I.M.F. Makes China’s Renminbi One of World’s Select Currencies
nytimes.com
nytimes.com
Most notably they have committed to issue 3 month T-Bills every week and to allow foreign central banks to access their currency and bond markets.
Note also that this doesn't take place until October of 2016 so there should be no immediate impact on the markets. Also note the SDR has a very minor share of the global currency reserves so this is more symbolic at the moment.
More (10.92%) than GBP (8.09%) and JPY (8.33%) actually.
See here:
https://en.wikipedia.org/wiki/Special_drawing_rights#Allocat...
It will be interesting to see how much they allow their currency to float and how much more (if any) they will allow their citizens to expatriate the yuan.
There is nothing here that if followed, will allow anybody to outperform because this is complete consensus, it's what's priced in almost exactly. Yet the real alpha-generation skill is to challenge the received wisdom which here, is light years from happening.
How about the view that the a 9% yield in Russia is actually hugely more interesting than a 2% yield in dollars. What about the idea that 40$ oil is cheap as chips and the bargain of a generation? Maybe China's debt situation is, if we dig a bit deeper than the surface, much worse than Japan's, short term? Perhaps the UK is a financial bubble far too long of Arab money and that the Eurozone's current travails represent the small potential for light at the end of the tunnel on the view of renewal?
Not saying these are true, just that they might be worth considering.
Still, thank you for paraphrasing in one short paragraph exactly what I hear in my inbox in PDF form 20x per hour from the analyst community.
I don't think Russia is interesting. They're incapable of doing anything economically outside of commodities, and so long as the dollar is strong, Russia will be a mess. Putin has wasted his time in power on consolidating power, rather than diversifying the economy. They're a very low innovation, stagnate economy. That has resulted in the facade coming off, it's clear now that Putin has no clothes and can never cultivate a truly prosperous economy (their GDP per capita is now below Romania and Poland). It's the typical command economy outcome. Russian culture seems to spend all of its time being angry at the outside world for their self-inflicted wounds, creating an us vs them mentality, and it leads them to the same place every time: isolation. They have an intense victim mentality, and extremely low national self-esteem (which is where the projecting comes from and why Putin has to pretend to be a strong-man when he's the exact opposite).
You watch these documentaries on their culture, and it's almost unbelievable how backwards they are:
https://www.youtube.com/watch?v=iZcUsdARY6o
https://www.youtube.com/watch?v=pv6ROkgsiNs
https://www.youtube.com/watch?v=IaoYKoImjys
I agree that China is in very, very serious trouble when it comes to debt. They may be the most indebted nation per dollar of GDP at this point, including the huge sums of shadow debt stalking around their economy. However, I think it's more likely they'll stagnate for the next 20 years, Japan style, rather than suffer any near term sharp event. They've practically copied the mistakes Japan made perfectly. China's debt will eat most of their growth potential, until they either grow beyond it enough, or start paying it down.
For years I have read about probable problems if the US dollar was no longer the reserve currency, but it seems from what I have been reading that there is some sort of negotiated slow migration from the US dollar to using SDRs as the reserve currency.
I like slow and steady change, even is it means that eventually my country (USA) will lose a lot of economic advantage.
But the upside is value of the dollar would drop, making U.S. exports more competitive.
Please note I'm not saying this will happen, but feel it should be a recognized risk if borrowing continues at the current trend. I believe this is an elephant in the room which is likely to cause a massive macroeconomic shock in 5-20 years. I simply cant see the current political parties making the sacrifice to address the unfettered debt growth. I too recognize most financial experts tend to disagree with this view.
http://blog.mpettis.com/2015/11/chinas-rebalancing-timetable...
China's debt today is over 200% of its GDP and may exceed 300% in five years. One hopes the IMF and China agreed on concessions will assist China in rebalancing its economy quickly, because as Petits' posting points out -- a disruptive end is near for the current model.
https://news.ycombinator.com/item?id=10601219
TL;DR China's financial system is partially privatized central planning so it follow different patterns than the Western financial system.
It doesn't have one single link to any of the claimed figures and a quick Google shows the claimed figures to be at least an order of magnitude out.
My country (USA) has benefitted hugely by being the reserve currency: effectively being able to generate money by fiat with lower chance of this causing inflation because other countries buy dollars and hold them in reserve to buy oil, etc.
