The primacy of the US dollar looks unsustainable
economist.com
economist.com
For the longest time, we've been under a hegemony that was originally far more stable than the world before it. This has helped to bring an unprecedented era of prosperity. The American empire is perhaps the first empire in history where people want to be under its banner as opposed to out in the cold.† But current antics threaten that very tenuous stability that was fought over for so many centuries. It is not without any faults, but out of all the alternatives out there - this is the most peaceful one.
Yes, there are arguments that broadening the base of support will help not hinder stability.ß The fact remains that this is the best system we have found so far and it does actually work. We might even someday have something far more stable than this, but the transition to that is not going to be easy. In fact, I think that on the existential risks meter of the world - stabilising American hegemony should be a priority. It is vital that this system is maintained until a better one emerges to take its place.
People might disagree, but it really is a tragedy that countries and groups now want to overthrow the American hegemony largely due to political missteps at home and a steady disconnect between what it means to be hegemon and the day-to-day of American politics. They've forgotten that their alliances were built upon shaky ground and need upkeep to maintain. And that even the firmest of empires do fall.
† http://www.middlebury.edu/media/view/214721/original/OdomPap... ß http://www.economist.com/blogs/democracyinamerica/2012/02/wo...
What I wonder is, how is inflation being calculated in terms of the CPI, which is essentially prices in dollars? After all, what exactly is being measured by this? If dollars the very currency which is being printed, how does measuring prices account for how much M0 money there is?
Purchasing power of Americans.
>how does measuring prices account for how much M0 money there is?
Why does it need to? On its own, the amount of M0 is irrelevant. We care about how the effects of supply manifest in prices.
Unlike internet stocks or housing, one big factor in bond prices is confidence in the US as a political regime, which remains high.
My interpretation is that the bond market rolls its eyes at the posturing kerfluffle in our electoral politics and ignores it.
Yeah, I know....
This is the point - no more bond vigilantes as in days of yore. Bonds are smooth sailing on calm seas. This signals that everybody's on board with the low rates.
So this signals a lack of concern without deficits/debt.
This kind of thing has happened before in some cases. Malta wanted to be part of the British Empire when the French left in the early 19th century. Of course "wanted" might need to be taken with a pinch of salt, given that representative democracy and polling were not established procedures at the time.
That's a pretty poor summary of the controversy. It's not like the U.S. is debating whether women should have Pap smears every two years or every three years. If that's how the international media is presenting the controversy, it wouldn't surprise me that the U.S. would come across poorly.
As an American, that sounds like an fairly accurate summary to me. A sizable number of US elected officials are fighting to defund/shutdown the largest women's healthcare provider in the nation.
But regardless of any opinions on that specific issue -- It seems completely rational to me that the international community might consider American currency "higher risk", when we're increasingly threatening to shut down our federal government over reasonably-straightforward issues that most developed nations resolved decades ago (like healthcare).
I assume our multiple recent debt-ceiling crises probably add to that risk profile too.
Congress is wholly empowered to pass any budget it likes. If President Obama wants to veto a budget to cater to a special interest group, I suppose that's his right, too. We obviously don't want that, but the White House and Congress aren't exactly looking for joint action on this.
The frustrating thing about this whole controversy is that there are compromises here (like bringing late-term abortion restrictions in line with international norms), but entrenched special interests are pushing nuclear options since nobody can stomach understanding their opponents.
As a community heavier in skeptics and rationalists than the general public, I would hope HN and the tech community to be good examples in promoting understanding and finding compromise.
Where's the media outlet that specializes in moderation and compromise? There isn't one. Perhaps reason.com but not in an electorally interesting way.
You have generators of stories of barbarism on the Right and stories of oppression on the Left.
Yes, and the international community is wholly empowered to consider Congress a risk to the financial stability of the United States if it takes decisions that look like they're risking the financial stability of the United States. Congress has no power to dictate how other people view them; quite the opposite, they're supposed to be held accountable to others' view of them!
>As a community heavier in skeptics and rationalists than the general public, I would hope HN and the tech community to be good examples in promoting understanding and finding compromise.
Skepticism and rationality are about arriving to correct conclusions, not about pouring on the Fallacy of the Golden Mean until suddenly "compromising" on a policy that annual government shutdowns are a "reasonable" way to maintain currency values.
