He also argues for further appreciation of bitcoin/gold type assets going forward.
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I'm going to give this a college try.
He starts out with technical analysis saying that the dollar is bullish when looking back, from the early 80s, or the 2000s depending on which chart you look at. He points out a 15 year top in Asian currencies. Emerging market forex has been falling against the USD for ten years. Fed has been printing but velocity remains low over the same time frame of ten years. Huge swathes of currencies have fallen against the USD in the past year despite easing.
"slowing growth causes the dollar to rise, which causes slower growth, which causes the dollar to rise, as all borrowers play musical chairs to get access to the dollar to service debts"
"swap lines cant help the weakest sovereign borrowers as they have no reserves."
"The global system is just not set up to deal with this. It is an UGLY situation with almost zero options without a change in the entire system. No printing of money will solve this. It is structural."
He is bullish on gold and says bitcoin will play a role but hasn't made any moves relative to this problem yet.
This is an observation of the debt deflation cycle and he says bonds will create the next signal when yields go negative.
"that will be the signal to sell equities and the INSOLVENCY phase will begin."
I read it. I'm not a chart person, and I think a lot of others aren't, so please explain what we're seeing. I do get that relatively speaking, the US dollar appears to be increasing against other world currencies. Which to me seems like a fair time to buy other currencies or other currency denominated assets to hedge exposure to the dollar.
I think what he is saying is that you can't really hedge against the USD since other world currencies are behaving like they are relatively fixed against the USD. And that this situation can't be resolved by other countries since they don't have reserves or growth, and the US can't resolve it since the US is struggling with growth and cannot maintain a perpetual $ deficit to keep up with demand for USD.
So the fed is printing a lot of money, which we know. But because the velocity of money has dropped so much, even with more dollars circulating, we're seeing signs of deflation, not inflation. And the dollar is appreciating against other currencies in the world. A lot of the charts seem to be arguments for further increases in the dollar's value relative to other currencies.
Raoul argues that this shows that the Fed printing money both directly and via dollar swap lines with other countries around the world is doing nothing. It's not clear to me how he's distinguishing "doing nothing" from "reducing the deflation/dollar appreciation that would otherwise be caused by a slowing velocity of money, but not all the way." Did someone else catch the reasoning there?
He also argues for further appreciation of bitcoin/gold type assets going forward.
The thread starts with a rebuttal of the idea that fed easing in the US will be inflationary, then points out the deflationary landscape at play more globally and more historically, then says we don't really have a path out of this. He's arguing we are already in a debt deflation trap and the USD continuing as a reserve isn't going to resolve it.
Edit: I believe he's also expecting an equities market sell-off due to this as well. Peter Schiff commented further down the thread, you can read the twitter thread here:
https://twitter.com/RaoulGMI/status/1254110879479746562
Schiff: "The primary reason the dollar didn't collapse because of past ZIRP and QE is that the Fed fooled markets into believing that the policies were temporary and that it had an exit strategy. The realization that both are permanent and exit is impossible should seal the dollar's fate."
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@maizeman and @Wrenchturner : thanks to both of you for taking the time to explain. Something to think about and digest.
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Schiff: "The primary reason the dollar didn't collapse because of past ZIRP and QE is that the Fed fooled markets me into believing that the policies were temporary and that it had an exit strategy more than enough to offset demographic disinflation. The realization that both are permanent and exit is impossible should seal the dollar's fate help prevent a deflationary spiral by boosting inflationary expectations?"
There, I fixed that for Mr. Schiff so that it doesn't seem to contradict over a decade of market outcomes in the U.S, 3 decades of market outcomes in Japan, and most economic thought over the past two generations.
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There, I fixed that for Mr. Schiff so that it doesn't seem to contradict over a decade of market outcomes in the U.S, 3 decades of market outcomes in Japan, and most economic thought over the past two generations.
Just to be clear, you're saying that deflation remains the big risk although you are attributing it moreso to demographics?
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Right now the U.S. economy is shut down and China's economy is opening. The U.S. and China are arguing about how COVID-19 started. What if China picks this time to make a move?
The U.S. Fed is buying junk bonds while the U.S. economy is mostly under lock down. After COVID-19, the U.S. will need to figure out who's bankrupt and who isn't. It could be a mess...
