Whenever I see headlines like this, I ask: what happened in 1994?
It was post-Cold War and central banks were trimming USD reserves to test alternatives.
Then, crises hit (tequila, Asian, Russian, dot com) and the world reconsolidated around USD, thanks to the immense strength of the Federal Reserve and IMF.
Similarly now, reserve share is falling as countries hedge sanctions and geopolitics, yet dollar usage in trade, debt, and crisis funding remains dominant, and unless a true full-stack alternative (liquidity, safety, yield, and crisis response) emerges, history will repeat.
Makes me wonder: is this just an artifact of the world being relatively "stable" right now?
No, this is an artifact of Russian reserves getting frozen in 2022 and autocracies the world round getting more careful about having all their eggs in that basket.
The PRC’s SAFE is selling dollars and buying gold in a very covert but absolutely massive fashion, and most likely, so are many other countries in a smaller way.
No, each pushed alternative is just worser. The euro could take over, but europe just revealed itself as a "lawful" player with no plan and no pants (security-wise) - so the euro is just defacto tied to the dollar value wise. For without the us guarding europe, the euro is just loaded with invisible gigantic security and pension debts.
BRICs is dealing in store credits and raw-materials. Every other empire and kingdom is not to be trusted or only to be trusted as long as the town power-drunk world-police-man does his job. He may be the towns drunk, mumbling "Screw you guys, im going home!" but he is also the only one so far doing a decent job as sheriff.
You can grasp how unreliable the other actors are, by how one of the hostile actors (russia) recently complained about the (world-police) doing what its proxies in yemen and ukraine are constantly doing (piracy) to venezuella. They complained about the break-down of maritime safety- to the us. Yep, its that bad.
I'm not an economist so someone please correct me / expand on this;
I'm guessing this is kind of a "It's not a problem until it's a crisis" situation? So far other central banks haven't begun selling treasuries, they've just stopped buying them. But once one starts selling it could become self reinforcing?
What could replace it? There doesn't seem to be any new hegemonic power on the same level. Could we enter a world where all central banks hold a mix of currencies and nobody benefits from being the reserve?
This is more of a go out with a whimper rather than a bang type thing. Being the world reserve currency (as well as the largest consumer market in the world) previously enabled the US to do things like relatively easily export inflation in spite of relatively reckless monetary policy. Now that inflation is sticking around far more persistently, even long term bonds have gone from 1-2% to 4%+, and so on. Stagflation is a conceivable longer term outcome.
The replacement will probably be a multinational currency with strictly controlled quantity tied to some sort of physical asset(s). Basically Bretton Woods 2.0, except with the learned experience of not just granting a single country immense power and having them pinky swear not to default on their obligations and then abuse that granted power. China's probably betting that that asset will be gold.
Gold-backed currencies, and even Bitcoin, are really good if you want your economy to be only this big, and never grow bigger. Eventually, a crisis will happen, and you'll say "actually, its now 1.3 yuan to the gram, because we need to build tanks", or "actually, did we say we had 8,000 tons of gold in reserve? we meant 9,000. Yeah we just counted, no you can't look at it, we have 9,000, here take the yuan and go build vaccines", or "its now illegal for citizens to own gold, turn it in at your nearest party headquarters" (even the US participated in that one!)
"actually, did we say we had 8,000 tons of gold in reserve? we meant 9,000. Yeah we just counted, no you can't look at it, we have 9,000, here take the yuan and go build vaccines"
Because dumping all of your US treasuries is a political statement. You can only sell to a willing buyer and announcing that you’re going to do that is tantamount to lighting wealth on fire. Treasuries are assets so there’s no counterparty that will “run out”.
> The replacement will probably be a multinational currency with strictly controlled quantity tied to [...] probably [...] gold.
This is econolibertarian fan fiction. Literally no one wants that except people already involved in speculating[1] on gold. Are there bad externalities to relying on a unlitaterally controlled reserve currency? Yes. Are they made better by handing financial control over to a bunch of fucking mine and vault operators? Let's be real, here.
Basically this idea appeals to people who've convinced themselves they can get rich betting on financial policy and stay rich by burying their loot in their metaphorical backyard.
[1] The very fact that such speculation even exists should be a triple exclamation point red flag on any argument about hard currency, but alas no.
US Treasuries have terms, if you aren’t refreshing your treasury buys, it is the same as selling them. US treasuries and by extension USD was useful because it could soak up billions of dollars of savings (debt for America) without taking a huge inflation hit (treasury rates were often less than inflation, so you still take some hit).
As for where that money is going now? Other currencies and saving instruments probably..
Its only really a crisis for people who are dependent on the US for protection. The whole compact is that you use the dollar, and the US will look after you (ie House of Saud, Europe, taiwan, south korea, etc) But that isn't really certain anymore.
You need to make tributes to the suntan king, and he is most capricious and likley to tariff the fuck out of you. So alternative destination for your goods is a necessity
Also the markets are not convinced that the fed is in good hands. The whole point of the fed is that they are far enough away from the meddling in Washington so that you can rely on the dollar. The fed is being steadily erroded, with the new chair being selected soon. The problem is that present administration is hell bent on loyalty over competence.