3% of the services Planned Parenthood provides are abortion-related: https://twitter.com/emschuch/status/649690759453646848
Also, Planned Parenthood has been found to be doing nothing wrong by offering fetal tissue from abortions at cost, with the permission of the patient:
http://www.csmonitor.com/USA/Justice/2015/0928/Planned-Paren...
http://www.huffingtonpost.com/entry/congress-planned-parenth...
http://www.msnbc.com/rachel-maddow-show/investigations-turn-...
Planned Parenthood exists to provide healthcare services to women, full stop. Abortions are only a very small part of those services, legal services I might add.
Progress, as usual, occurs one funeral at a time (old people dying with their no-longer-relevant views).
http://www.sba-list.org/sites/default/files/content/shared/1...
It's kind of a weird argument to act like abortion isn't core to Planned Parenthood. If it weren't that important, PP could spin abortion services into a separate organization. And then the conscientious objectors out there would have much less to complain about.
No, the weird argument is "We shouldn't fund Planned Parenthood because they provide a legal service we don't like."
Same sex marriage got here eventually, the legalization of marijuana will come to pass across the entire country in the next 3-6 years, and abortion too won't be fought over as soon as more conservative voters pass on (which no longer necessitates a republican party that must cater to its extremists).
Conservative talking points and beliefs are almost like zombies; dead, just not knowing it.
What is weird about using politics to fight for the things you agree with and against those you don't? Even if you may not win?
I agree in principle, but abortion is a really stupid place to draw the line. I recognize that legal abortion makes my country a far better place, and likely a far safer one if the theories about the decline in violent crime being partially due to a decline in unwanted children hold any water. I don't have to "like" or "dislike" abortion to recognize the ROI in sound public policy.
When it comes to abortion and contraception, social conservatives want all of the authority and none of the responsibility. I don't want them to have either.
We don't have to agree with our opponents to be able to see the arguments from their side.
There is no objective basis for a moral judgment here, and in government, objectivity is a requirement for (good) lawmaking.
Opinions on abortion haven't changed nearly as much as gay marriage or marijuana have, and in fact have remained fairly static over the past 40 years:
http://www.gallup.com/poll/1576/Abortion.aspx
Scientifically, we really don't know when a fetus becomes a person - although we all probably agree that it does happen sometime between conception and birth - and since this question will likely never be conclusively answered, there will probably always be a fair number of people opposed to unfettered abortion.
As a new parent, I'm not convinced...
humanrebar, stop lying[1].
In another comment, you praised sceptics and expressed interest in promoting understanding and finding compromise, yet you post lies and cite bogus sources to support your lies. Shameful.
[1] http://www.politifact.com/punditfact/statements/2015/aug/04/...
"Not all of Planned Parenthood approximately 700 clinics offer prenatal services because prenatal care is not Planned Parenthood's focus."
That's the point behind the number. If even simple prenatal care (vitamins, education, referrals) were part of the focus of Planned Parenthood, they would be tracked and we would see them in the metrics. Even the PoliFact article doesn't address the underlying point... that abortion is a (if not 'the') core part of Planned Parenthood's mission.
Great point, but I think Americans would mostly fall into two camps.
- Those who realize how bad it is, and are eternally frustrated at our politicians.
- Those who don't care about the world at large. (my feeling is due to lack of education, but that is my own bias)
But I really agree with you, political circus is the perfect way to put it.
For example, lets say some banks got together and defined a meta-currency called Euro-Dollars, which is a mixture of 55% Euros and 45% USD. I could take out a loan in Euro-Dollars from a bank. I could buy and sell goods internationally in Euro-Dollars. I could hold my personal savings in Euro-Dollars. I could buy on Ebay, Amazon and Alibaba with Euro-Dollars because the sellers know that it's a good idea to diversify their currency holdings, they can buy other goods and services with Euro-Dollars and currency trading is relatively frictionless.
Or, perhaps, we could go further and create a currency that's a mix of the top 10 most traded in some suitable ratio. Rather like an index fund, wouldn't this insulate from the relative fluctuations of the individual economies and help facilitate international trade?
