US Dollar Status as Global Reserve Currency?

So, how hot is the Chinese Renminbi? And is the euro dead yet?

The US dollar’s role as global reserve currency is defined by the amounts of US dollar-denominated assets – US Treasury securities, corporate bonds, etc. – that central banks other than the Fed are holding in their foreign exchange reserves. To diminish the dollar’s role as a global reserve currency, these central banks would have to dump the dollar.

So, let’s see. Total global foreign exchange reserves, in all currencies, came in at $11.4 trillion in the third quarter, according to the IMF’s data on “Currency Composition of Official Foreign Exchange Reserves” (COFER), released this morning. The amount of USD-denominated exchange reserves was $6.63 trillion. This amounted to 61.9% of total foreign exchanges reserves held by central banks, the lowest since 2013:

In the chart above, note the arrival of the euro. It became an accounting currency in the financial markets in 1999, replacing the European Currency Unit. Euro banknotes and coins appeared on January 1, 2002. At the end of 2001, the dollar’s share of reserve currencies was 71.5%. In 2002, it dropped to 66.5%. Now it’s down to 62.2%.

The euro replaced a gaggle of European currencies that had been held as foreign exchange reserves, on top of which was the Deutsche mark.

In Q3, the euro’s share rose to 20.5%, the highest since Q4 2014. The creation of the euro was an effort to reduce the dollar’s hegemony. At the time, the theme was that the euro would reach “parity” with the dollar. But the euro Debt Crisis ended that dream.

The other major reserve currencies don’t have a “major” share. The combined share of the dollar and the euro, at 82.4%, leaves only 17.6% for all other currencies combined. The two currencies with the largest share in that group are the Japanese yen, at 5.0%, and the UK pound sterling, at 4.5%.

And the Chinese renminbi? On October 1, 2016, the IMF added it to its currency basket, the Special Drawing Rights (SDR). This elevated it to a global reserve currency. Some people thought, or hoped that, being the currency of the second largest economy in the world, it would dethrone the dollar’s status as hegemon. The process is sputtering along. The RMB’s share, after jumping nearly half a percentage point to 1.84% in Q2, has now inched down to 1.80% in Q3.

In the pie chart below, the RMB is the thin red slice – minuscule, given the size and globalized nature of China’s economy. Central banks remain less than enthusiastic about holding RMB-denominated assets:

The Swiss franc, the barely visible black line in the pie chart above, is becoming more irrelevant in this lineup, as its share has now dropped to 0.15%, though it plays an outsized role in the currency-trading sphere:

The chart below shows the major reserve currency trends over time. The US dollar’s share (black line at the top) of reserve currencies has edged down. The euro (blue line) has been vacillating at around 20% for years. The Chinese RMB is the bright red line at the bottom as of its inclusion in the SDR basket. It’s above the Swiss franc and sandwiched between the Australian dollar and the Canadian dollar:

All this data is based on the currencies’ share of “allocated” reserves. Not all central banks disclose to the IMF how their total foreign exchange reserves are “allocated” by specific currency. But disclosure has increased and the data is becoming more complete. In Q4 2014, “allocated” reserves accounted for only 59% of total reserves. By Q3 2018, this has risen to 93.9%.

There is a theory circulating that the US, as the country with “the” global reserve currency, “must have” a huge trade deficit with the rest of the world. This “must have” is patently not the case because the Eurozone, which has the second largest reserve currency, has a large trade surplus with the rest of the world.

However, the fact that the dollar is still the top reserve currency and top international funding currency allows for those trade deficits to be financed easily, and this has made those trade deficits possible over the past two decades. There is no telling for how long this can continue without causing some sort of never-before-seen financial mess. But that moment isn’t on the horizon yet.

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  115 comments for “US Dollar Status as Global Reserve Currency?

  1. raxadian
    Dec 31, 2018 at 4:46 pm

    The first thing China should do is change the name, most people still think the name is Yuan.

    • Wolverine
      Dec 31, 2018 at 6:56 pm

      In the old days, the Chinese Government had two currencies, the Yuan for foriegners and the Remembi for citizens. It was illegal for citizens to hold Yuan and illegal for foriegners to hold remembi.

      • matelot
        Jan 2, 2019 at 9:43 am

        I have not been in China since 1990 and I know a lot has change since then. But when I was in China, there were two types of currency – 1, FEC (Foreign Exchange Certificates) monetary unit in yuan; 2, renminbi (the people’s currency) in yuan as well. Officially they were equal, but in reality they were quite different. FEC yuan money was for foreigners and it was illegal for Chinese citizens to have them. But, many Chinese wanted them because certain retail stores only accepted payment in FECs. Some time ago, China ended the dual currency system.