Printing dollars to get out of domestic budgetary problems was never a thing (excluding QE, but thats different, nominally) was never an option in the US. but that doesn't seem so far fetched now.
In some ways, this effect can have a positive impact on US citizens; demand for the US dollar requires supply to satisfy the demand. Where does that supply come from? Oftentimes: Printing. The US generally does not make a habit of telling US dollar buyers "no, we don't have any US dollars to sell you", so less demand on the dollar for reserve holdings can have a deflationary impact on its value. This can be combined with lowering interest rates, which creates more domestic demand for dollars, to help balance out the inflationary impacts from that.
Many economists take the stance that being the world's reserve currency is something of a two-edged sword; a curse that does come with geopolitical advantages, but bundles those advantages with significantly more difficult global financial responsibilities.
It’s either printing or increasing taxation for constant benefits. We all know what happens when the government tries to increase taxes at all, now try doing it for zero increased benefits. This is a populace that’s had candy for dinner since WW2, and forcing them to eat their vegetables will result in a never before seen level of civil unrest from people of all political inclinations.
The Fed most commonly uses Open Market Operations to modify the money supply, with "money printing" or Quantitative Easing used in more emergency situations.
But more broadly your comment doesn't really represent reality, whatever happens in the markets and economy the Fed manages inflation (or deflation) and it's much more complicated than a single relationship like you describe.
More interesting is trade, where the US consumes so much and pays out so many dollars for goods that places like China which run huge surpluses have few choices other than lend it back to the US.
Sure; and I'm referring directly to those "emergency situations", which aren't much of an "emergency" as most people would understand the word given that they've engaged in QE for ~7 of the past twenty years.
If they stop buying treasuries, that's still a big problem, because the US continues to run a deficit, and therefore continues to need to sell treasuries.
Imagine if there was a gold which could be transferred across borders easily and completely securely within seconds, proof of holdings and ownership could be easily proven, and there was no future risk of gold supply shocks (eg gold asteroid hitting earth or alchemy becomes viable).
All the arguments against gold are completely bogus because there is nothing stopping the price of gold from climbing to meet the economic need. The price of gold was suppressed for a long time by institutions, but this active suppression is increasingly difficult to continue.
As for verification and transfer, that's what electronic shares are for, distributed across a few key physical asset holders.
Only the fact that it would be an idiotic policy that would destroy the economy.
Why would you let your monetary policy be run by gold miners in China, Russia and Australia? They could cause inflation or deflation simply by increasing or decreasing gold production.
Conversely how is the Fed supposed to manage inflation if it runs out of gold?
Gold is an industrial metal, also used in jewelry, not a financial panacea.
Gold is a terrible unit of international money because the supply isn't flexible enough to accommodate any growth in international trade.
Contrary to popular belief, during history gold has always had limited role in the monetary system, because it was too scarce to really be useful (in most of human history, Silver, not gold was the cornerstone of trade, and trade itself was a tiny part of economic activity in an era where most of it was subsistence farming). It's only when banking and paper money replaced silver that gold took a bigger role in the monetary system. The gold standard is in fact an invention of the late 19th century and it didn't last long before it disappeared progressively (the first world war being the beginning of the end).
Unfortunately for us, it just happened to be the period when a bunch of influential economists grew up (particularly Ludwig Von Mises), and like every human being they assumed that the system they grew up with was special and what came after was decadent, an idea that has unfortunately since then become widespread in the general population.
Most people wrongly assume that the key property for a commodity to become the basis of a monetary system is scarcity, but in reality scarcity is a drawback. Money must be abundant enough (too abundant is bad, but too scarce is even worse).
The British pound was displaced by the US dollar. Currently, the US dollar just doesn't have a proper rival. The euro, yuan and rupee are considered politically suspect (each for its own unique reasons); the pound and yen have too small a base. Without further transformation of the global financial system, the only alternative is for banks to hold a basket of currencies, and in such a basket the dollar would likely still play a significant, if reduced, role. This is a slow process because it means changing the nature of currency reserves from a single safe haven to a "nest". What this means for USG spending power is not immediately clear.
Who considers them politically suspect? I’m guessing the people who live in the countries that use them don’t, and on the contrary would increasingly be seeing the USD as politically suspect.
The people who live in the countries that use them aren't relevant, because we are talking about them as reserve currencies. What matters is whether other countries see them as politically suspect.
Dollar dominance erosion shifting towards dollar inertia. Post RU sanctions dollar lost much of it's leverage (as geopolitical weapon), i.e. actual useful dominance function (transaction panopticon, sanctions)while still retaining most of the liability (Triffin etc). Dollar going to remain popular by volume because plumbing in place, but parallel payment systems last few years = systematic blindspots where US treasury can't monitor what others buy outside of dollar system, and generally weaker ability coerce countries. What's left of dollar system is US enjoying exorbitant privilege of going into ~35T and rapidly increasing debt to serve as asset for everyone else, while dragging down export via uncompetitive FX.