I expect the economy in the USA will take a small gradual hit over the next decade as we lose (mostly exclusive) reserve currency status.
I think in theory, say the US Dollar weakens, everything appears cheaper, exports increase. US companies will then be able to employ more people within the country and thus improves employability and domestic consumption.
It makes us poor overall, if we consume imported products, travel internationally, and if the economic plan fails in which employability and domestic consumption does not increase. This can happen when other equally competitive countries counter by de-valuing their currency as well.
It might be an advantage for most people in the country (at least in the short term), but it would be a disadvantage (even in the short term) for the people with the most wealth, and, perhaps more specifically, for the people with the most power over monetary policy.
The advantages (particularly in the near term) that countries get from weakening currency is why the people who loan them money have come to insist than monetary policy should generally handled by independent central banks that are, while generally accountable in some way to government, also somewhat insulated from political pressure from the rest of government (and, often, with direct influence from the financial industry.)
We will be better off in the long run by not playing that game. Keeping the currency fairly stable helps to encourage long-term economic growth by allowing businesses and consumers to plan ahead. That's better than chasing a quick and unsustainable boost in exports through devaluation.
But the point is, the US dollar has been kept “artificially” strong for a good while now, which goes along with a structural trade deficit, current account deficit, low domestic savings rate, unemployment, rising prices of non-tradeable goods, and struggling US export industries. On the other side, countries with artificially weak currencies like Germany or China have had high domestic savings rates, trade surpluses, current account surplus, etc. This kind of imbalance builds up pressure over time, and isn’t stable in the long term.
I'm not sure I understand all of your argument, but would be interested in your counterpoints to point 6 of his appendix on that post. Perhaps he's missing some of the benefits of a reserve currency that you espouse.
One thing I've learned, most people do not understand international trade or the balance of payments.
For more on this see:
Introductory video: https://www.youtube.com/watch?v=i35uBVeNp6c
Book that describes everything in detail: http://www.amazon.com/Modern-Money-Theory-Macroeconomics-Sov...
I don’t understand why you find it confusing. Perhaps you could elaborate a bit? (Admittedly, this stuff is clearer when spelled out over 100 pages of a textbook with a bunch of examples, clear formulae, and discussion of competing theories, vs. condensed into a blog post.)
Wilson and Riley’s argument is pretty hand-wavey, full of entirely unsupported assertions. (Which is fair for a very short blog post, I suppose, but isn’t very convincing.) I’m not sure what they have to do with “Modern Money Theory”, which from what I gather in a quick web search disagrees sharply with their analysis.
MMT agrees with most of the points Wilson and Riley make (ie. that exporting is a cost and importing is a benefit, referred to in the article as "Seignorage", and lower transaction costs) but they're incorrect on the notion that one of the advantages of being the reserve currency is the ability to "run up huge amounts of debt at low interest rates" -- the US doesn't need to borrow US dollars, it creates US dollars. If they're referring to the advantage in being that the US private sector has been able to borrow US dollars from foreigners cheaply, then maybe that's a benefit I'm not really sure but they could just as easily have gotten that money from other banks with accounts at the Fed anyway (so long as there was sufficient cash reserves to satisfy the demand for dollars!)
[1]http://www.amazon.com/Modern-Money-Theory-Macroeconomics-Sov...
Those might pass for European reserve currencies in a pre-Industrial Era, but they certainly do not reflect the world economy of the time period by any means.
In addition to all of that, the USD is the only currency on that graph that was not on a gold standard at the time. That's a huge difference.
Yeah, it does. The more I think about it, the less sense that graph makes.
It's not entirely meaningless because there are still benefits to being the reserve currency in a gold-backed world (e.g. cheaper cross-border transactions from not having to do any forex). But the biggest impact of being the reserve currency today is on monetary policy, which only makes sense in the context of fiat money.
But if the amount of currency issued can float relative to the gold reserves held, then the values of currencies relative to each other could still flow significantly.
Put another way, it's an issue of trust. If currency X and currency Y are both theoretically backed by gold, but it's far easier or more reliable to convert X into gold than Y, then X as a reserve would be more valuable than Y.
Holding assets in dollar makes little sense for most people on the planet, and when these people become richer, it makes sense they will use their own currencies. With them, their companies. With those, their governments.
