Central banks seem leery about the Chinese yuan.
What will finally pull the rug out from under the dollar’s hegemony? The euro? The Chinese yuan? Cryptocurrencies? The Greek drachma? Whatever it will be, and however fervently the death-of-the-dollar folks might wish for it, it’s not happening at the moment, according to the most recent data.
The IMF just released its report, Currency Composition of Official Foreign Exchange Reserves (COFER), for the fourth quarter 2017. It should be said that the IMF is very economical with what it discloses. The COFER data for the individual countries – the total level of their reserve currencies and what currencies they hold – is “strictly confidential.” But we get to look at the global allocation by currency.
In Q4 2017, total global foreign exchange reserves, including all currencies, rose 6.6% year-over-year, or by $709 billion, to $11.42 trillion, right in the range of the past three years (from $10.7 trillion in Q4 2016 to $11.8 trillion in Q3, 2014). For reporting purposes, the IMF converts all currency balances into dollars.
Dollar-denominated assets among foreign exchange reserves rose 14% year-over-year in Q4 to $6.28 trillion, and are up 42% from Q4 2014. There is no indication that global central banks have lost interest in the dollar; on the contrary:
Over the decades, there have been some efforts to topple the dollar’s hegemony as a global reserve currency, which it has maintained since World War II. The creation of the euro was the most successful such effort. Back in the day, the euro was supposed to reach “parity” with the dollar on the hegemony scale. And it edged up for a while until the euro debt crisis derailed those dreams.
And now there’s the ballyhooed Chinese yuan. Effective October 1, 2016, the IMF added it to its currency basket, the Special Drawing Rights (SDR). This anointed the yuan as a global reserve currency.
But not all central banks disclose to the IMF how their foreign exchange reserves are allocated. In Q4, the allocation of 12.3% of the reserves hadn’t been disclosed. These “unallocated reserves” have been plunging. Back in Q4 2014, they still accounted for 41% of total reserves. They’re plunging because more central banks report to the IMF their allocation of foreign exchange reserves, and the COFER data is getting more detailed.
So among the 87.7% of the “allocated” reserve currencies in Q4 2017, the pie was split up this way:
Disappointingly for many folks, the Chinese yuan – the thin red sliver in the pie chart above — didn’t exactly soar since its inclusion in the SDR basket. Its share ticked up by a minuscule amount to a minuscule share of 1.2% of allocated foreign exchange reserves in Q4. In other words, central banks seem to lack a certain eagerness, if you will, to hold yuan-denominated assets.
The Swiss franc, with a share of 0.2%, is the black hair-thin line in the pie chart.
Note that the euro’s economic area, the Eurozone, has a large trade surplus with the rest of the world, which, along with other factors, disproves the assertion that a country that issues a reserve currency, such as the US, must always have a large trade deficit with the rest of the world. It can go either way.
The chart below shows the percent share of various reserve currencies since 2014. The black line with the red dots at the top is the hegemonic US dollar, whose share has edged down a tiny bit. The euro (blue line) is stable at around 20%. The dollar and euro combined accounted for 82.9% of the allocated foreign exchange reserves in Q4 2017. Each of the rest of the currencies was an inconsequential also-ran. As a memo entry and not part of the percentages, I added the descending purple line to show the rapid disappearance of “unallocated reserves.” The Chinese yuan is the bright red line at the very bottom, just above the Swiss franc:
Since 1965, the dollar’s share has fluctuated sharply, and the current share of 62.7% remains in the middle of the range. The chart below shows the dollar’s share at year-end for each of the past 52 years:
The dollar’s low point was in 1991 with a share of 46%. Starting in 2001, the euro, which had replaced the Deutsche mark and the currencies of four other Eurozone member states as reserve currencies – now expanded to 19 – made a visible dent into the dollar’s hegemony. But the Financial Crisis did not.
And the Chinese yuan, on which all recent hopes had rested that it could pull the rug out from under the dollar, well, it’s barely above the level of a rounding error. In other words, folks who’ve been eagerly waiting for the death of the dollar or similar fiascos will have to learn how to be very patient.
Not that there isn’t enough going on that could raise doubts about the dollar, with trillions flying out the window so fast, they make your eyes water. Read… US Gross National Debt Spikes $1.2 Trillion in 6 Months, Hits $21 Trillion
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Trivia: some years ago, before the sanctions on Russia, Russia floated the idea of using the Canadian dollar as a significant part of its reserves.
All I recall about this is that the Bank of Canada was not amused, and I believe the Russians were asked not to.
As most Americans will suspect, Canada is happier without the prestige of high dollar against the $US. It was amusing when parity or near- parity briefly happened, but it wasn’t good for business.
Large and possibly ongoing Russian purchases would have complicated the BOC’s ability to massage (NOT manipulate) the $C.
Canadians are not pleased by the confiscated purchasing power of the Canadian dollar. Far from it.
Swiss francs are tiny slice. Very exclusive. Hope there is an ETF.
