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Comment by kristianc | Hacker News Reader

People have been predicting the decline of US hegemony for over thirty years now. It rears its head nearly every time there’s a major US policy failure.

Every time this argument is raised it’s now ‘Yes, but now is really the time.’ But why not after the Cold War, when a multipolar world was widely predicted? Or after Iraq, or the Arab Spring, or the financial crisis?

If COVID really is the trigger, I’d argue that people have had a good taste of China-style authoritarian restrictions on freedom and movement over the last year, and I’d say they didn’t like it very much.

It’s got to the point where in the absence of any new and compelling evidence, such claims have to be treated with a little scepticism.

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As is typical, there is an element of truth to it, but people love to make sensational claims because it gets people to read.

It would be completely natural for there to be a transition to more balance between the major trading bloc currencies, namely USD, EUR and RMB, but it won't be as severe or cataclysmic as claimed, mainly because that doesn't serve anyone's interest (who is holding USD and can bring it about) and because the markets will smooth the way.

The most likely outcome is that everyone will be better off and The US will lose some soft power, which is a process that has already been underway.

He mentions this right here: "So, what is wrong with three world currencies – the euro, the renminbi, and the dollar – sharing the spotlight? ... US government borrowing rates would almost certainly be affected"

USG owes $28 trillion, borrowing at an increasing volume. If switching to 3 reserve currencies happens as you say, rates will go up. How exactly do you service $28 trillion and beyond debt with higher rates? So no, it won't be as joyous for everyone as you suggest.

Why would rates go higher? The Eurozone has lower rates than the US. Heck, Australia and New Zealand (not exactly global reserve currencies) have the same rates as the US.

The only way that the dollars international status would meaningfully affect USG’s ability to borrow is if it was relegated to emerging markets status. All developed market currencies can borrow at sub-2% rates. That doesn’t require you to have reserve currency status.

Great question, I'm just reading the article and noticed he's so convinced that the rates will go up in this case, that he used the words "almost certainly". Maybe a deeper look at his works can explain his conviction.

Borrowing is subject to supply and demand. If people are buying substitutes for dollar-denominated debt, they're not buying dollar-denominated debt, or they're buying less of it. The price paid for the bond goes down, so the rate goes up.

Yes, there's a Federal Reserve too, and they can bid up the price of bonds and buy as many as they want, but it's functionally equivalent to printing money, so it becomes a question of how badly they overshoot their inflation target, and that influences demand as well.

Central banks FX reserves make up only a sliver of the demand for long bonds (5+ years of maturity). Long bonds are generally not considered money substitutes, so FX reserves have no interest in holding them.

Foreign central banks may hold a sizable proportion of short bonds, particularly 3-month T-Bills. But there’s essentially an infinite wall of demand for short bonds at the near zero bound. So maybe loss of reserve status increases borrowing costs from 0.02% to 0.15%. Not exactly a catastrophe for the budget deficit.

This is why reserve status is essentially irrelevant to borrowing costs. All developed market governments, regardless of their currency’s reserve status, can borrow cheap in today’s regime.

> Central banks FX reserves make up only a sliver of the demand for long bonds (5+ years of maturity).

The average Treasury bond duration is about 60 months, and falling, so that's still half the bonds we're talking about (and rising).

If demand for USD denominated debt drops that puts downward pressure on the USD. That can be good and bad for the economy, but it can cause all imports to go up, essentially importing inflation into the US economy. If that's a problem then the Fed can raise interest rates (or just stand by while they go up), but it can also make the USD it has on its balance sheet disappear, which is deflationary. Quantitative tightening is also a thing.

You've got to keep in mind that the people who are buying or holding these bonds are the ones who will get burned, so they're not going to suddenly dump their USD holdings at great expense. The Chinese I'm sure would love to strike at the USD but they're holding trillions of it, so they would mostly be hurting themselves.

So if it happens it will be relatively gradual and the Fed and the market will do its thing.

> If that's a problem then the Fed can raise interest rates (or just stand by while they go up), but it can also make the USD it has on its balance sheet disappear

Those are the same thing. The Fed shrinks the money supply by inducing someone to surrender dollars in exchange for debt. This means there is increased supply, and the price of the debt goes down (i.e. the rate goes up).

It's the same point: it won't be as bad as you're implying. Rates will of course go up, but not drastically. The US won't be able to borrow as much, which is good, but it will still be able to borrow close to the same amount as a percentage of GDP.

The US will service the debt the way it always has, by growing its economy. Somewhat higher inflation will actually reduce the debt load in real terms.

The "joy" is that the US will be forced to be more disciplined.

Kennth Rogoff actually wrote a book called: this time it is different.

For USA and Europe COVID-19 has been really expensive whereas China in particular has grown through it. The US relies on Asia - in particular China and Japan to cover that cost by buying US treasuries in an slowly inflating currency. At the same time the relationship between China and the west is increasingly antagonistic. This creates a different dynamic from 2008 - how different - time will tell.

China and Japan are the top foreign holders of treasuries, yes, but the story is a little more complicated.

https://www.fiscal.treasury.gov/files/reports-statements/tre...

As of the end of 2020, there are 27.7 trillion dollars in outstanding public debt. 10.8 trillion is held by the Federal Reserve and the US government. About 7 trillion (no data since September) is held by foreign countries. Of those, China owns 1.07 trillion and Japan owns 1.29 trillion. I don't think it's reasonable to characterize the US as relying on China and Japan to cover those costs.