The EUR, despite current instability, and the Chinese Y have good chances.
You have a lot of misplaced faith in foreign central banks. A lot of foreigners absolutely do not trust their central banks, some even to the point of using the US dollar in their day-to-day transactions (Cambodia, various African nations, etc.)
If you're in the position where you don't trust your own central bank, why would you trust the Bank of China instead of the Federal Reserve? It's been around a lot less time and does not have the political independence the Fed does.
The dollar is going to be dominant for the rest of our lives IMO.
No matter what happens, I can pay my taxes and get food at the bakery in Euro. Even if the Euro crashes.
But if I hold Dollar, my government and bakery won’t take Dollar, so I’d have to convert – and lose or make money based on the exchange rate every time.
It’s the same reason why bitcoin isn’t effectively used: If you have to exchange currencies every time you try to buy something, the currency is worthless to you.
And for a billion chinese people, the Yuan is going to be the currency of choice. For 500 million europeans, the Euro is the currency of choice.
But only the US and a handful of instable african or island nations use the Dollar, all combined still less people.
For private holdings, the Dollar is going to lose power. (In fact, it has lost the majority of private holdings long ago)
Origin
"The gold specie standard arose from the widespread acceptance of gold as currency.[7] Various commodities have been used as money; typically, the one that loses the least value over time becomes the accepted form.[8] The use of gold as money began thousands of years ago in Asia Minor."
China's exchange controls are leaking at the rate of about $500bn a year.
It's worrisome that China's rich people want to get their money out of China. China is growing faster than the dollar or euro zones. Yet rich people in China are overpaying for US and UK real estate. What do they think is going to go wrong in China?
No, it's not even remotely close to the end of the dollar as the international norm. The dollar is stronger today than it has been in 20 years, and it's gaining strength as the Eurozone and Japan are a mess.
The most likely outcome to this, is that the Yen loses the position it has held on the global stage for the prior 30+ years or so. Japan is the nation that will suffer the most as China's currency rises. Right now Japan is depending on the Yen as their only remaining prop to use against their debt; the weaker the Yen's global position, the less they can spread that debt monetization cost around. China's currency will become the dominant Asian currency; the Euro will remain the dominant European currency (unless something unexpected - and worse than it has already absorbed - happens to rip the union apart (that could be Finland bailing, triggering other nations to leave as well)); the dollar will remain the global reserve currency (there needs to be one, and the West is far more comfortable with that scenario than becoming more reliant on China, as are Japan and numerous China competitors in Asia).
As far as I remember the US Dollar was about 1.25 the value of the Euro at it's peak in 1999/2000.
We traded in dollars at the time.
The dollar is as strong as it is even with 0% interest rates. Imagine if rates were even half the levels they were 20 years ago. I'd definitely make the argument the dollar is stronger today than it has been since the late 1990s when the US economy was riding very high.
In the next few years, most likely the dollar will gain more strength (the US budget is currently under control, growth is ok, and the employment picture continues to strengthen spurring tax growth), the Euro will be debased with more QE in mostly futile attempts to spur Eurozone growth, and the Yen will lose a lot more value. The Yuan is also likely to face significant devaluation as China struggles to grow in real terms, but it will at least see greater global share. Things are looking great for the dollar at least for the next ten years.
The dollar was trading at about 0.75 to the Euro around 2009. What is a challenge in your eyes?
Anyway, these are just opinions ( yours and mine ). Mine: no US rate hike in the foreseeable future, QE4.
The lack of Eurozone growth will spur more QE for years to come. The US is presently done with its QE program, and there's nothing on the horizon that indicates it'll need to return to that in the next several years (large budget deficits would cause that, but so far Congress isn't growing spending in an out of control manner).
That context will push the Euro lower, and the USD higher versus. Until the Eurozone can show off serious growth (not 0.3%-0.5% type 'growth'), rapidly improving household balance sheets, and a significantly improving employment picture (not 11%), the Euro will struggle.
I can't say what adventured meant by a challenge, but it certainly wasn't that. The exchange rate with the dollar is just a function of how many euros exist. Challenging the dollar would be something more along the lines of "do people prefer to store their wealth in dollars or in euros".
See also: http://www.straightdope.com/columns/read/2120/why-is-the-lat...