One interesting attack vector vs USD is PRC recycling it's dollar surplus / shadow lending it's USD reserves at more favorable rates than US gov can, i.e. countries (emerging markets / BRI recipients) who would have borrowed USD from FED (or US influenced IMF/WB) now borrow from USD from PRC -> reduce US treasuries demand and drive up US interest -> further increase US debt. PRC basically hijacked and weaponize USD liquidity to make increasingly ineffective dollar system (as geopolitical tool) even more expensive to maintain while PRC can enjoy dollar liquidity without the maintenance costs. And that's probably the ultimately the goal, smart play is not to inherit reserve obligations, but to turn reserve holder's exorbitant privilege to exorbitant curse.
There’s more to international trade than what central banks do. The US is still a good place to invest overall, which is why we can run trade deficits. The money earned by foreigners, whether it’s from selling oil, cars, or anything else, goes into US investment of all kinds. Foreigners can buy the S&P 500 just as easily as bonds.
US interest rates have been declining lately, so perhaps other investments are more attractive.
Insane this administration wants pimp the US out to the highest bidder and let the crypto weirdos run the world. If we ever lost the reserve currency peg treasury bills will spike and it’ll be impossible to fund the government. We spend 7T every year and take in 5T in taxes. This admin is gutting the IRS and banking on tarrifs which are just taxes. So … without the ability to keep interest rates very low because everyone wants our debt …
My understanding is that it has happened. The oil market was tied to the USD. The BRICS have now implemented a payment system as robust as SWIFT system. Oil is now being paid for using that system.
Panics about how oil is being traded in non-USD terms are as old as the internet and, in all likelihood, even older than that. You can find usenet slop from 20-30 years ago about the petro-euro and the "tehran oil bourse". Here's an old site that is/was daily panics about the fall of the dollar, from 15-25 years ago. http://www.engdahl.oilgeopolitics.net/
Nobody is panicking. BRICS has gotten steadily larger and is gaining as an alternative banking system. This is competition. This just requires more thoughtful strategies.
So gutting public institutions and the tarifs do not work as trump intended because the fed opposed it? What did they do achieve that? (Sorry if i come across as trump deranged.)
Highly unpopular opinion here and I'm going to get downvoted into the ground (who cares), but ... this has been a very long time coming and has very much been a self-inflicted change.
My bet is that it will end up being a very good thing for the world at large.
China has recently started to buy Arabian oil and paying with yuan.
Major countries (India, China) are starting to buy Russian raw materials and paying directly using rubles.
In both cases, trade is happening and completely bypassing the once unavoidable USD.
The US choosing to weaponize the USD for geopolitical purposes has finally made the world realize the immense loss of sovereignty they had allowed themselves to be subjected to by making the USD the global trading currency.
This change will also force the US to finally get fiscally responsible and get the bloody USD printing machine under control, something they never had to do because of the USD reserve currency status.
The golden triangle of Russia (raw materials), India (highly educated workforce, strong demography), China (industrial powerhouse, stole the bulk of Western IP, is now producing more cutting-edge research than the west) finally free of the shackles of the USD and establishing direct overland trade routes that 100% avoid the seas (thereby 100% avoiding potential US embargoes, both financially and militarily enforced) ... the world is going to change in a rather profound way, finally relegating the US to being a simple country instead of the has-been empire it currently is.
Every time I hear people claiming India and China now not using dollar and the end of dollar’s dominance, I feel it’s coming from mostly clickbait headlines, not data. From a global payments share, dollar is still the single largest currency from a percentage standpoint, and is at historically highest share of global trade. Any changes to currency share are coming from lower volume from the Euro. On top of that, if you look at foreign reserves, yes there has been a recent selloff from the peak, but we are still at 60% of global reserves and its still kind of around the same historical average for the last 30+ years.
Edit: I also want to add, that while having the international trade entirely in dollar sounds very appealing, it can actually destroy US exports and damage the trade balance. This can have massive impact on domestic as well as global economies. What you want is a strong enough dollar.
I think youre conflating 2 different things, share as a payment currency and share as reserve.
Share as a payment/trade currency is not going away though it will be greatly reduced especially with CIPS that bypasses SWIFT.Andmost data showing no change is usually from SWIFT - with zero visibility to the volumes in CIPS.
Share as reserve is more visibly viz central banks stacking gold and hedging on treasuries , with most tresurie bids coming in from offshore financial hubs likethe Caymans.So could be a whole shellgame there to inflate the volumes.
So yeah the $ isnt going away anytime soon (cross border trade still requires it in many places),the exorbitant privilege it enjoyed is.
> Every time I hear people claiming India and China now not using dollar and the end of dollar’s dominance, I feel it’s coming from mostly clickbait headlines
I would encourage you to actually take a gander at the history of reserve currencies, how long they last, how they lose their reserve status, and what the current state of thinking around where the dollar is headed.
Unless you would classify the IMF as a clickbait farm, of course.
Start with the brit. pound and what led its downfall to the niche financial instrument it is today.
But the pound is just the latest, and by no mean the only one.
> get the bloody USD printing machine under control
The amount the US government spends on debt service is already unreasonable. If the US dollar lost reserve status, the first thing that would happen is that the Fed would have to buy the debt with newly created money to prevent bond rates from causing interest payments to explode. Meanwhile the act of other countries unloading US dollar reserves would cause significant inflation in itself.
Basically, loss of reserve status = hyperinflation. At least at the outset.