A very thin slice albeit an extremely lucrative , stable , consistent and secure slice since the 1910’s . Remembering the Swiss have had to devalue their currency multiple times over the past thirty years just to keep tourism at least somewhat affordable .
Suffice it to say the Swiss Franc has served my family extremely well thru two world wars , the Great Depression and more worldwide recessions than I care to think about .
our us dollar is backed by the rule of law and is used in 2/3 of global transactions. big money [pension funds, sovereign wealth funds, etc] will never park their big money with communist dictators or totalitarian oligarchs [china and Russia] or other smaller weaker corrupt countries. despite our problems with coups, corruption, and warmongering, the dollar will remain king dollar as far as the eye can see. with china now moving to dictatorship with president xi for life, I am now even more certain of this.
The delusion in this statement is just off the chart. The US Dollar is backed by a single thing only. The supposed invisibility of the US Military, which is totally false.
As long as all currencies are fungible, the dollar will be the preferred choice.
When the day comes that the U.S. Military is not capable of enforcing dollar use, currencies will no longer be fungible.
The likelihood of a shift to another reserve currency that doesn’t include WWIII and the US Military using everything (including Nukes) to protect their ability to pay for the the world’s largest military with printed paper is extremely unlikely.
The things that must happen that would make the Yuan the reserve currency have a probability of essentially zero.
The reintroduction of gold-backed fiat currency (The “petroyuan” is convertible into gold) won’t make an impact? Perhaps not to Yuan dominance, but back toward precious metal-backed currencies?
How does the military force the use of US$?
The key reason why the dollar holdings are rising is because a lot of freshly printed dollars have been released into the global financial system. Many of the so called allies are essentially required to buy all those treasuries issued in trillions. In fact, dollar is no longer required for international trade. The only reason it is being used is custom and existing infrustructure. But China does not have to buy all those commodities for dollars. If Americans do move to weaponize dollar, this will inevitably cut demand for dollars and will shift trade to other currencies. Oil is, of course, the most important one. As long as the oil exporters are willing to continue to use dollars, dollar is safe.
Blakesly: yes, the impact of the petro-yuan has not yet been felt.
Also, interestingly, a physical gold-backed crypto, Kismet, is due to be launched in October.
The US dollar’s supremancy will not die overnight but I suspect it’s heyday is over.
What reintroduction of gold-backed fiat currency are you referring to? The “petroyuan” is NOT convertible into gold. Those yuan-denominated oil futures contracts are just that and nothing more. They are not convertible into gold nor is the yuan gold-backed.
“petroyuan” is convertible into gold”
the Yuan is backed by the dollar. Release the peg and then we’ll talk
Also there is no such thing as a gold-backed fiat currency. Fiat money is currency that a government has declared to be legal tender, but it is not backed by a physical commodity. Any currency that is truly gold-backed is not fiat.
My apologies for an error in my earlier comment. The new gold backed crypto will be Kinesis, not Kismet. Andrew MacGuire is involved in launching it.
“The things that must happen that would make the Yuan the reserve currency have a probability of essentially zero.”
The sultan of the Ottoman Empire probably thought the same about their dominance…
Fifty years ago, many people probably thought that the probability that China become the second economy in the world was essentially zero.
“How does the military force the use of US$?”
Was it not so that Saddam did refuse to sell oil for USD and accepted only EUR instead ? And Khadaffi did have those plans for a gold backed African Union issued currency …
Just some speculation on the real reasons for a couple of recent wars. After all, how would the Imperial City finance their games in a world with reduced external demand for USD ? Yes, the FED would print to a certain point, but that would only work so far as the Central Bank of Weimar did discover once upon a time or as the Venezuelan government is about to find out, just to mention two examples. Another nice example is Zimbabwe.
Well said, and mostly correct.
The (no doubt) spell-checker induced word-replacement — invisibility for INVINCIBILITY may well be a very good case of a SPELL CHECKER FREUDIAN SLIP — the point being that much of the world desires more invisibility of the U S Military.
Of course that is false. The US military is highly visible.
Invisibility? Lol. If only…
Absolutely correct everything else is totally off.
Bona M.D., don’t believe the cynics, (IMO) you have got it right. If the yuan were to dispose of the dollar it would mean that democracy isn’t in our future.
And that ain’t such a bad thing when the takers outnumber the producers and in turn vote their pocketbooks.
No correlation to oil for dollars? Most every coup and military intervention to take out “bad man” oil producing country was about sustaining selling that oil for U.S. Dollars. Operation Ajax-early 1950’s was our first endeavor in shaping Arab leadership to our way of thinking. 1979 was the blowback. Today MBS in visiting the U.S. on a whirlwind tour while having smoke blown up his backside. They had NYC news stands full of a new magazine with a picture of MBS on the cover. The courtship of SA by China and its gold for oil is frightening a lot of people who understand what petrodollar is. All paper money is just a belief system until you can find a way to force it on the world. In 1973 we found that way.
Russia isn’t totalitarian, but it is oligarchical – like the U.S. and maybe a bit more so.
“The dollar’s low point was in 1991 with a share of 46%.”
1991…what else happened around that time?