> Man, where to start? Just because a country's basic unit of currency is worth more than ours doesn't mean the country is richer. If you think that 100 pennies is "richer" than 10 dollars because the absolute number is bigger, then we're not going to have much luck dealing with foreign exchange rates.
> A common myth is that if a currency is worth less than $1, it's weaker than the U.S. dollar, and if it's worth more, then it's stronger. Your Latvian friend is trying to pull this on you, but it's nonsense.
Meaning that if US wanted to buy something off china, it would have to convert USD into Bankor, then buy whatever from China, that would then turn those Bankor into Renminbi (or hold them for more imports).
This would mean that a import heavy nation would find their Bankor exchange rate plummeting etc, potentially balancing out trade.
As long as the USD is the international trade currency, USA can always print to cover needs. This in contrasts to various historical death spirals where a lack of exports and a constant printing to cover foreign expenses ran the currency into the ground.
Russia's economy is now - as of the latest 2015 numbers - 1/12th the size of the US economy. It no longer matters as a global economic power (it still matters as a global commodity player). Its economy is smaller than Canada's now.
China will continue to use greenbacks because they will never have any other choice, the same as they'll continue using Euros. The US is back to being China's biggest trade customer (with the dollar having gained so much value): that trade is mostly done in dollars and that will continue.
You're talking about public debt, which is a small fraction of all US wealth holdings (household + corporate + government), and can be trivially managed. Further, unlike a lot of countries, the US has significant spare taxing capability (it rests in the middle tier globally on taxation). The US could easily raise $200 billion in new annual income taxes on the top 25% and not miss a beat - that single move alone would handle any potential issues from the public debt cost. Or better yet: the US can constrain its spending growth (as it has been), allowing income and assets to continue to outrun the problem.
And of course the US owns the global reserve currency, which enables it to export inflation to the rest of the world as a means to reduce the domestic hit of things like QE (which is why the Eurozone's QE hasn't been as effective). When the US uses the dollar to improve its fiscal circumstances, the rest of the world foots a big part of the bill. While that's sort of like cheating, it's an advantage the US possesses that nobody else does.
You picked out the one thing that is the easy trump card: the global reserve currency makes it all that much easier for the US.
[1] - http://fortune.com/2015/10/14/1-percent-global-wealth-credit...
[2] - https://en.wikipedia.org/wiki/List_of_countries_by_distribut...
"Some 39 percent of the world’s wealth belongs to Americans, while Western Europe accounts for another 31 percent."
And that was before the huge asset rebound in the US, and was a drop of 12% due to the great recession.
http://economix.blogs.nytimes.com/2010/09/14/americas-domina...
Allianz's 2015 report indicates North America holds 45% of all global financial assets. Unless you're pretending that Canada and Mexico hold 20% of all global assets, your figures are wildly off the mark (Canada is less rich than the US per capita on average, and Mexico is far less so); at a minimum the US holds 40% to 42% of all global wealth.
https://www.allianz.com/v_1443702256000/media/economic_resea...
Yes, the US has debt, but if the market believes it's stronger than any of the alternatives... the US dollar still holds value.
I am very skeptical of this.
If this ( http://www.allianz.ru/upload/iblock/ff7/ff77bf0183742b88ea8f... ) is it, then you have misread it.
"Permit me to issue and control the money of a nation, and I care not who makes its laws!" - Mayer Amschel Rothschild
Secondly, the government creates dollars by spending -- when the US government spends, money is created. When the US government taxes, money is destroyed[1].
Same is true for the RBA in australia, it's even on their website[2]:
"As the Australian Government is a customer of the Reserve Bank, these payment flows can be very large. Expenditure by the Government adds ES funds to the account of the recipient (or their financial institution), while tax receipts have the opposite effect."
The US has several bizarre, self-imposed constraints like the "debt limit" and some crazy mechanism for the fed to buy treasury bills from the government that goes via the private banking system for no good reason but the net effect is the same. Government spending creates money and taxation destroys it.
In terms of ownership and control, the RBA is owned by the Commonwealth (probably the same for Canada) and the Fed is owned by private companies because of concerns about government control when it was setup (even though the Fed and the Treasury co-operate so much they might as well be the same institution) but ownership is very different from ownership of a normal company[3].
[1] http://www.mecpoc.org/2011/07/who-can-really-print-money-the...