On the plus side, that would pretty much wipe out the excessive amount of US consumer debt as long as wages stay consistent with the value of the dollar.
> My bet is that it will end up being a very good thing for the world at large.
I generally agree with pretty much all your points other than this one.
While it will be good for other countries to regain sovereignty - and the weaponization of the US dollar for trivial reasons will be the biggest self-own perhaps in history - I do not think the world is going to be a better more peaceful place in 50 years.
It might be more free in a certain sense though, which may or may not end up long-term (over multiple generations) being better overall for humanity. Time will tell.
Certainly though, the average quality of life in the US is about to plummet.
Lot of emotion in this comment; not a lot of substance. I think you're misunderstanding how some of these systems work.
> This change will also force the US to finally get fiscally responsible and get the bloody USD printing machine under control, something they never had to do because of the USD reserve currency status.
It is not the case that the US didn't "need" to get the USD printing machine under control because of the reserve status; it is the case that the US
"could not" get the USD printing machine under control, because of the reserve status. When there is demand for US dollars, domestic or foreign, US dollars sometimes needed to be printed to satisfy that demand. If the US decides to not print those dollars; this is literally "defaulting on the debt", and would be bad-bad.
This gets at where you're misunderstanding how these systems work, because I think you're imagining that US debt is, like, an account in your Chase app that goes up, then you pay it down. US debt are, obviously, bonds. The USG says "we've got bonds to sell, they're at N year M% interest". Buyers say "we want those bonds we'll buy them". The USG is now in debt, and is obligated to repay those bonds; and sometimes has to print money to do so. This gets at the previous paragraph; money, broadly, is printed to satisfy debt obligations, not directly to service the deficit (proceeds from the initial bond sale are what could be said to directly service the deficit, but that's pennies compared to the size of the overall market).
Extending the Chase app analogy, you have it internalized that if we just get the deficit under control, then we could start "paying down the debt". In fact, probably, even our President understands it like this. But this isn't how it works. To "pay down the debt" would require two things to happen: We stop issuing new treasury bonds, and we pay off the already issued ones over 20/30/etc years as they mature.
The general professional sentiment on what would happen if the US even communicated it wanted to, in totally good faith, begin doing this at some point in the future, is basically armageddon. You have it in your head that, because Dave Ramsey says debt bad, the US should have no debt; but the world wants our debt; it has an insatiable (though, decreasing) appetite for it. Depriving the world of this debt would leave trillions of dollar-equivalents without anywhere to park safe from inflation, which would descend global financial markets into chaos. Tens of millions of people would starve in the first three months, among other undesirable outcomes. Some actively make the argument that the USG refusing to take on new debt would be net-worse for the world than the US defaulting on their existing debt, though its an interesting space to game out; a little game of global-cataclysm worst-thing-to-ever-happen-to-humanity olympics you can play.
But, debt servicing is becoming unmanageable for the US budget; so the best case for the United States is that USG debt demand from the rest of the world drops slowly and naturally, so we can naturally slow the issuance of new debt; and over 100 or so more years let managed inflation catch us up to recover from the utter shitshows that was 2001, 2008, and 2020. Everything I've seen, and I do mean everything, suggests that this is what is happening; but we'll know for sure in 90 more years.
Ooooh that must've struck a nerve. Seems we can't post that here without massive loss of reputation. Progressivism != liberalism. That stuff just doesn't fare well, even as sarcasm.
Dude is giving what many have wanted for years, the largest of which is a massive reduction in US hegemony. Restarted militarization of Europe, accelerated the expansion of China into Africa. Causing Five Eyes to curtail the flow of intel.
But at the same time, utterly burning US soft power with the shuttering of USAID and most likely causing 14M excess child deaths world wide. Shutting down USAID was a bigger "mistake" than the invasion of Iraq and the blowback will be even larger.
Bro just drove the US empire off a cliff. Manufacturing will have to come back if they succeed in burning US currency. Good thing the rich have so much of it, Elon at 1/10th is still 40-70B.
Whenever I see headlines like this, I ask: what happened in 1994?
It was post-Cold War and central banks were trimming USD reserves to test alternatives.
Then, crises hit (tequila, Asian, Russian, dot com) and the world reconsolidated around USD, thanks to the immense strength of the Federal Reserve and IMF.
Similarly now, reserve share is falling as countries hedge sanctions and geopolitics, yet dollar usage in trade, debt, and crisis funding remains dominant, and unless a true full-stack alternative (liquidity, safety, yield, and crisis response) emerges, history will repeat.
Makes me wonder: is this just an artifact of the world being relatively "stable" right now?
No, this is an artifact of Russian reserves getting frozen in 2022 and autocracies the world round getting more careful about having all their eggs in that basket.
The PRC’s SAFE is selling dollars and buying gold in a very covert but absolutely massive fashion, and most likely, so are many other countries in a smaller way.
No, each pushed alternative is just worser. The euro could take over, but europe just revealed itself as a "lawful" player with no plan and no pants (security-wise) - so the euro is just defacto tied to the dollar value wise. For without the us guarding europe, the euro is just loaded with invisible gigantic security and pension debts.