On another note, this would help insulate individuals from currency fluctuations in a global economy. I happen to be in Australia and my personal accounts are in AUD. Since 2011 AUD has dropped about 40% relative to USD. If I now want to buy something from a company in the US, I am 40% poorer. If my money had been split into a mix of major currencies, I would be in much the same position whether I now wanted to buy domestic or international goods. Some banks offer multi-currency accounts for personal use, but it's far from the norm. Wouldn't it make more sense if my bank automatically diversified my currency holdings to insulate me from international fluctuations?
(I say global apples, because Apple prices in Australia are probably pretty stable in AUD.)
Trade between countries otherwise degrades into complicated barters, which is the problem currencies tried to resolve on tribe/state level.
In the 90s the Polish zloty was pegged against a basket of 4 or 5 currencies, I forget, which included marks, dollars, yen, and swiss francs if I recall.
Today, the Singapore Dollar has one of the lowest aggregate volatilities, precisely because it is tightly controlled against a basket of global currencies.
The motivation is exactly what you point out: reducing exposure to a single currency's fluctuations, and trying to match a country's balance of payments more accurately. Often, unfortunately, because baskets go together with pegs (crawling or not, with bands or not), they encourage speculative attack at some stage or another.
You mention your consumption basket in AUD has become more expensive. Your country is highly exposed to commodities which have dropped about 37% in the past 3 years, as measured by the CRB. Thus your nation's income is declining, and you're unfortunately unavoidably exposed to that if you don't hedge your foreign consumption currency basket, because recognizing Australia's commodity links, the market has depreciated the AUD against the dollar by 28%, and by 15% against the EUR in the same 3 year period. That, by the way, keeps commodity prices denominated in AUD, more stable, and dampens the blow to the Australian economy. But it makes foreign goods more expensive (as it is supposed to given Australia's economic circumstances).
You could have hedged yourself quite well by simply going to a broker and selling an AUDUSD futures contract for example, and these contracts are available in "retail" size, or even smaller if you're prepared to get into the index betting sites. Essentially the option is open to you at very reasonable cost, to create your own exposure basket, and that basket, by the way, could also include commodities themselves. Indeed I would argue that currently, as we move towards higher risks of political/policy upheaval globally, hedging is more important than ever. But not putting all your eggs in one basket has always been good advice, as you point out ;-) My point is that you can do that with your liabilities as well as your assets, quite easily.
Minor point: Pegging is not equivalent to being backed by 55% EUR + 45% USD, and nothing else. The RUB had risks associated with it independent of those other currencies, whereas a true basket currency would not (or at least not to the same extent).
The last two people that wanted to challenge US dollar dominance in the world financial markets were Saddam Hussein (wanted to trade oil for Euros instead of USD) and Muammar Kadafi (wanted to trade oil for gold). We all know how that ended for both of them - their countries were invaded in under 6 months after they announced their plans.
Now, the only country powerful enough to force switch from USD to currency basket is China, and their recent initiatives, like creating AIIB bank, or devaluating juan are aimed at exactly that.
--> Americans can buy stuff / take international vacations more cheaply --> Better lifestyle
--> American corporations can use their stocks valued in dollars to takeover foreign companies/assets and expand more cheaply.
--> Power to punish enemies with financial sanctions/manipulations.
--> QE over and over again with near perfect impunity. Ability to rescue itself from certain kinds of financial crises.
#2 Sounds like something significant. Do you know of a way to quantify it?
#3 As far as I know, the threat is to shut financial institutions out of the US market. I don't think the US government has much control over a dollar once it's leaves the country.
#4 The Chinese have a similar ability to print massive amounts of money without inflation. I wonder if it's a property of sufficiently large economies. The article also mentions a downside that the Fed has had to print money to keep foreign institutions afloat.
You're kidding, right? Economic views aside, these men were monsters who, combined, were responsible for the deaths of hundreds of thousands, if not millions of people. These were not great men. They were monsters. I'm not going to call Charles Manson "charitable" and "soft-hearted" because his social views are liberal, the guy is still a monster. That's what he is, first and foremost.
And if you sell bonds for yuans that causes the yuan's value to raise which hurts Chinese exporters. So, devaluating it first was a way of neutralizing that effect, protecting China's economy.
Bond sale itself was a way of putting mild pressure on US in the ongoing negotiations about making Yuan part of world's reserve system.
China didn't just "start selling US treasury bonds". You're implying that they're offloading their bonds, they are far from it. China sold off an insignificant portion of their holdings for liquidity to bail out themselves. They were facing an economic crash and they were trying to stave it off. They needed cash to do that, hence, they sold a very specific amount of their bonds for that specific purpose.