The other major (all holding > 100 billion) holders of US debt overseas, in order, are the UK, Ireland, Luxembourg, Brazil, Switzerland, Belgium, Taiwan, Hong Kong, the Caiman Islands, India, Singapore, Saudi Arabia, Korea, Canada, and France. This seems like a pretty good mix.

NB: Real yields on treasuries are all negative. People are buying treasuries despite knowing they will lose money in real terms. I don't think people giving the US free money just so they can hold t-bills is a sign of the weakness of the US dollar.

https://www.treasury.gov/resource-center/data-chart-center/i....

I don't know how much it matters.

The numbers sound big but then in different perspective not so big. The internal debt of the US, in some sense, at least when we are thinking about the viability of the US dollar in international trade, cancels itself out. And debt and swaps with Europe or the UK? Perhaps it matters less than debt to other countries.

It really boils down to the exorbitant privelige. How big is it really? Who exactly bears the cost and who encurs the benefits? Not exactly clear in the details.

However were Japan and China to give up their "mercantalistic" practices of buying US treasuries and instead letting their own currencies appreciate and start trade and investing without using the USD.

Then that probably would be quite a thing.

The article is specifically about the US dollar as the global reserve currency. To your point, it has in fact been declining for the majority of the past thirty years.

https://www.reuters.com/article/us-global-forex-reserves/u-s...

FTA:

> The greenback’s share slid to 59% in the fourth quarter, from 60.5% in the third, declining for three straight quarters. Its share in 1995 was 58%.

If you have a building, and the engineer says "it is unsafe and going to fail soon", then each month that passes witout anything happening should increase the expectation of failure, not decrease it.

Besides, the situation did change recently. Wikipedia now recognises China as effectively the worlds largest economy.

https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)

Important to note this is the PPP GDP, not the nominal one. When talking about macro concepts like currency dominance, nominal GDP is more useful (in which the US still maintains a lead).

Both the nominal and PPP GDPs of the US as a percentage of the world GDP have been dropping steadily over the past few decades. It used to be near 40% of the world's GDP. Now it's barely 20%. At what percentage point will the world look at the US Dollar and its economy and decide maybe that figure is too low for the dollar to be world reserve currency? 15%? 10% or 5%? And did weaponizing the dollar as a geopolitical stick against its enemies change that threshold? Or does it even matter as long as the US retains military primacy on our planet?

These things are more guesswork and storytelling than anything.

This.

At some point the world economy is so much bigger than the USA's (even if no one stuffs up), the the US government simply CANNOT product enough dollars* for the demand.

Exactly the same reason why the Swiss franc can never be the global reserve currency.

* Although the current USG is certainly giving it a good go ;).

The supply of USD should be mostly irrelevant. If supply is constrained then the FX rate just adjusts.

The parent's point (about US' share of world GDP) is quite different to the one you're making here.

But us wealth is still around 30% of global total for only 5% of the population. How long does it stay this way ? Until usa stays the safest destination for talent and capital. Maybe hard after AI enables real time translation of language at some point.

This is an example of an analogy that is superficially fitting but doesn't actually map to the reality of what's being discussed.

The reason why our subjective probability of a building collapse goes up with the passage of time is because we know already that structural engineers are reliable. The passage of time tells us more about the structural integrity of the building than about the reliability of the engineering advice.

Macro-economists and geopolitical pundits on the other hand have little credibility when it comes to forecasting. The passage of time should only increase scepticism, especially when the reasons for the forecasted collapse keep changing.

If a psychic keeps giving you either incorrect predictions or predictions that remain unrealized, does your belief in them go up or down?

You have it backwards. One should always assume our way of life is about to fail, so we take action to protect it. If you assume it is impervious, complacency will let it decay.

Pessimists persists in humanity because sometimes they are right. It’s valuable to let that fear be voiced, explored, determined, and planned for.

The new development is that the USA had been exporting freedom (at least on the surface) and projecting strength.

Now it exports totalitarian morality, while China is telling boys to be more masculine and mocks the western 白左.

It is fairly easy to lose a country's reputation.

> It’s got to the point where in the absence of any new and compelling evidence, such claims have to be treated with a little scepticism.

But there is constantly new and compelling evidence.

In my opinion there are two factors. 1. Domestic economic and fiscal health; and 2. Foreign aid.

US debt, consumer debt, student loan debt, and corporate debt are all at historic highs. Across the board there are defaults at historic highs and a general inability to service these debts at every level. In that period of 30 years you mention we have seen for the first time ever US cities and governments declare bankruptcy.

But maybe even more important to maintaining global hegemony is foreign aid. That it’s paying foreign governments to make it worth their while to support the US dollar as the global reserve. Consider from 2001-2011 foreign aid exploded from $10B to $50B where it peaked and has plateaued and even slightly declined for the next 10 years (and in reality numbers aren’t even available for the last 2 years). It should come as no surprise the explosion in spending kept the US ahead of China, but since the US peaked China now outspends the US in foreign aid. It’s “keeping up with the Jones’” on a global scale.

> But why not after the Cold War

Because the former USSR is/was far weaker than anticipated.

Covid is only mentioned once in the article, mostly in the context of ginormous astronomical compounding debt, the favorite remedy for no matter what came our way in the last two decades.

The article seems to be more about this: "Just as the US eclipsed Britain at the end of the nineteenth century as the world’s largest trading country, China long ago surpassed America by the same measure."

that seems to be the author's new compelling evidence.

Side note, I don't see how most of the events you listed: winning the Cold War, Iraq or the Arab Spring could even remotely challenge the US dominance, just the opposite, if anything.

> I’d say they didn’t like it very much.

Depends on the country. Majority of U.K. want vaccine passports to go to places like pubs and ball games

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