BRICs is dealing in store credits and raw-materials. Every other empire and kingdom is not to be trusted or only to be trusted as long as the town power-drunk world-police-man does his job. He may be the towns drunk, mumbling "Screw you guys, im going home!" but he is also the only one so far doing a decent job as sheriff.
You can grasp how unreliable the other actors are, by how one of the hostile actors (russia) recently complained about the (world-police) doing what its proxies in yemen and ukraine are constantly doing (piracy) to venezuella. They complained about the break-down of maritime safety- to the us. Yep, its that bad.
I'm not an economist so someone please correct me / expand on this;
I'm guessing this is kind of a "It's not a problem until it's a crisis" situation? So far other central banks haven't begun selling treasuries, they've just stopped buying them. But once one starts selling it could become self reinforcing?
What could replace it? There doesn't seem to be any new hegemonic power on the same level. Could we enter a world where all central banks hold a mix of currencies and nobody benefits from being the reserve?
This is more of a go out with a whimper rather than a bang type thing. Being the world reserve currency (as well as the largest consumer market in the world) previously enabled the US to do things like relatively easily export inflation in spite of relatively reckless monetary policy. Now that inflation is sticking around far more persistently, even long term bonds have gone from 1-2% to 4%+, and so on. Stagflation is a conceivable longer term outcome.
The replacement will probably be a multinational currency with strictly controlled quantity tied to some sort of physical asset(s). Basically Bretton Woods 2.0, except with the learned experience of not just granting a single country immense power and having them pinky swear not to default on their obligations and then abuse that granted power. China's probably betting that that asset will be gold.
No, physically backed currencies will not return because physical goods do not correlate with the size of an economy, especially the amount of gold
Gold-backed currencies, and even Bitcoin, are really good if you want your economy to be only this big, and never grow bigger. Eventually, a crisis will happen, and you'll say "actually, its now 1.3 yuan to the gram, because we need to build tanks", or "actually, did we say we had 8,000 tons of gold in reserve? we meant 9,000. Yeah we just counted, no you can't look at it, we have 9,000, here take the yuan and go build vaccines", or "its now illegal for citizens to own gold, turn it in at your nearest party headquarters" (even the US participated in that one!)
"actually, did we say we had 8,000 tons of gold in reserve? we meant 9,000. Yeah we just counted, no you can't look at it, we have 9,000, here take the yuan and go build vaccines"
You cant do that with bitcoin
We almost got that with Bretton Woods 1.0:
https://en.wikipedia.org/wiki/Bancor
With highly liquid capital markets, why wouldn't the dynamics be more like a bank run?
Because dumping all of your US treasuries is a political statement. You can only sell to a willing buyer and announcing that you’re going to do that is tantamount to lighting wealth on fire. Treasuries are assets so there’s no counterparty that will “run out”.
Imagine how red 100 years of economists faces will be when the world ends up back on a gold backed currency.
Probably only takes 2 years before they start inventing abstractions on top of it and this kicking off the eventually next economic disaster.
There were, of course, no economic disasters back when the world operated on gold-backed currencies.
The goldbugs won't be red in the face, though, because they are never wrong and are constitutionally incapable of feeling any shame.
Works until we have someone mining asteroids for gold. Then the gold backed currency collapses overnight.
No that's a good thing actually, because then we get asteroid mining spaceships
> The replacement will probably be a multinational currency with strictly controlled quantity tied to [...] probably [...] gold.
This is econolibertarian fan fiction. Literally no one wants that except people already involved in speculating[1] on gold. Are there bad externalities to relying on a unlitaterally controlled reserve currency? Yes. Are they made better by handing financial control over to a bunch of fucking mine and vault operators? Let's be real, here.
Basically this idea appeals to people who've convinced themselves they can get rich betting on financial policy and stay rich by burying their loot in their metaphorical backyard.
[1] The very fact that such speculation even exists should be a triple exclamation point red flag on any argument about hard currency, but alas no.
US Treasuries have terms, if you aren’t refreshing your treasury buys, it is the same as selling them. US treasuries and by extension USD was useful because it could soak up billions of dollars of savings (debt for America) without taking a huge inflation hit (treasury rates were often less than inflation, so you still take some hit).
As for where that money is going now? Other currencies and saving instruments probably..
Its only really a crisis for people who are dependent on the US for protection. The whole compact is that you use the dollar, and the US will look after you (ie House of Saud, Europe, taiwan, south korea, etc) But that isn't really certain anymore.
You need to make tributes to the suntan king, and he is most capricious and likley to tariff the fuck out of you. So alternative destination for your goods is a necessity
Also the markets are not convinced that the fed is in good hands. The whole point of the fed is that they are far enough away from the meddling in Washington so that you can rely on the dollar. The fed is being steadily erroded, with the new chair being selected soon. The problem is that present administration is hell bent on loyalty over competence.
Printing dollars to get out of domestic budgetary problems was never a thing (excluding QE, but thats different, nominally) was never an option in the US. but that doesn't seem so far fetched now.
In some ways, this effect can have a positive impact on US citizens; demand for the US dollar requires supply to satisfy the demand. Where does that supply come from? Oftentimes: Printing. The US generally does not make a habit of telling US dollar buyers "no, we don't have any US dollars to sell you", so less demand on the dollar for reserve holdings can have a deflationary impact on its value. This can be combined with lowering interest rates, which creates more domestic demand for dollars, to help balance out the inflationary impacts from that.