“The Soviet Union, officially the Union of Soviet Socialist Republics was a socialist state in Eurasia that existed from 1922 to 1991.”
The path for global American domination was cleared with the collapse of the Soviet Union and maybe that saved the USD from it’s decline. After 1991, only huge blunders could change what seemed to be inevitable.
And the blunders came – Iraq, Afghanistan, Libya, Ukraine, Russia, Iran…to name just a few, and because of that things have changed. Russia is rising, and it and a growing list of nations are uniting against the U.S. while at the same time the U.S. is “sanctioning” and at war with an ever creasing portion of Planet Earth’s economy. To me, U.S. actions are increasingly desperate, belligerent, and bizarre like a flailing (Roman?) empire in decline compensating by using more and more of it’s military force to persever crumbling hegemony.
I agree there is no clear replacement shown in the graphs, which show only slow decline for the USD.
I also think recent events starting around 2003 (Iraq War) are a sign that power is shifting away from America mostly because of extremely bad chooses.
The charts will lag, but I expect they will eventually reflect America’s bad chooses.
David Walker does compare the current state of the USA to the fall of Rome:
“declining moral values and political civility at home, an over-confident and over-extended military in foreign lands and fiscal irresponsibility by the central government.”
I give the dollar another twenty years or so before is drops to under 50%. However not only the numbers should be counted but the currency value. If we compare what you can bought with a hundred dollars to what you could buy twenty years ago, the dollar valie has dropped a lot.
So if we take into account that, is not looking good long term for the dollar.
I believe the Dollar days are numbered, but it will take awhile, yet. Inertia is one reason.
def: “a property of matter by which it continues in its existing state of rest or uniform motion in a straight line, unless that state is changed by an external force.”
Readers comment that it is the ‘rule of law’ that keeps it going, or the failings of other countries. Others say it is military might. It’s really all of the above. But, its’ demise is inevitable as a reflection of the end of American empire.
The old, ‘cleanest shirt in the laundry basket’ isn’t much of a support argument for the Dollar. Look for incremental change such as the Petro-Yuan, Iranian efforts to undermine, KSA willing to trade oil for whatever works, and a growing anger by Russia towards America and a program to continually undermine. After all, Russia is still the largest oil producer in the World. China is the largest economy.
Sandjay Gupta had a news piece last week on the declining infrastructure in America. Highlighted was the condition of water supplies outside major wealthy cities. Think Flint, over and over again as a premier site for Erin Brokovich, al across the heartland. Think of the highways falling apart, and the bridges. (my teeth are still rattling from the I-5 heading south from 49). Yet, the Economy is supposed to be smoking hot. Is it really? Debt debt everywhere, and nothing one can buy; (except on time).
Dollar use will chug along until the next economic crisis, or major war. When the dust settles other currencies will be used more and more. Trade deals the the US opts out of will involve more direct currency exchanges between other countries, bypassing the US enitirely. And countries who have been singled out and attacked by US policy will be more open to using alternative currencies. One day, the US dollar will be like the English Pound.
When even friends and allies are attacked for political purpose, it won’t take a whole lot for countries to look around for other partners. It’s inevitable.
The USD has been declining in value since its inception. Creeping or galloping inflation does that.
But the real question is the relative value of the USD v. other currencies. And the Chinese Yuan is still holding the hand of the USD.
Putting the Yuan into the SDR basket was solely a political move. A pegged Yuan to the USD? What other currency in the basket is holding the hand of the USD?
Meh. It will probably drop under 50% within 20 years then rise again, then fall again. The last nation to bet against American capital, greed, innovation and technology was KSA and that didn’t work out so well for them.
One step at a time. Get the Petro-dollar out of the way and then move to step two..whatever that is for now.
It is not clear how much longer the US dollar will remain as the world’s primary reserve currency. History shows that, at some point, it will lose that status and be replaced by something else, probably another currency.
I fully expect that the replacement process will be a lengthy messy affair, perhaps even a violent one.
I also would like to point out that it is totally unreasonable to have expected that the Yuan would almost instantly displace the US dollar.
The US has, for decades, relied on spending more than it generates in revenues and the deficits appear to once again be on a steep upward slope with no end and no means to reduce them in sight. I point out that nothing in the Universe is allowed to grow exponentially for forever and I believe that the US deficit will not be an exception to that observation.
How much longer it can go is impossible to say, the only sure thing is that it will end at some point.
Re: the apparent consensus that the strength of the $US is because of military backing: before the euro the German D-MARK was a much stronger currency than the $US.
If, as many on this site predict, the euro collapses, and Germany returns to the D-Mark, this will reassert itself violently. The $US, the cleanest dirty shirt, will overnight be facing an actually clean shirt.
Around 1981 the US military was supreme but the $US dollar almost collapsed. US tourists around the world were asked to please pay in local currency, including the lira.
To contain the run on the $US, the US had to issue bonds denominated in D-Marks and Swiss francs (Carter Bonds)
No one wanted promises to pay in $US.
If anything, overspending on the military will be a major cause of the US going broke.