If they sold all of their treasury bonds, it would be economic suicide because there would be so much unstableness in the global economy that every market would crash, including Chinas. They would probably fall the hardest, too.
Since all currencies are fungible, you're only a multiplication-by-the-exchange-rate away from any other currency.
The confusion I have is your argument of "that can't be the reserve currency advantage, because it's already true", which seems to ignore the (strong?_) probability that it's already true because of being the reserve currency.
I meant that vacations for people who live in non-dollar places are cheap, goods are cheap. I recall that trips from Canada cost pretty much the same as from the US, taxes notwithstanding.
The main complaint I hear about goods is VAT and import duty where applicable.
This allows the US to import goods for 'free' (in exchange for printed money). This is especially true for institutions which are close to the printing presses (the gov., big gov. contractors). This is what allows the US to have such an extravagant military spending.
Those US dollars printed that get stuffed under mattresses don't actually... exist, in a way, wrt to US monetary policy.
The military spending is the same as for everything else.
Sure. You can do this. But why would you rely on or expect your bank to do so, unless you wanted to pay for the service?
>that's a mix of the top 10 most traded in some suitable ratio.
The problem is there is no "suitable ratio". You're always speculating on the future value of currencies in the basket. Sure, the diversification will likely dampen the fluctuations, but you're equally likely to miss out on upside as downside.
But again, countries are free to do this right now if they want to. In discussions like this, there's always some implication that the US is asserting some authority to force countries to use the dollar, and if they could somehow just get off it, everything would be grand. In reality, it's a conscious economic decision to use or peg to the US dollar. Sometimes it's great, other times (like now, with the EMs hurting and the US economy relatively strong) it isn't.
And it is just that, talk. People forget, as the Yuan rises, so does the dollar. The real question is, how much ground is the Yuan gaining on the dollar? And the answer? None. If anything, it's taken a couple steps back.
You see all these articles over the last few years about how the Yuan is starting to do well but for some reason, people think that the U.S dollar just stands still the entire time and is letting it catch up. It doesn't work like that. If the yuan was to ever replace the dollar, it would be several decades, likely much more, before it's even remotely close to replacing the dollar as the world's currency. If it happens, it almost certainly won't happen in your lifetime unless some asteroid drops of the sky, destroying most of the U.S.
Even in that unlikely event, they would still have to do something about their rampant corruption before countries start pegging their currency to the Yuan. They rank 127th on the global corruption index. No country is going to willingly sign up for that, a country that tightly controls it's own currency and where politics, business and corruption are all one in the same. It's just not happening.
Like it or not, the U.S dollar is simply the lesser of all the evils. And it's not even close, we're talking orders of magnitude. It also has a fortitude that is unrivaled by anything before in world history.
Exactly. Reserve currency is as much about trust, political stability and transparency as it is transaction frequency and liquidity. China is a wonderful country, great people and an admirable success story. It also has the wrong political system and current value structure to rise to reserve currency status anytime soon.
https://en.wikipedia.org/wiki/Bancor
Meaning a currency not tied to any one nation, existing specifically for trade between nations.
And i'm not sure i follow the line about "rule of law" regarding China.
Rule OF law means that, at some level, I protect your interests (because I am forced to by the law). Rule BY law means I do whatever I want. You can't fully trust someone who is only committed to their own interests. Trust happens when I know that you will look out for my interests. Deep trust happens when I know you will look out for my interests even if it costs you.
If China's rulers think it will keep the Party in power, they won't hesitate to devalue their currency, or set an arbitrary exchange rate, or limit the amount of money foreigners can exchange, or any numbers of other things that could cause problems for a company holding a large amount of RMB. Imagine you sold $100 million of goods in RMB, and you have $95 million in expenses in USD. Great, convert RMB -> USD, collect $5 million in profit! But one day, you wake up to discover that the currency is worth 10% less than yesterday, or now there is a rule that you can only take $500 out of the country per day. In the first case you now have a $5 million loss, in the second case you have a cash flow problem. Not the kind of thing I look for in a reserve currency.
Edit: Talking strictly about constraints put on the government.
> In recent months the prospect of even a tiny rate
> rise in America has sucked capital from emerging
> markets, battering currencies and share prices.