Many economists take the stance that being the world's reserve currency is something of a two-edged sword; a curse that does come with geopolitical advantages, but bundles those advantages with significantly more difficult global financial responsibilities.
It’s either printing or increasing taxation for constant benefits. We all know what happens when the government tries to increase taxes at all, now try doing it for zero increased benefits. This is a populace that’s had candy for dinner since WW2, and forcing them to eat their vegetables will result in a never before seen level of civil unrest from people of all political inclinations.
The Fed most commonly uses Open Market Operations to modify the money supply, with "money printing" or Quantitative Easing used in more emergency situations.
But more broadly your comment doesn't really represent reality, whatever happens in the markets and economy the Fed manages inflation (or deflation) and it's much more complicated than a single relationship like you describe.
More interesting is trade, where the US consumes so much and pays out so many dollars for goods that places like China which run huge surpluses have few choices other than lend it back to the US.
Sure; and I'm referring directly to those "emergency situations", which aren't much of an "emergency" as most people would understand the word given that they've engaged in QE for ~7 of the past twenty years.
If they stop buying treasuries, that's still a big problem, because the US continues to run a deficit, and therefore continues to need to sell treasuries.
There’s nothing fundamentally stopping all currencies from floating against gold and gold being the base asset
If your economy grows by 100 percent, and the supply of gold grows by 10 percent, its a massive problem
Imagine if there was a gold which could be transferred across borders easily and completely securely within seconds, proof of holdings and ownership could be easily proven, and there was no future risk of gold supply shocks (eg gold asteroid hitting earth or alchemy becomes viable).
This sounds amazing! Is it also protected from being lost forever by trivial mistakes that are very common?
All the arguments against gold are completely bogus because there is nothing stopping the price of gold from climbing to meet the economic need. The price of gold was suppressed for a long time by institutions, but this active suppression is increasingly difficult to continue.
As for verification and transfer, that's what electronic shares are for, distributed across a few key physical asset holders.
There is a fixed supply of gold that does not correlate with economic output. It makes zero sense to tie the value of paper money to gold.
Only the fact that it would be an idiotic policy that would destroy the economy.
Why would you let your monetary policy be run by gold miners in China, Russia and Australia? They could cause inflation or deflation simply by increasing or decreasing gold production.
Conversely how is the Fed supposed to manage inflation if it runs out of gold?
Gold is an industrial metal, also used in jewelry, not a financial panacea.
Gold is a terrible unit of international money because the supply isn't flexible enough to accommodate any growth in international trade.
Contrary to popular belief, during history gold has always had limited role in the monetary system, because it was too scarce to really be useful (in most of human history, Silver, not gold was the cornerstone of trade, and trade itself was a tiny part of economic activity in an era where most of it was subsistence farming). It's only when banking and paper money replaced silver that gold took a bigger role in the monetary system. The gold standard is in fact an invention of the late 19th century and it didn't last long before it disappeared progressively (the first world war being the beginning of the end).
Unfortunately for us, it just happened to be the period when a bunch of influential economists grew up (particularly Ludwig Von Mises), and like every human being they assumed that the system they grew up with was special and what came after was decadent, an idea that has unfortunately since then become widespread in the general population.
Most people wrongly assume that the key property for a commodity to become the basis of a monetary system is scarcity, but in reality scarcity is a drawback. Money must be abundant enough (too abundant is bad, but too scarce is even worse).
The British pound was displaced by the US dollar. Currently, the US dollar just doesn't have a proper rival. The euro, yuan and rupee are considered politically suspect (each for its own unique reasons); the pound and yen have too small a base. Without further transformation of the global financial system, the only alternative is for banks to hold a basket of currencies, and in such a basket the dollar would likely still play a significant, if reduced, role. This is a slow process because it means changing the nature of currency reserves from a single safe haven to a "nest". What this means for USG spending power is not immediately clear.
Who considers them politically suspect? I’m guessing the people who live in the countries that use them don’t, and on the contrary would increasingly be seeing the USD as politically suspect.
The people who live in the countries that use them aren't relevant, because we are talking about them as reserve currencies. What matters is whether other countries see them as politically suspect.
Dollar dominance erosion shifting towards dollar inertia. Post RU sanctions dollar lost much of it's leverage (as geopolitical weapon), i.e. actual useful dominance function (transaction panopticon, sanctions)while still retaining most of the liability (Triffin etc). Dollar going to remain popular by volume because plumbing in place, but parallel payment systems last few years = systematic blindspots where US treasury can't monitor what others buy outside of dollar system, and generally weaker ability coerce countries. What's left of dollar system is US enjoying exorbitant privilege of going into ~35T and rapidly increasing debt to serve as asset for everyone else, while dragging down export via uncompetitive FX.