Great comment Nick Kelly. I had forgotten much of what you said about the travel days of past.
I remember working up in Yukon during that period. An American pilot on his way to Alaska stopped in at our private facility and asked to buy some avgas. We said no, it was for our own use and we were waiting for a fuel order. He was pretty angry about it. When he begged we told him he must use Cdn dollars. When that was a problem we finally accepted US dollars at par. The guy went ballistic and swore he’d never come back and we had to remind him we wern’t a gas station for his convenience.
> What will finally pull the rug out from under the dollar’s hegemony?
Canadian Tire Money, obviously.
There have been talks about going back to gold as the world currency for a while, these talks never go anywhere because of the following reasons:
A) There is just not enough gold to replace all those dollars used worldwide.
B) The sinking of the US economy caused by going back to gold as currency worldwide would drag the rest of the world down.
C) You can print dollars, you can’t print gold.
D) Fear of a WWIII because again there isn’t enough gold.
With respect, the argument that there is not enough gold does not hold water. Using the current above-ground gold availability, it is possible to have gold-backed currencies if the price was allowed to rise and not kept down by paper gold manipulation.
Take a look at the US debt. Then take a look at companies that are said to make trillions of dollars. Then take a look at all those dollars used as reserves outside the US.
Do the math.
Workwide there might theoricaly enough gold but the US doesn’t even have a third of that.
Is been said for decades that if even a third of the dollars outside the US went back to the US to be expended, the US would sink.
Heck the US doesn’t even have enough gold to back up the dollars inside the US.
Gresham’s law will quickly take care of any country which is foolish enough to try to back more than a tiny fraction of its currency with gold or makes its currency convertible into gold.
“A) There is just not enough gold to replace all those dollars used worldwide.”
You have it backwards, there are too many dollars in the world.
The debasement of the US dollar since the US defaulted on the Bretton Woods agreement is truly staggering. People laugh at Zimbabwe, but is the US, and all the other currencies that value their currency against the US dollar any different?
Very timely article, because there are news reports of the Chinese wanting to use the yuan to pay for oil, thus breaking the back of the petrodollar. If the United States is around 25-30% of the world’s economy, why shouldn’t dollars be around 25-30% of the world’s foreign reserve currency and there just isn’t a hegemonic global reserve currency?
China has been trying to pay for imports of Iranian oil with yuan for years now, at least since 2012 with little luck: while the oil bourse in Kish (where Iranian petrochemical products are traded and priced) does price some oil grades and mixtures in yuan and there’s the occasional, much advertised payment, NIOC (the State-owned oil company) is still wary of the Chinese currency and demands to be paid mostly in euro, with some Swiss francs, UAE dirham and Canadian dollars at the margin.
There are also reports part of the payments is still in US dollars (albeit the government in Teheran will vehemently deny this) coming by the way of Dubai, and I have no problems believing this.
If China, or India, or any other country wants to get serious about this whole reserve currency business they had better ask themselves why, for all the shenanigans of central banks in New York, Bern, Frankfurt and Tokyo, we still prefer holding US dollars or Swiss francs over Chinese yuan and Indian rupees.
Hint: it’s not merely a question of habit.
“…we still prefer holding … Swiss francs …”
“We” must be quite a small population. See Wolf’s pie chart.
If you don’t want yours, I’ll gladly take them off your hands. I usually prefer ChF 1,000 notes, but will settle for smaller denominations.
In return I can give you a whole bunch of, let’s see, Deutsche marks and French francs. Somebody will tell you they are not legal tender anymore and not worth the paper they are printed on but those are just malevolous mudslingers.
It took 2 world wars the Marshall plan and a lot of very nasty maneuvering by the US to finally lever sterling out of the top reserve seat.
It is still a player at the table (and bigger than china).
Currently Idont see another shirt on the horizon and that shirt will not come from a Totalitarian state (china russia Etal). Simple.
Non-sense. Political regime has very little bearing on it. It didn’t prevent nations ruled by monarchies from attaining such status. It is about economic policies.
Martin Armstrong of Armstrong economics states that the oil trade globally is 3.6% of world trade, prompting him to say ”what petrodollar.” he states the us dollar is king dollar because it greases 65% of the world trade, and people can safely park big money in this relatively stable currency where it cannot easily be pilfered [ie, rule of law]. please see comments above. with kind regards, ab.
I was once in a meeting, something has gone awfully wrong. In the room was a very high ranking manager…he was furious at everyone and rightfully so. Everyone was shouting and yelling, and complete breakdown of communication. Then in the midst of the discussion they managed to bring up the data…after taking a glimpse at the data, the manager went silent and said “Proceed”. The room went quiet, and we went on to resolve the issues.
It is fascinating how data brings quiet to the storm, and that is why I like this site.
Which is why data vanished from most news sources in March, 2012.
The purpose of holding foreign reserves is to support the value of your own currency in the face of international capital flows. American banks are the major players in international finance. As long as that is the case, the dollar must be the main reserve currency.
regarding: “American banks are the major players in international finance.”
