Comment by oostevo | Hacker News Reader

Comment by oostevo | Hacker News Reader

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There are _huge_ economic, cultural, and military benefits to being the sole superpower that don't exist for country number two.

These benefits are, in essence, virtuous cycles that give the superpower a advantages on the world stage just by virtue of already being in first place. Think of it like compound interest, or a really big ball in Katamari Damacy, only for geopolitical power. That is, the US can arrange things in its favor to make it more powerful just because it's already quite powerful and no other country is.

As an example, the United States Dollar is the de-facto reserve currency for the rest of the world. That means that the US can purchase things without having to first go through (expensive) currency exchange, giving the US an economic advantage. The reserve currency status is also a major factor that also allows the US to borrow money pretty much at will.

Similar arguments can be made about cultural, military, diplomatic, and other power.

That means that countries aspiring to be the superpower have the deck stacked against them. So when, despite this, China overtakes the US, the US will have an awful lot of catching up to do. It's not fighting for food in the streets, but it would be a fairly serious blow to the US.

That means that the US can purchase things without having to first go through (expensive) currency exchange,...

Expensive? The Bid/Ask spread for EUR-USD is (at the moment I write this) 1.4582-1.4584. Hedging your forex risk can be expensive, but exchange is not.

Well, I was thinking of relatively expensive on the scale required for country-scale commodity purchasing, but that may not be right either.

Since I gather you probably know more about monetary policy than I do, how's this logic for an explanation of the benefit of reserve currency status?

* Things (like oil) on global markets are traded in USD.

* That means countries need to accumulate or exchange for USD in order to buy things.

* This both increases the value of the USD and means the US Government can issue bonds at lower rates than they otherwise could.

[Edit: formatting]

Countries don't need to accumulate USD to participate in the oil trade [1], only liquidity providers do. If you live in China, and want to buy oil to produce widgets sold in Europe, you hold RMB and need to accept payment in EUR. So you trade RMB for USD, buy your oil, later on trade widgets for EUR, and then trade EUR for RMB (if you want dividends) or USD (to reinvest). The person selling the oil is probably going to trade the USD in for Rial's, Pesos or Loonies.

(The market maker captures 0.0002 USD in compensation for the adverse selection risk he takes on.)

The particular dollars being used for these purchases tend to be reused. They flow from the market maker to China, China to Saudi Arabia, and Saudi Arabia back to the market maker. This facilitates the real trade (oil + french wine in exchange for widgets), but is merely a bookkeeping mechanism.

The only person who needs to hold USD is the market maker. They need to hold enough reserves so that normal variation (e.g., today 5 people buy USD, tomorrow only 3 sell) doesn't deplete their supply. I don't know that much about commodities markets, but this probably is a small fraction of all dollars out there.

None of this has anything to do with T-Bills. US bonds have low interest rates because the US government is believed to be highly unlikely to default.

[1] Many countries do accumulate dollars for other purposes. For example, they might accumulate a reserve of stable currencies as a hedge against hyperinflation. Or, as in the case of China, market manipulation.

"...because the US government is believed to be highly unlikely to default."

And that belief stems largely from the status of the US as the sole superpower (at least for now). That's the point I was trying to make. I just didn't do a very good job of it.

I probably should have just picked an example of the US exercising diplomatic power, because that's much more intuitive to me than currency markets are.

(Thanks for patiently correcting me, by the way.)

>> "...because the US government is believed to be highly unlikely to default."

> And that belief stems largely from the status of the US as the sole superpower (at least for now). That's the point I was trying to make. I just didn't do a very good job of it.

US currency got its current "highly unlikely to default" status before it was the sole superpower so it's unclear how that status "stems" from being the sole superpower.

International trade tends to drift to the most stable currency's which is why things are moving the the EURO. Then again the EU is the worlds largest economy so there could be some truth in your assumptions.

Is the Euro considered stable? The articles I've been reading predict that the Euro-zone can't last too much longer as the debt crisis spreads from Greece to Portugal to Spain to... other places that the Germans can't afford to keep bailing out.

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