What De-Dollarization? The Dollar Rules the World
bloomberg.com
bloomberg.com
It's convenient (at most) for people in the USA to have the dollar as the de facto reserve currency. It's also convenient for people outside the US to have a dominant reserve currency -- having a small number larger than 1 would be OK, but not especially convenient and in the end would still converge back to the largest one, which would be the incumbent.
The convenience for the US is simply that if you do any foreign transactions you can easily see their value. Also, domestically, if you borrow you have a lot of predictability in interest rates. That's basically it.
If you are, say, Australian and use aussie dollars the same is basically true! If you're a very small country, or your economy is a basket case and there is no real lending in your currency then the reserve currency doesn't help you much -- you have to borrow in some foreign currency so currency fluctuations hurt can hurt (or help) you, and you have no control over it.
The USD is a good choice because foreign exchange is a small part of the size of the total amount of money, and the amount doesn't fluctuate a lot. It might feel like it does when you live in the states, but really it's like swimming in the ocean: there's some surface chop, but the big waves have such long wavelength you don't even notice them.
The real power is in control of the banking forex interchanges -- you can see them being used against Russia and Norks, for example. In reality the US doesn't really have a lot of control over them except by persuading other important economies to go along. It's like a very weak form of nuclear weapons: their value comes from not using them. And for forex -- well let's just say the US control over that is negligible, specifically because it's the reserve currency. So not much of a weapon at all.
It's pretty easy to not use the dollar as an exchange currency -- think of hawala, with perhaps, say, its own private set of AED/PKR exchange rates (notice the plural!). Or china and iran selling oil without the dollar. These work for small sums, but at the end of the day people work out the exchange rates...by comparing vs dollars, the same way a translation between Maltese and Estonian probably goes through English or French. This is why having more than one will regress back to the incumbent barring a major, and very slow (decades/centuries scale), problem.
The US can afford to have a lot of debt because it has enormous, highly liquid markets without currency controls, so people want to do transactions with it. So does Japan, which is why it works out for them.
To the degree that reserve status drives debt at all: the US has to issue some debt anyway because that's how foreign countries hold dollar reserves for foreign exchange. But the US is able to issue more than is needed for that (for the reasons above) so this is irrelevant. But it's not a case that being a reserve currency allows you to issue more debt than others can.
> Being the reserve currency allows the US to borrow at much cheaper rates than would otherwise be possible
26 countries borrow for less than the US, and from your list those 26 include Japan (the cheapest!), Singapore and Portugal. The US is indeed in the top 1/3, but that hardly supports your claim.
In the end it's simply no big deal either way. Ego-stroking for some, infuriating to others, but at the end of the day just a snooze.
This is so misleading. The U.S. is intentionally raising the rate at which it borrows to slow down its own economy. Also, the rate at which you borrow is only half the equation. You also need to consider the amount being borrowed.
You seem to be trying hard to make a point where neither data nor theory support it
Where did I mention foreign exchange reserves? I just said the US had an easier time borrowing money. That includes from other countries, institutions, and individuals.
Think about it like this: The US can say: “Hey world, I’m borrowing money at X%”. Regardless of what X is, the US will be able to borrow large amounts of money. Some of the borrowers will be foreign governments, some will private citizens, some will be institutional investors. It doesn’t really matter. There will be huge appetite for the debt regardless of yield.
Now, Portugal is free to say “Hey world, I’m borrowing money at X/2%”. That’s totally within Portugal’s rights. But they’re going to have a very difficult time borrowing any substantial amount of money. Maybe they’re ok with that. Maybe they don’t need to borrow much. But if they did want to borrow a lot they’d need to pay a premium on top of what the US was paying to borrow.
Now you’ll probably respond with something like “The BoE and ECB rates are lower than the Fed’s” and that’s true. And the reason is because there is a complicated relationship between demand for dollars and bonds, the amount the US wants to borrow, domestic monetary policy, and the opportunity cost between holding other currencies other than the US dollar. The point is that being the reserve currency allows the US to borrow more for cheaper than it otherwise would be able to. That doesn’t mean the US has the highest debt or the absolute lowest interest rate. It just means, had the US not been the reserve currency, they would have paid more for borrowing the amount of money they borrowed.
If I may quote J. M. Keynes: "Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back."