> Foreigners own 20-50% of local-currency government
> bonds in places like Indonesia, Malaysia, Mexico,
> South Africa and Turkey: they are more likely to
> abandon emerging markets when American rates rise.
> America increasingly uses its financial clout as a
> political tool
> All this suggests that the global monetary and
> financial system will not smoothly or quickly wean
> itself off the greenback
They've been talking about SDRs for over 40 years. I'd say it's a demand problem, not an implementation problem.
There is (growing?) demand for a reserve currency. There is currently a single supplier.
I don't know if the demand is actually increasing - these conversations have been going on for decades.
The Euro was discussed as a potential rival reserve currency (e.g., see http://www.cer.org.uk/insights/euro-world%E2%80%99s-reserve-..., which says it was created with that idea), but that's faded recently.
Although people inside and outside the U.S. decry the capriciousness of the US government and political process, as long as there is no better (or even comparable) alternative, the US dollar will retain its position of prominence.
The Japanese Yen would rise to be the dominant currency, with Japan eventually becoming the top economy. Then it was the Euro that would inevitably conquer the dollar in importance. Then it was the Yuan that would of course conquer the dollar, with China becoming the dominant global economy - that prediction is also going to fall flat.
The dollar primacy is stronger today than it has been in 10 to 15 years and it's gathering strength - pulling trillions in capital away from the rest of the world, and crushing emerging markets in the process - even before the Fed has raised interest rates. So long as the US avoids going on any more massive spending binges that blow out the budget (2000-2010), and avoids starting any new trillion dollar wars, the dollar will continue to gain in dominance rather than lose it over the coming decade.
However the US had the world's largest economy by about 1890 or so. At that point it was already significantly far ahead of the classic (and much older) powers France and Germany. It didn't require the global petro dollar to accomplish that.
Oil has become less important in the last 40 years, while the dollar has remained stubbornly in place as the reserve standard. We're now within ~20 years of a large scale switch to electric vehicles for instance, and the dollar is doing the opposite of quaking in its boots.
Possessing ~45% of all global wealth is far more powerful as a lever, than having the petro dollar. The US has the world's richest corporations, its richest citizens, the world's largest middle class, the #2 manufacturing economy, the top universities, the highest total scientific and invention output, and remains extremely innovative with a high level of productivity - while having 320 million citizens generating a massive tax base and GDP.
I understand the arguments about the importance of the petro dollar. I don't agree that it's nearly as important as supporters of that theory project.
I do wonder how quickly those would "flag out" if ever the tide turned. Damn it, likely many of them already have wealth stuffed away in offshore accounts.
For the richest corporations, citizens and the rest I agree but I'm not sure the middle class is as good as it was before, the american middle class has been quite destroyed recently. It's more that the richest got richer, the poor got poorer and the middle class sort of disapeared in the middle.
But I have an impression that it's a trend with a lot of things in the US. Sure the top US universities are the best in the world but if you pick one school at random, I'm pretty sure that it's not as good as its european counterpart. (But this does not affect your argument anyway).
I read an article recently about urban Chinese youth being only interested in money and clothes and not work, that almost exactly paralleled an article I remember reading in about 1990, except s/Chinese/Japanese/g.
The current administration wanted a deal. Any deal at all. That's all the recent agreement with Iran is.
Because politics?
Again, what is the alternative to the dollar? It's completely reasonable that the global community diversifies away from the USD. But any specific basket they come up with is going to be heavily titled towards the strongest currency of the biggest economy on the planet. Otherwise, it's useless.
There's a bit more to it than just that, protecting the dollar is also part of it.
If you want to understand where I'm coming from better, would recommend watching the History of Oil (it's entertaining as well as informative):
If you have a job, the government will mandate that you get paid in "real money" and it will demand its not-inconsiderable cut in taxes. You want to buy some food? Ok, buy it in bitcoin, but give us our 8% sales tax in "real money". Property tax on your house? That's 3% of assessed value, "real money" only. Etc.
As one pundit tweeted: "You know what's cooler than a million dollars? Virtual currency backed by nothing and nobody."
I'm probably in the minority on these boards, so call me crazy: I want my currency backed by the economic and military might of the state.