It wasn’t too long ago these banks were almost over the cliff due to gambling addictions and lack of oversight. Your statement is true, for sure, but I think the cleanest shirt is getting pretty frayed. The banking system barely survived 10 years ago. Anything is possible with these current levels of worldwide debt.
Back when international trade was increasing exponentially, no one complained about the dollar. Exporters were more than happy to use the dollar as the currency of international finance. So happy that banks traded dollars they didn’t even have. Now those “debts” (really claims on dollars, or iou’s) still sit on the books of banks all over the world, including China, Japan and even Germany. These banks would love to be able to “quit” the dollar now, but all of those trillions of imaginary dollar claims, but very real debts, are just waiting for the next crisis to reemerge. Because of this, the dollar has nowhere to go but up.
Again, this is ignorance. No one “complained” about the dollar because it had been backed by gold. By the time the gold window was closed, the new international system had been established. Honest people would just call it “bait and switch”.
In fact, prior to the gold window being closed, foreign countries were rushing to convert the dollar to gold, leading to the gold window being closed.
The dollar has lost 90%+ of its value. Nowhere but up? Where have you lived? In a cave? Even if there’s a crisis, the dollar might gain say 20% back, those will be gained through the destruction of the assets of the rich which they will NEVER allow to happen for long.
I’ve noticed that whenever China is involved, the discussion quality just drops. I would argue at this point that the US dollar being a reserve currency has helped in making economic inequality as wide as it is right now.
You overestimate the importance of shiny metal in international finance.
And you overestimate your knowledge of reality. No one can dispute the fact that foreign countries were losing confidence in the dollar which led them to want to convert the dollars back to gold.
Your next question is why is the dollar still widely accepted then? Because Europe, Japan, etc are our colonies you dolt. Why do you think Murica has over 1000 bases all over the world?
“Because Europe, Japan, etc are our colonies you dolt. Why do you think Murica has over 1000 bases all over the world?”
Exactly. It always circles back to military might and reach. But if the US keeps the current trajectory (trade deficit and value-losing currency), it will have a hard time maintaining its military (and those bases). The natural reaction is an attempt at expansion of its colonial farm (NATO has been expanding even after the cold war ended).
Military bases. Got it. And China uses the dollar because secretly it’s a colony of the U.S. Thank you for linking your bizarre theory to my post.
In a certain way one can claim that it was De Gaulle who forced Nixon to ditch the goldbacked dollar and switch to FIAT paper.
De Gaulle used once a year to send a battleship loaded with France’s entire USD reserves and exchange all those USD for gold at the NY FED and if Nixon hadn’t done what he did, the USA would have run out of physical gold. Even the usually obedient Brits managed to exchange their dollars for gold when they realized the gravity of the woes faced by the US.
With gold holdings running low and a war to pay for, Nixon needed the printing press and since you can’t print endlessy notes that promise they’re exchangeable for a certain amount of physical gold, no wonder Nixon ditched the gold standard and cranked up the printing works.
Drango, are you for real? At the end of WWII, most of the world was destroyed. Only the US remained standing. That allowed the US to dictate the terms of the Bretton Woods i.e. the use of US Dollar instead of Bancor as the reserve currency.
The Chinese only rose AFTER the gold window had been closed (sometime after 1980, LONG after 1970). At that time the Chinese were super weak. Saying they would only accept Yuan was impractical. They had to join the international order which was already forced to accept the dollar.
Between 1970 and 1980, China wasn’t even a player in the international markets.
Your grasp of reality and history needs to be examined. You know what the difference is between China and our “colonies”? The presence of actual military bases in the later. There’s ZERO US military base in China.
Rates, I can’t believe I have to tell you this, but there are no American troops in China forcing them to use the dollar. China doesn’t want to have the reserve currency because the dollar was very good to it, for a while. Now they have trillions of dollar reserves and can’t do anything with them. If you think the U.S. forced China to do this, you’re the one who needs to read up on his history.
Wolf, can I ask u a favor?
I need 2 pie charts, 2008 and 2017. Put together allocated and unallocated.
I don’t understand looking at line graph above where unallocated went.
The previously “unallocated” reserves were disclosed in detail by the various central banks. In other words, before, these central banks just disclosed their total level of reserves. So the specific composition of those reserves wasn’t known to the IMF, and it summarized all those reserves as “unallocated.”
As more central banks started disclosing the composition of their reserves, this data then moved into the “allocated” column since it was now known to the IMF.
So this is where unallocated went: to allocated. That’s why I also made sure to say that the “unallocated” line in the chart is just a memo figure, and doesn’t add to the percentages of the other data sets in the chart.
Maybe in this respect, the chart was a little confusing, but a I wanted to show how the data is getting more complete. Maybe next time, I’ll show allocated and unallocated in a separate chart. It will look like a wobbly X. And it will be a lot clearer.