So what if China picks this time frame to insist on transactions being denominated in Chinese Yuan? China already had the #2 economy in the world, behind the #1 U.S. economy. But given current circumstances, shouldn't China be the #1 economy right now?
I expect that move would fail right now, so China probably won't try it. China has restricted the outflow of it's currency for some time - you can't take much Chinese money out of China. The government there clearly covered up details of the outbreak in Wuhan, and refuses to allow other countries to investigate it. There's transparency issues in the government and economy - it's hard to trust them.
I think the U.S. will retain reserve status despite U.S. President Donald Trump, who most of Europe hates. Even hating the leadership, Europe still trusts the U.S. Fed will remain stable and trustworthy. I'm not saying they should hate Trump or not - I'm saying even places that hate the leader of the U.S. have trust in the Federal Reserve.
Maybe that ignores the Euro as a possible reserve currency. Italy narrowly avoided it's bonds being rated as "junk bonds", or too dangerous for institutional investors. Greece was in that position before Italy. The countries that nearly go bankrupt, but must use the Euro, presents a problem. Right now, with UK exiting, isn't the strength of the Euro mostly down to Germany and France? Seems like too many uncertainties to make this the reserve currency for all transactions.
I don't know, but I don't see a good contender for next reserve currency.
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There, I fixed that for Mr. Schiff so that it doesn't seem to contradict over a decade of market outcomes in the U.S, 3 decades of market outcomes in Japan, and most economic thought over the past two generations.
Just to be clear, you're saying that deflation remains the big risk although you are attributing it moreso to demographics?
Yes.
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We can throw out anything Peter Schiff says. A broken clock is right twice a day, and he might be right about once a decade. I figured out his flaws about 10 years ago.
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There, I fixed that for Mr. Schiff so that it doesn't seem to contradict over a decade of market outcomes in the U.S, 3 decades of market outcomes in Japan, and most economic thought over the past two generations.
Just to be clear, you're saying that deflation remains the big risk although you are attributing it moreso to demographics?
Yes.
@ChpBstrd is closer to the truth on this one that Schiff is. Demographics are bigger drivers than most people realize. They change slowly and insipidly, never front page news.
Aging populations across the rich world, less children and less immigration mean that there will be less demand for goods and services relative to the 1960's, 70's or even 80's. Therefore, less inflation.
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I think the U.S. will retain reserve status despite U.S. President Donald Trump, who most of Europe hates. Even hating the leadership, Europe still trusts the U.S. Fed will remain stable and trustworthy. I'm not saying they should hate Trump or not - I'm saying even places that hate the leader of the U.S. have trust in the Federal Reserve.
Maybe that ignores the Euro as a possible reserve currency. Italy narrowly avoided it's bonds being rated as "junk bonds", or too dangerous for institutional investors. Greece was in that position before Italy. The countries that nearly go bankrupt, but must use the Euro, presents a problem. Right now, with UK exiting, isn't the strength of the Euro mostly down to Germany and France? Seems like too many uncertainties to make this the reserve currency for all transactions.
I don't know, but I don't see a good contender for next reserve currency.
I think the big advantage that the dollar has relative to the euro is exactly that confidence in the Fed's decision making.
European Union/Eurozone central bankers (the ECB) seem to have much less freedom to act. Or maybe they have the freedom but choose to exercise it less? Part of this could simply be that the Federal Reserve board of governors seems to have a more cohesive view of their duties and goals, while the ECB, at least back during the great recession and subsequent eurozone debt crisis, seemed to have widely conflicting views of what their mission even was.
During the global financial crisis the US fed was creating trillions of dollars out of thin air to not only keep the US economy afloat, but also to keep European and Asian banks from collapsing under the weight of US dollar denominated debts (via swap lines). Are Japanese, Korean, and US banks confident that if they had owed large amounts of euro denominated debt during the last crisis, the ECB have been as willing to print Euros to save them?
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This discussion is definitely expanding my mind!
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I’m thinking that a move away from the US dollar need not be all that dramatic to have some serious impact. Does there even need to be a “global reserve currency?”There is nothing that I’m aware of to prevent settlement in other currencies if companies/ countries wish to do so.