To me, "money" is a means of performing transactions and acquiring real assets. I don't need a hunk of metal or a fancy digital wallet that is "unreproducible" to do that. Being able to print money is a feature of the system, not a detriment. The current system works well enough for me, for now.
You realize that this means you're actively supporting murder, surveillance, and debt slavery built on the backs of the unborn, right? Sure it's easier to just go with the status quo currency flow, but that doesn't make it the most ethical or moral choice.
None of these things are unique to fiat currency, as distinct from capitalism as a whole.
We're only partway out of that crisis, and it could come roaring back. Chest-thumping about "Where else ya gonna go?" is unproductive.
I don't see US hegemony as good or evil, except if you call brittleness that could lead to a very deep unprecedented crisis "evil."
So, yes, it is that radical... and the suggestion betrays an immature understanding of what currency is.
In the rest of the world, most people don't know about Bitcoin, most of the people who know don't care, and a fraction that I won't try to estimate care but dislike it.
It makes no sense to expect a mention of cryptocurrency in every article about currency.
http://www.frbsf.org/education/publications/doctor-econ/2007...
The strong dollar and the unregulated medical sector are virtually the only problems with the US economy.
The high US dollar is sustainable as long as the American public are willing to collectively take on a half-trillion dollars worth of debt every year.
With Europe in economic malaise and China's economy hitting the brakes, it'll be a long time before US economic supremacy is challenged.
I don't know all the details, but didn't a number of investors from all around the world lose money when the US switched away from the gold standard?
As for a safer investment, how about land ownership?
Same as US treasuries also.
Furthermore, unlike land that can give you valuable goods even if you can't sell it, US treasuries are worthless if you can't sell them.
I heard the following story recently, though I haven't checked if it's true... Back when the dollar was a gold backed currency, multiple foreign governments traded some of their gold in for US treasuries. It became clear to these governments that the US was issuing more treasuries than they had gold deposits for, so these countries tried to get their gold back. IIRC France was one of these countries. The US government stalled the sale of the treasuries then switched away from the gold standard.
If the above was true, France and the other foreign governments lost money in this deal. Who's to say what other adjustments could come in the future. So you see, US treasuries can potentially be a bad investment regardless of whether the US continues to exist as sovereign state.
The strong dollar is powering the US economy ahead while most of the world is struggling to stay above water. Americans gained roughly 20-25% in purchasing power against the rest of the world in just the last 18 months. US households have paid down a vast amount of debt in five years, significantly improving their debt to income ratio (while much of the world has done the opposite). Full-time job openings are at 15 year highs. The US share of all global wealth remains above 45%. The US median income remains among the highest of any nation, with no indication of erosion inbound. US economic competitiveness is among the highest, and total US manufacturing output is the highest it has ever been. Economically the US has been persistently getting better the last three to four years. The US is also about to enter a significant wage increase cycle that will see the standard of living move upward for the first time since the late 1990s.
By comparison, China is a disaster; Japan is stuck in the same hole it has been in for 25 years with 'deflation' (debt) continuing to eat away at their economy; Europe hasn't seen net GDP expansion since roughly 2007, with the Eurozone having twice the unemployment rate of the US, and with the Eurozone QE program failing to boost growth meaningfully.
Further, US neighbors Canada and Mexico both have done tremendously well over the last decade and will continue to, which will act as a multiplier for the US economy.
The fact that your comment was instantly donwvoted indicates just how out of touch most people are with the reality of global economics.
Capital is flooding to the US because of its relative strength.
The only thing on the rise in the US seem to be:
- all sorts of debts (check out the student loan debt, in particular, it has exceeded the credit-card debt and has currently a 17% deadbeat rate)
- the number of people not in labor force (95 million, the highest in 30 years).
The fact that the US is (for now) in better shape than Greece or Brazil does not mean it is doing great. And the direction things are going in is down, not up.
In simplest terms, gang wars break out when there's no strong leader on top. When a strong leader is killed/arrested, others will try to muscle their way to the top. Same story will take place if US loses the primacy.
A small group of industrialized countries are responsible for holding together what we call Western Civilization. Lose that and the world economy collapses by at least 90%.
When the world economy collapses, the world population will also collapse. The world goes back to tribalism. That's OK for places like Afghanistan, that haven't really advanced past tribalism. But not so good for first world countries. E.g. about 99% of the jobs of HN readers will no longer exist.