IMHO, the U$D will be “less needed” as a Reserve Currency moving forward due to Two primary reasons:
1) Special Drawing Rights of the IMF will be explored and utilized by those desire a “Basket of Currencies” as a base; and
2) CHN implementing their PetroYuan and CHY-Au Exchanging Venues. Foreign Entity access to their INE was allowed earlier this week. CHN being the World’s Largest Consumer of Petroleum, paired with RUS, one of the Largest Producers and Suppliers of Petroleum to CHN, Europe, IND and the rest of the World, will be comprise the PetroCHY Core.
One thing to note is that RUS has Pipeline Connections to CHN and DEU; and are not restricted to the Suez or Panama Canals.
With the CHY-Au Exchanging Mechanisms rolling out in HKG and DUB – with more most likely to come – the INE will expand beyond sourcing CHN’s Domestic Market; and become the PetroBourse of Choice for Europe and Asia.
Consequently, U$D will be available for PetroDollar Transactions, Direct Trading with the USA, and as an Reserve Currency along with the IMF-SDR for smaller Nation-State and Private Entities.
Are the reserves held in actual currency, or are they held in treasury bonds of a particular country. Does the data distinguish between the two?
This could be meaningful given the Fed’s reverse QE operation. If the Fed is pulling USD out of supply, one would expect foreign holding of USD to drop.
Reserves are “claims” on the dollar, so financial assets of any kind denominated in dollars. This could be Treasuries or corporate bonds or other financial assets. Actual currency, if any, would only be a small portion.
China is not a credit provider, it lacks the infrastructure, including enforceable contracts, private property rights, rule of law and a body of jurisprudence.
China is a communist dictatorship ruled by a single party, a police state where all relationships are ‘conditional’. Hardly creditworthy (or creditable).
The collateral for the entire Chinese economy is its forex reserves. Retaining reserves at all costs is the focus of the Chinese overlordship. Getting reserves out of China is the national sport for everyone else.
What solidifies the dollar’s status as reserve is its immense float, instant dollar credit availability everywhere … and the redeemability analog: that dollars are traded on demand for gasoline millions of times every single day at gas stations around the world. Like gold, gasoline is a non-renewable natural resource with real value = it is capital.
What can the yuan buy? Without the dollar peg and Beijing’s unrelenting efforts hold onto its dollars, the yuan can buy poison dog food and little else.
“The collateral for the entire Chinese economy is its forex reserves.”
This is another really stupid observation that has no correlation in real life.
It’s like saying the entire size of the Chinese economy is equal to its forex reserves. It’s obviously not true EVEN if the Chinese GDP is not as as big as the Chinese says it is.
The Chinese economy borrows in Yuan (mostly), and the forex is useful only in buying things from overseas. Your observation is only true if every input the Chinese economy needs comes from overseas, but China is a huge country with its own natural resources.
Read this from Wikipedia:
The rare earth industry in China is a large industry that is important to Chinese internal economics. The rare earth metals are used to manufacture everything from electric or hybrid vehicles, wind turbines, consumer electronics and other clean energy technologies.
China’s rare earth industry makes up 97 percent of rare earth trade worldwide.
Your cellphones, your Tesla, etc are based on materials only the Chinese has. The question is what can the dollar buy?
You forgot to mention that China manufactures just about everything, so you could buy lots of manufactured product with Yuan. These products are worth a lot more than oil and gas.
What will hold back China as reserve currency (in the short term) is the political instability and explosive debt that will ultimately cause a severe deflation, requiring lots of money printing in the future. Who wants to own Yuan with that looming issue? Kyle Bass will be proven right on this.
If I am a leader of a country, what money/currency units would I reserve? I will NOT reserve USD because US military point a gun to my head. I am looking for two things. 1st, the reserve will be able to be exchanged for real stuff. Oil, gold, manufactured goods, useful services. For this, USD woks because US military convinced middle east to only take USD, those who refused have been killed. CNY works too, JPY works too, EUR works too.
2nd, because it is reserve, I can NOT tolerate it to decay. So I have to at least maintain its purchasing power. This, sitting idle gold works. What’s better than gold is a unit that has vast deep pool of bond market where I can invest and “increase” its purchasing power. US being the country has the most stable political structure and the size of its economy, has been the superior choice. China will NOT work, Euro has problems. But now, as the debt grows in US outpacing the economics, I will seriously start to worry about the decay of my USD reserves. Maybe hold is better now. Or an alternative like SDR, the world money where the entire world borrows and as long as the world investment, economic growth is in tact, my reserve will NOT decay by investing in the world. I do NOT care whether it is China or US, because the whole world borrow and use this. The SDR is NOT controlled by US or China, it is a round table of ecountries around the world, which gives its trustworthiness. I do NOT care if my currency is the reserve or NOT unless I want to have control over the world.
The value of a circulated Roosevelt Dime:
1964- Bullion Value
1965- Face Vale
Extra credit, explain the difference between money and currency.
Bitcoin will render them all obsolete in a very few years, as long as the electricity doesn’t go out
Hi Wolf,this reply is off subject.Check out today’s ,Truthdig’.
There is a article about a new documentry titled,’The china hustle’. I haven’t yet seen it but think you will find it of interest. P.S. I been enjoying your site for years…
I’ve seen the trailer of it. Looks very interesting. On my list to see, and if I cannot talk my wife into it (she isn’t into financial things), I’ll watch it by myself.