One interesting attack vector vs USD is PRC recycling it's dollar surplus / shadow lending it's USD reserves at more favorable rates than US gov can, i.e. countries (emerging markets / BRI recipients) who would have borrowed USD from FED (or US influenced IMF/WB) now borrow from USD from PRC -> reduce US treasuries demand and drive up US interest -> further increase US debt. PRC basically hijacked and weaponize USD liquidity to make increasingly ineffective dollar system (as geopolitical tool) even more expensive to maintain while PRC can enjoy dollar liquidity without the maintenance costs. And that's probably the ultimately the goal, smart play is not to inherit reserve obligations, but to turn reserve holder's exorbitant privilege to exorbitant curse.
There’s more to international trade than what central banks do. The US is still a good place to invest overall, which is why we can run trade deficits. The money earned by foreigners, whether it’s from selling oil, cars, or anything else, goes into US investment of all kinds. Foreigners can buy the S&P 500 just as easily as bonds.
US interest rates have been declining lately, so perhaps other investments are more attractive.
Who would tell. Economy runs on 'trust' - not on 'by tomorrow we apply this random tax rate to this pinguin island and everone else'.
A 2% change, more likely this has something to do with the global rush for US tech stocks.
Some countries like South Korea are crazy on US stock trades.
Dollars' depreciation probably helped a bit too.
We do have a trojan horse with social security. Overnight we can become the largest single owner of global corporate stocks and bonds.
So is "non-traditional reserve currencies" cryptocurrency or not?
Insane this administration wants pimp the US out to the highest bidder and let the crypto weirdos run the world. If we ever lost the reserve currency peg treasury bills will spike and it’ll be impossible to fund the government. We spend 7T every year and take in 5T in taxes. This admin is gutting the IRS and banking on tarrifs which are just taxes. So … without the ability to keep interest rates very low because everyone wants our debt …
My understanding is that it has happened. The oil market was tied to the USD. The BRICS have now implemented a payment system as robust as SWIFT system. Oil is now being paid for using that system.
Panics about how oil is being traded in non-USD terms are as old as the internet and, in all likelihood, even older than that. You can find usenet slop from 20-30 years ago about the petro-euro and the "tehran oil bourse". Here's an old site that is/was daily panics about the fall of the dollar, from 15-25 years ago. http://www.engdahl.oilgeopolitics.net/
Nobody is panicking. BRICS has gotten steadily larger and is gaining as an alternative banking system. This is competition. This just requires more thoughtful strategies.
Are you trying to project this unto Trump when the Fed is doing everything it can to oppose his measures?
I'm only the crypto weirdo guy asking.
So gutting public institutions and the tarifs do not work as trump intended because the fed opposed it? What did they do achieve that? (Sorry if i come across as trump deranged.)
Have you ever thought it doesn't matter what the fed does to try to minimize the damage.
Trust needs to come from the top, and there is none there right now.
Highly unpopular opinion here and I'm going to get downvoted into the ground (who cares), but ... this has been a very long time coming and has very much been a self-inflicted change.
My bet is that it will end up being a very good thing for the world at large.
China has recently started to buy Arabian oil and paying with yuan.
Major countries (India, China) are starting to buy Russian raw materials and paying directly using rubles.
In both cases, trade is happening and completely bypassing the once unavoidable USD.
The US choosing to weaponize the USD for geopolitical purposes has finally made the world realize the immense loss of sovereignty they had allowed themselves to be subjected to by making the USD the global trading currency.
This change will also force the US to finally get fiscally responsible and get the bloody USD printing machine under control, something they never had to do because of the USD reserve currency status.
The golden triangle of Russia (raw materials), India (highly educated workforce, strong demography), China (industrial powerhouse, stole the bulk of Western IP, is now producing more cutting-edge research than the west) finally free of the shackles of the USD and establishing direct overland trade routes that 100% avoid the seas (thereby 100% avoiding potential US embargoes, both financially and militarily enforced) ... the world is going to change in a rather profound way, finally relegating the US to being a simple country instead of the has-been empire it currently is.
Every time I hear people claiming India and China now not using dollar and the end of dollar’s dominance, I feel it’s coming from mostly clickbait headlines, not data. From a global payments share, dollar is still the single largest currency from a percentage standpoint, and is at historically highest share of global trade. Any changes to currency share are coming from lower volume from the Euro. On top of that, if you look at foreign reserves, yes there has been a recent selloff from the peak, but we are still at 60% of global reserves and its still kind of around the same historical average for the last 30+ years.
Edit: I also want to add, that while having the international trade entirely in dollar sounds very appealing, it can actually destroy US exports and damage the trade balance. This can have massive impact on domestic as well as global economies. What you want is a strong enough dollar.
https://www.federalreserve.gov/econres/notes/feds-notes/the-...
I think youre conflating 2 different things, share as a payment currency and share as reserve.
Share as a payment/trade currency is not going away though it will be greatly reduced especially with CIPS that bypasses SWIFT.Andmost data showing no change is usually from SWIFT - with zero visibility to the volumes in CIPS.
Share as reserve is more visibly viz central banks stacking gold and hedging on treasuries , with most tresurie bids coming in from offshore financial hubs likethe Caymans.So could be a whole shellgame there to inflate the volumes.
So yeah the $ isnt going away anytime soon (cross border trade still requires it in many places),the exorbitant privilege it enjoyed is.