My understanding of the reasons behind the primacy of the dollar was due to the need to use it to buy oil. Oil is available on the cheap right now and I suppose currencies are very negotiable. So If say China wants to make a deal for oil using the Yuan, I doubt oil sellers are going to turn up their nose.
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I’m thinking that a move away from the US dollar need not be all that dramatic to have some serious impact. Does there even need to be a “global reserve currency?”There is nothing that I’m aware of to prevent settlement in other currencies if companies/ countries wish to do so.
My understanding of the reasons behind the primacy of the dollar was due to the need to use it to buy oil. Oil is available on the cheap right now and I suppose currencies are very negotiable. So If say China wants to make a deal for oil using the Yuan, I doubt oil sellers are going to turn up their nose.
People often quote oil pricing in USD as a source of primacy for the USD. I see this as a common misconception and ungrounded in reality. I view the USD merely as a unit of account in the oil market. Please allow me to explain my thought process:
Oil producing country X has a local currency in which all bills must be settled. Oil producing company X can be either state owned or private, but in either case they must pay their local employees in the local currency, be it kroner, rial, peso, kwanza, ruble or dinar, all bills of that oil company have to be settled in the local currency, profits taxed and remitted to the treasury in the local currency, etc. So, the USD proceeds of the sale are then sold on the international market and the local currency is purchased and the bills are settled. In fact, the effect on the local currency is so strong, that there the terms 'petro-dollar' and 'Dutch disease' have been coined to explain how the local currency strength due to USD selling and local currency buying negatively affect the local currency and/or economy.
It's a wash transaction in accounting terms. No benefit for the USD as a reserve currency.
To your other point, yes, China would be estatic is any country would accept Yuan to settle their oil transactions. Their ecstasy would be due to the fact that the Yuan is not traceable internationally. You read that correctly, outside of the country it's as worthless as a three dollar bill, or perhaps an East German Mark would be a more appropriate analogy. China forbids the possession of Yuan outside it's borders, so..... it's really tough for an oil seller to hold a bank account denominated in Yuan. In effect, China's own laws prevent it's currency ever being used outside it's borders. One day this might change, but this will most likely take decades to change.
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China's own laws prevent it's currency ever being used outside it's borders. One day this might change, but this will most likely take decades to change.
Never heard that before. Googling "is it legal to hold yuan outside China" brought up articles saying that:
China has been internationalizing the yuan since 2004-2008
https://en.wikipedia.org/wiki/Internationalization_of_the_renminbi
and there is both an "onshore" and "offshore" yuan, where the offshore yuan is for international use by all actors outside China (I think), and China exercises influence over pricing in different ways for the two yuan.
https://www.cnbc.com/2019/08/28/china-economy-how-pboc-controls-the-yuan-rmb-amid-trade-war.html
They're both more than six months old, though. Did something change?
Or, is the rule you're discussing one that applies to Chinese nationals, and applies to the onshore yuan?
Fwiw, Googling "cnh vs cny" brings up a shorter, more basic discussion of the two yuan:
https://www.neatcommerce.com/blog/cny-vs-cnh-differences-chinese-renminbi
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As far as I know it is not illegal to take RMB (yuan) out of China. It's really hard to get them back in though, so their value may be limited outside the country. A colleague was "fired" by his US bank for making too many RMB cash deposits.*
*He had a second position inside of China and at the end of each visit there he would withdraw a big chunk of his pay in cash and carry it into the USA because of how next to impossible it is for a non-Chinese citizen to wire money out of China. If I remember right, even Chinese citizens are limited to the equivalent of $50k or so in money they can send out of the country each year.
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At the risk of repeating myself: the US dollar is the world reserve currency because the world wants to buy goods priced in US dollars. There is a lot of goods and services produced or sold by American companies that the rest of the world wants to purchase. It's that simple.
In theory there's nothing stopping companies from doing business in other currencies. Just like there is nothing preventing companies from using other than Microsoft Office, or incorporating outside of Delaware.
In practice, nobody wants to deviate from the well established, well understood, norm. It's a virtuous circle. It doesn't matter what the original reason for doing X was. Now that everybody is doing it, moving away is hard.