Currency value also reflects qualitative intangibles such as location desirability. China does not attract any meaningful immigrants from any other country. The US on the other hand is most sought after destination for ambitious and hard working foreigners.
When is the last time you heard of smart and ambitious non-Chinese native people talk about movIng to China for opportunity?? They don’t because China is less desirable place for relocation than the US inspite of all our “problems”. By a factor of 1000x or MORE. So it’s no surprise the dolllar remains in demand. It’s the currency of the most desirable place to exist given the opportunity. That’s why Chinese elite buy property in the Us and send their children here for college.
No one wants to relocate to China. The Yuan is a proxy for that sentiment.
Of course, there are reasons for the dollar to be useless as a reserve:
– That the US would decide to end dollar trade overseas for strategic reasons …
– That the US is deemed by the rest of world to be unworthy of credit.
A sensible approach would be for the US president to ask the Comptroller of the Currency to declare the dollar worthless outside the United States and its territories. At that the US would cease funding its adversaries including ISIS as well as Russian aggression, Turkish invasions, the Chinese dictatorship & its pet North Korean nuclear program, Iranian hostility, Israeli warmongering, etc. The status quo serves the interests of the banks and nobody else: dollar funding overseas has also cost the US millions of jobs.
Likewise, every time Donald Trump opens his mouth confidence in the US dies a little overseas. It may be that some — including oil exporters — might come to the conclusion that regardless of proofs offered, the US is unworthy of credit … that the dollar is a proxy for an idiot and his idiot country, no longer the US of old. in this case, our ‘creditors’ might object to sending us non-renewable natural resources such as crude oil: we would go on an instant and severe ‘energy diet’.
Personally, either / both would be preferable to the status quo.
“…every time (the President) opens his mouth …(this or that happens)”
I think to the contrary.
What the man says is all over the place, but what his administration is doing is not all bad.
The worlds biggest exporter country is the China and biggest importer of oil is the China.. US does not manufacture or have something offer Which is worthwhile for other countries to hold on to US dollars. The US prints money like drug addict on ICE. The military might is no longer there.. The declining Rome took around thousand years to fall. however with modern technology, it would be less than 10 years.. it’s pigeon vs 5G communication.
Why do you think Saudis were buying new weapons? US dollars is only good for overpriced junk weapons..
Concerning your statement: “US does not manufacture or have something offer Which is worthwhile for other countries to hold on to US dollars”: In 2017, the US exported $2.3 trillion in goods and services. That’s about twice the entire GDP of Spain.
Concerning your statement: “The US prints money like drug addict on ICE.” QE stopped in late 2014. That was the end of money printing. The “QE Unwind” started in October 2017. Which means the Fed has been doing the opposite of money printing for the past few months. Don’t you pay attention to anything?
Concerning your statement: “The military might is no longer there.” Are you delusional?
Do yourself a favor and look at the notional values of currencies and interest rate swaps as per ISDA. Brussel, Cayman et al are doing the bidding for the Fed. QE has never ended.
China is divesting away from their Treasuries holdings. Someone is buying those.
The Fed’s balance sheet is not expanding however everybody else’s is.
Where are they getting US dollars to buy those treasuries?
As a curiosity item, if funding an estimated $1.2T deficit is not money printing, what is it called?
So General Dynamics takes Treasury Bills as payment for refueling subs and then cashes them in to pay for their operating expenses? It seems to me that the Fed still has to print at least some of the money even if it is just creating digits in a computer and then transferring them to General Dynamics. Debt is a claim on current and/or future money or an agreed on means of payment such as fungible commodities but it is not, in and of itself money.
You’re being silly. And you know it. It works like this: The government issues (SELLS!) bonds (Treasuries), which is what investors BUY. In return, investors give their money to the government, which uses this money to pay General Dynamics. NO FED INVOLVED.
Wolf, a newb here and completely overwhelmed by most of the information contained in the comments and articles on your site. Any recommendations that you can make to explain more about the Fed and the workings therein as well as to get a better grasp on economics and how everything fits into place? Very confused by some of the theories in the comments. Great site, keep it up.
I am wondering why those folks who are predicting the demise of the US dollar are not selling their US dollar denominated financial assets such as T bills and T bonds and investing the proceeds in Yuan nominated bonds? I understand there are many such instruments available and the Chinese are quite willing to sell them to foreigners.
Because some of us don’t think the Yuan is a good “replacement either”. For example, gold might be a better bet.
The Dollar, the Yuan, they are all overvalued compared to Gold IMHO.
Here is an example of the drip…drip…drip…away from the USD. It’s from Zerohedge (which I’m skeptical of and Wolf’s comments on some of it’s articles has increased that skepticism).
It does fit in with what might happen over time if the USD is to lose it’s reserve status:
“A pilot program for yuan payment could be launched as soon as the second half of the year and regulators have already asked some financial institutions to “prepare for pricing crude imports in the yuan”, Reuters sources reveal.”