> Every time I hear people claiming India and China now not using dollar and the end of dollar’s dominance, I feel it’s coming from mostly clickbait headlines
I would encourage you to actually take a gander at the history of reserve currencies, how long they last, how they lose their reserve status, and what the current state of thinking around where the dollar is headed.
Unless you would classify the IMF as a clickbait farm, of course.
Start with the brit. pound and what led its downfall to the niche financial instrument it is today.
But the pound is just the latest, and by no mean the only one.
Here are a few links to get you started:
https://marketcap.com.au/history-world-reserve-currencies/
https://www.economicprinciples.org/DalioChangingWorldOrderCh...
Barry Eichengreen – “Exorbitant Privilege”
https://www.imf.org/en/publications/departmental-papers-poli...
> get the bloody USD printing machine under control
The amount the US government spends on debt service is already unreasonable. If the US dollar lost reserve status, the first thing that would happen is that the Fed would have to buy the debt with newly created money to prevent bond rates from causing interest payments to explode. Meanwhile the act of other countries unloading US dollar reserves would cause significant inflation in itself.
Basically, loss of reserve status = hyperinflation. At least at the outset.
On the plus side, that would pretty much wipe out the excessive amount of US consumer debt as long as wages stay consistent with the value of the dollar.
> My bet is that it will end up being a very good thing for the world at large.
I generally agree with pretty much all your points other than this one.
While it will be good for other countries to regain sovereignty - and the weaponization of the US dollar for trivial reasons will be the biggest self-own perhaps in history - I do not think the world is going to be a better more peaceful place in 50 years.
It might be more free in a certain sense though, which may or may not end up long-term (over multiple generations) being better overall for humanity. Time will tell.
Certainly though, the average quality of life in the US is about to plummet.
Lot of emotion in this comment; not a lot of substance. I think you're misunderstanding how some of these systems work.
> This change will also force the US to finally get fiscally responsible and get the bloody USD printing machine under control, something they never had to do because of the USD reserve currency status.
It is not the case that the US didn't "need" to get the USD printing machine under control because of the reserve status; it is the case that the US "could not" get the USD printing machine under control, because of the reserve status. When there is demand for US dollars, domestic or foreign, US dollars sometimes needed to be printed to satisfy that demand. If the US decides to not print those dollars; this is literally "defaulting on the debt", and would be bad-bad.
This gets at where you're misunderstanding how these systems work, because I think you're imagining that US debt is, like, an account in your Chase app that goes up, then you pay it down. US debt are, obviously, bonds. The USG says "we've got bonds to sell, they're at N year M% interest". Buyers say "we want those bonds we'll buy them". The USG is now in debt, and is obligated to repay those bonds; and sometimes has to print money to do so. This gets at the previous paragraph; money, broadly, is printed to satisfy debt obligations, not directly to service the deficit (proceeds from the initial bond sale are what could be said to directly service the deficit, but that's pennies compared to the size of the overall market).
Extending the Chase app analogy, you have it internalized that if we just get the deficit under control, then we could start "paying down the debt". In fact, probably, even our President understands it like this. But this isn't how it works. To "pay down the debt" would require two things to happen: We stop issuing new treasury bonds, and we pay off the already issued ones over 20/30/etc years as they mature.
The general professional sentiment on what would happen if the US even communicated it wanted to, in totally good faith, begin doing this at some point in the future, is basically armageddon. You have it in your head that, because Dave Ramsey says debt bad, the US should have no debt; but the world wants our debt; it has an insatiable (though, decreasing) appetite for it. Depriving the world of this debt would leave trillions of dollar-equivalents without anywhere to park safe from inflation, which would descend global financial markets into chaos. Tens of millions of people would starve in the first three months, among other undesirable outcomes. Some actively make the argument that the USG refusing to take on new debt would be net-worse for the world than the US defaulting on their existing debt, though its an interesting space to game out; a little game of global-cataclysm worst-thing-to-ever-happen-to-humanity olympics you can play.
But, debt servicing is becoming unmanageable for the US budget; so the best case for the United States is that USG debt demand from the rest of the world drops slowly and naturally, so we can naturally slow the issuance of new debt; and over 100 or so more years let managed inflation catch us up to recover from the utter shitshows that was 2001, 2008, and 2020. Everything I've seen, and I do mean everything, suggests that this is what is happening; but we'll know for sure in 90 more years.
Trump is the most progressive president we have ever had.
Ooooh that must've struck a nerve. Seems we can't post that here without massive loss of reputation. Progressivism != liberalism. That stuff just doesn't fare well, even as sarcasm.
He is neither progressive nor liberal. It’s not sarcasm, it’s bullshit.
Dude is giving what many have wanted for years, the largest of which is a massive reduction in US hegemony. Restarted militarization of Europe, accelerated the expansion of China into Africa. Causing Five Eyes to curtail the flow of intel.
But at the same time, utterly burning US soft power with the shuttering of USAID and most likely causing 14M excess child deaths world wide. Shutting down USAID was a bigger "mistake" than the invasion of Iraq and the blowback will be even larger.
Bro just drove the US empire off a cliff. Manufacturing will have to come back if they succeed in burning US currency. Good thing the rich have so much of it, Elon at 1/10th is still 40-70B.