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As far as I know it is not illegal to take RMB (yuan) out of China. ... next to impossible it is for a non-Chinese citizen to wire money out of China.
I wasn't referring to someone carrying a suitcase of cash out of China, but the situation where a foreign investor wants to move the money electronically, which as you mention was/is hard.
This article from Dec 2017 is what I meant, roughly:
"China puts US$15,000 annual personal cap on overseas bank card withdrawals"
https://www.scmp.com/news/china/economy/article/2126252/china-puts-us1500-daily-personal-cap-overseas-bank-card
I believe China is lifting restrictions this year to encourage foreign investment. But my point is only a few years ago China was tightly controlling Chinese yuan (人民币). One year you can withdraw a big investment, another year you can't - that's not a situation you want to be in, and favors the U.S. dollar. U.S. Treasuries are the most liquid investment in the world, and considered the safest investment in the world. China would need many years of consistency to approach the levels of trust the world places in the Federal Reserve and the U.S. dollar.
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Good points on CNY and CNH. I didn't want to confuse things by getting in too deep, but since you mention it.....
My company wanted to sell goods in China, but we decided not to do it because the customers in China can only pay in onshore Yuan (CNY). Nobody in China has access to offshore Yuan (CNH) any more than they have access to USD or EUR or perhaps even less so as it's not a physical currency. As a result, our company could bring in goods to China, sell them and not have a way to return the money to then purchase more goods, etc.
In other words, CNH is a hard currency and fully convertible into any other currency, yet not available in physical form. CNY is a soft currency, unconvertible and worthless outside of China, yet you can hold one in your hand.
CNH does not exist as a physical currency any more than the FinRand did. It was a 'digital' currency for financial transactions/foreign investments in South Africa under apartheid. Eventually it was phased out (!) under the new government. Not exactly the kind of track record one is looking for in currencies/reserve currencies.
Why any oil exporter would want to accept CNY is beyond me. They might be willing to accept CNH just as easily as they'd accept EUR or Swiss francs or Canadian dollars.
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As far as I know it is not illegal to take RMB (yuan) out of China. It's really hard to get them back in though, so their value may be limited outside the country. A colleague was "fired" by his US bank for making too many RMB cash deposits.*
*He had a second position inside of China and at the end of each visit there he would withdraw a big chunk of his pay in cash and carry it into the USA because of how next to impossible it is for a non-Chinese citizen to wire money out of China. If I remember right, even Chinese citizens are limited to the equivalent of $50k or so in money they can send out of the country each year.
Correct. Private citizens in China are limited to $50,000 annual currency controls. Because the Party knows what's best for you! Or some other reason. Dunno.
The above anecdote is unimaginable in any hard currency. In any other currency, the bank might give you a crappy exchange rate, or ask you to fill out forms to say where you got the money, but not close your accounts. Then again, with any other currency you'd just go to the bank and wire transfer the money to the foreign bank account (or wherever). But, in China you can't do that because the government doesn't allow it.
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As far as I know it is not illegal to take RMB (yuan) out of China. It's really hard to get them back in though, so their value may be limited outside the country. A colleague was "fired" by his US bank for making too many RMB cash deposits.*
*He had a second position inside of China and at the end of each visit there he would withdraw a big chunk of his pay in cash and carry it into the USA because of how next to impossible it is for a non-Chinese citizen to wire money out of China. If I remember right, even Chinese citizens are limited to the equivalent of $50k or so in money they can send out of the country each year.
Correct. Private citizens in China are limited to $50,000 annual currency controls. Because the Party knows what's best for you! Or some other reason. Dunno.
The above anecdote is unimaginable in any hard currency. In any other currency, the bank might give you a crappy exchange rate, or ask you to fill out forms to say where you got the money, but not close your accounts. Then again, with any other currency you'd just go to the bank and wire transfer the money to the foreign bank account (or wherever). But, in China you can't do that because the government doesn't allow it.
Yup. I'm not arguing that China's currency is at all viable as the basis of international trade or reserves held by international banks. Simply that the statement "China forbids the possession of Yuan outside it's borders" wasn't correct.
There's no legal problem with simply possessing RMB outside of China. Just logistical hurdles to getting much of it or using it once you have it.