“According to the proposed plan, Beijing would start with purchases from Russia and Angola, two nations which, like China, are keen to break the dollar’s global dominance. They are also two of the top suppliers of crude oil to China, along with Saudi Arabia.”
“A change in the default crude oil transactional currency – which for decades has been the “Petrodollar”, blessing the US with global reserve currency status – would have monumental consequences for capital allocations and trade flows, not to mention geopolitics: as Reuters notes, a shift in just a small part of global oil trade into the yuan is potentially huge.”
The list of nations I’m aware of that would like to get “off” the USD keeps growing…Russia, China, Iran, Syria, Angola, maybe Pakistan and Turkey…and India could be a wild card at some point should some asymmetrical event happen that creates an opportunity for the growing anti-US sector of the world. Brazil is another large player but the U.S. has neutralized Brazil for now by installing a loyal neoliberal corrupt puppet.
We’re talking some big nations here and a lot of Planet Earth.
The debate on the importance of the dollar being a reserve currency has gone on a long time, and should we lose the cover of this form of seigniorage, we charge the world to use our money, we could still monetize our deficits directly. In some ways that might be preferable, and provide some transparency into the process. Assuming inflation is never a problem, and lately it never is, financials would continue to trade.
It’s also a contrary rule on supply demand that a smaller float often demands a lesser price, which may be what we are seeing right now. The dollar is dropping because supplies are shrinking. It may be in Chinas’ best interest to repatriate their forex bonds into dollars if only to support the availability of dollars, though the danger is they can’t stop the fall of the dollar any better than the Fed rate hike program (normalize? please) China might buy up US dollars but they would take them to the grave. So either way, orphaned bonds rolled over in perpetuity, or dollars and nothing to buy.
The reason that Americans are not interested in Yuan/RMB is because it is impossible for Americans to open a foreign bank account denominated in Yuan.
There is no reason not to hold Yuan as an individual. It is a currency that can always be used to buy something of value, even if it is a container of shirts or something else manufactured in China. When the dollar devalues, or is not accepted in foreign trade, what of value can you buy with dollars?
And BTW, it is extremely difficult for an American to open a foreign bank account in any country. Banks simply do not want the hassle of the small client because of the FATCA requirements. Banks are required to open their books completely to Federal demands. This comes from the former chairman of the board of an Ecuadorian bank.
Speaking of a weaker dollar The Debt clock has been on a year lately Over 21.1 trillion at the moment
Then I guess it’s settled.
We should adopt the euro as a one world currency. No need to agonize over reserve status any longer. Also, think how much QE the ECB could print if it absorbed China into the fold. Numbers don’t go that high.
Plus, if the euro became a one world currency, pesky ideas such as devaluation wouldn’t be an issue if debt monetization got a little out of control. In fact, the whole idea of ‘a little out of control’ couldn’t exist. Wage and price controls would settle the issue. A world filled with ECB dictated winners and losers, all according to EU models of fairness. A new world order. Fairness via QE. China would join the EU and eurozone, of course.
Think of it as a much simpler life. Always enough euros to go around and everyone always has a pile of their own. Economic Valium.
” all according to EU models of fairness”
replace with …
all according to EU models of enforced fairness
43 wanted a North American currency, to compete with the Euro. When they poll Europeans they all dislike the EU regulations, but they like the currency. Since 45 has revisited 43s border wall, would he revisit the AMERO?
I bet they would feel less positive about the euro if the ECB stopped monetizing debt and rates rose to market levels so that they were actually paying their own individual way.
EU kick the can is a bottom-up way of life. It’s a part of the cultural core. I’m looking forward to the day they scream like murder victims because the free lunch is taken away. Real funny stuff is coming someday.
The only way the euro could work is if it’s a one world currency that enjoys a legally enforced economic equilibrium. Sort of like the old soviet union and its command planning economy but dialed up a lot way past 11.
Central bank holdings are stagnant. What funds our trade deficit is
A) the desire of foreign savers to stuff their mattress with dollars.
B) the desire by China and lesser exporters to maintain a trade surplus for the purpose of keeping their workers employed.
When savers prefer saving something else, the something else will become thevreserve currency. Nukes have nothing to do with it. What do you want in your mattress?
As an aside, foreign savers mirror central banks antipathy for saving yuan.
As long as the rest of the world has to pay for there oil in dollars demand for dollars will remain high and reserve currency status for the U.S. dollar will remain.
What Could Dethrone the Dollar as Top Reserve Currency?
Easy answer, gold.
As with all fiat currencies the US simply won’t stop printing, and so will go the way of all those before it.
Chinese Crypto Currency which is still not avaible, I dont think the russian one could do it..
Maybe I am ignorant, but the IMF is cheating by simply quoting all other currencies in US$.
If the US dollar lost up to 60% of its value against most other currencies in the past 15 years, for a country X having up to 60% more US$ in the portfolio is just a consequence of the exchange rate, indeed an indicator of US$ weakness, not of strength…
The Euro is not a currency: it is a puppet manipulated by the US$ lobby through the IMF.
As for the yuan, let’s wait and see.