I cannot tell if you are serious or joking.
De-dollarization has been attempted for decades. It's not a new thing. Governments around the world have tried to switch away from the dollar only to be squashed in the name of democracy. You only need to look at Gadaffi with his Gold Dinar and pan-African currency push and how that turned out. Only large governments with real militaries like Russia and China can openly defy the Petrodollar, and even then only between themselves and with great ire from the US State Department.
That being said, the continued proxy wars are wearing down the US Military and the US Government's ability to get backing for war. Even if the USA wins the current Ukranian proxy war, it no longer has the political will to declare war on BRICS directly. We are likely going to throw people into the meat grinder until both parties are exhausted. What I see as the final compromise is a new UN CBDC used for international settlements, which will still be a US win since the UN is a US puppet currently.
Actually the dominance of a currency is harder to challenge, since you can post the same text on both twitter and mastodon, but you can't invest the same money in both dollars and euros.
This, I do not understand why the GOP goes nuts over the debt limit. If they blow it this year, inflation worries we have now will seem quaint.
If China was not gaming their currency and had a real open economy, that would be a possible alternative. But with Xi in power, it will never happen. EUR should have been in a position to ascend, but Greece, Spain, Italy, Ireland and later on UK stopped that in its tracks. No trust there with the Euro right now.
One of the reasons they continue to get away with this is that it takes a long time for the results of economic policies to become apparent - witness the overarching narrative pinning the past spate of price inflation on the current administration, when it was actually the delayed effect of all the inappropriate "stimulus" during Covid.
the Euro made a run at greatness twenty years ago but never gained traction
Japan doesn't have its hooks into petro-politics
China will try next and may succeed with the Yuan but only through conflict
what Cowen isn't telling you is that it won't take that many US dollars washing back to our shores to create serous inflation...just having BRICs migrate off of it for some transactions may very well result in dollars with no place to go come home with nothing to do but inflate things
as for the debt ceiling, we might as well just scrap it
Nobody can tell the future, but I don't think it's looking good for the CNY. Xi Jinping's unprecedented (since Mao Zedong's demise almost 50 years ago, at any rate) third term coupled with every indication that he's going to try and hold on to power for life presents a bearish picture on the long-term stability of the country and its currency.
Many successful Chinese people have a foot out the door already, sending their children abroad and transferring as much wealth out as they can given capital controls. Xi's own daughter went to school in the US. And the demographics are not in favor of the supposed eventual supremacy of the CNY over the USD.
I feel like Fidel Castro, for example, didn't really use the office as a vehicle for self-enrichment and seemed to bow out in a graceful attempt to preserve his long-term legacy.
It seems like Xi is on a similar vector-- his domestic credibility is largely due to rising global economic and political importance, and you don't really hear rumours of grand mansions and fleets of luxury vehicles on the state's tab. Maybe from that perspective, it's a "why change horses in mid-stream" scenario in the short-mid term at least.
When we talk about how flexible and adaptable free markets are, we also forget how inertia-prone they are-- too many private businesses will let their country's future rot because they want to milk dying business plans for one more calendar quarter. China's ability to direct economic activity gives them a way to break the stiction.
He ruled for nearly fifty years and his successor was his brother. Certainly no part of that can be described as "bowing out", gracefully or not ;-)
Why are closed-capital markets in China a sign of a strong American dollar?
On a serious note, I recently read that there a big difference between the Reserve currency and the Payment currency. Interestingly, the Reserve currency is not US dollar, but US Treasuries instead. I guess it makes sense, as China, for example won’t be able to keep trillion USD Reserves in a bank account, it would have to invested in some highly liquid market, like US Treasuries. This can only change slowly, and the dollar reserve status will continue for quite a while. Replacement of Sterling for USD took some 30 years, for example, 1914-1944.
On the other hand, the status of USD as a Payment currency is changing quickly. I am not sure what the implications are.
10. "that's a conspiracy theory, that's a conspiracy theory"
20. mainstream media begins to ease their audiences into the new narrative
30. "we knew that all along, there's nothing to see here!"
40. goto 00
(I'm never sure whether an economist is an expert)
"The Fraying of the US Global Currency Reserve System"
lol, Except for these pesky bank runs, pay no attention to them. Oh and the constant intervening to prop up yield curves and inject liquidity, look the other way comrade.