    • subunit
      Dec 31, 2018 at 7:34 pm

      This makes about as much sense as renaming the USD the “buck”

    • roddy6667
      Dec 31, 2018 at 8:16 pm

      Yuan is usually used to refer to the currency.
      Renminbi (RMB) is equivalent to “dollar”, used to denote price, although sometimes it is interchangeable with yuan.
      You often hear “kwai” when buying something retail. It is slang that means the same thing as “buck”.

      • Rick Horocholyn
        Jan 1, 2019 at 6:37 am

        As has been explained to me by a Chinese person, the currency’s name is “renminbi” and “how many” is measured in yuan. This is analogous to the UK currency, which is named “sterling” and how many is given in pounds.

        • Rick Horocholyn
          Jan 1, 2019 at 6:38 am

          Renminbi is translated as “people’s currency”

      • Jan 1, 2019 at 3:57 pm

        This confused me when I was in China. Everyone was talking about Kwai. Kwai? What was that? I’m not sure, but I think it’s the counter, like, 100 Kwai.

    • Čampa Mitja
      Jan 1, 2019 at 6:26 pm

      Do global official reserves include FED’s UST reserves? 😀

      • Jan 1, 2019 at 7:03 pm

        Čampa Mitja,

        No, as I explained in the article, since they’re in domestic currency (dollars) and therefore not foreign exchange reserves.

    • Ming Chan
      Jan 1, 2019 at 8:43 pm

      I agree. YUAN is simple, less syllables to pronounce, and has a rounded sound to it compared to the ‘penny-pinching’-“Renminbi”!

    • Nguyen van Tuan
      Jan 5, 2019 at 2:05 pm

      The Reminbi is the official currency of China,denominated in Yuan. Just like the US Dollar is the official currency of the US, denominated in Dollar.

  2. William Smith
    Dec 31, 2018 at 5:17 pm

    There is huge sovereign risk with anything to do with china. They have a very secretive, opaque and inscrutable governing dictatorship. And there are valid historical reasons why they would hate the western world (1800’s opium trade). At least with the US, chaotic as it is, there is a degree of transparency. If I didn’t want my currency holdings to be suddenly reduced or eliminated at the whim a capricious dictator, I’d stay away from china. I still have no idea how western companies dare to invest in a country with such potential sovereign risk. The USD is here to stay until something really bad happens.

    • roddy6667
      Dec 31, 2018 at 8:17 pm

      Nobody is allowed to audit the Fed or Fort Knox. No transparency in the US.

      • Paul
        Jan 1, 2019 at 12:38 pm

        The feds balance sheet is public. What would be the point in auditing them.

        • Briny
          Jan 1, 2019 at 2:34 pm

          “What would be the point in auditing them[?]”

          Oh, I don’t know. Perhaps steering some big bucks to one or more of the Big Four accounting firms? That’s usually the way things work in government contracting.

        • Jan 2, 2019 at 11:55 am

          Last year the Fed lost a rather large wire transfer to the Philippines which was stolen by some Chinese bandits. Does anyone know how that came out?

      • Dan Romig
        Jan 1, 2019 at 12:55 pm

        Wolf, apologies for taking offense to a citizen’s conspiracy types and posting the comment awaiting moderation.

        But, I just read the review of ‘Vice’ on zerohedge and they show this clip:

        https://www.youtube.com/watch?v=Mamvq7LWqRU

        • Jan 1, 2019 at 3:23 pm

          Dan Romig,

          Yes, all WTC buildings that collapsed collapsed into their own footprint. What else were they supposed to do? I was there (on Church Street), I saw the first tower go down before I started running.

          Building 7 (WTC 7) housed the City’s emergency response center. This included a big diesel generator and a huge fuel tank full of diesel, and fuel lines going through the building, including in the upper floors. Building 7 got hit by big pieces from the tower next to it (North Tower). They damaged the building and ruptured the fuel lines, and a large amount of diesel fuel caught fire, burning inside the building. The fires inside caused the building to weaken further (after having already been weakened by getting hit by falling debris from the North Tower). It collapsed several hours later, and everyone in Building 7 had time to evacuate. This includes some people I know personally. These people also saw right from their window how the first plane hit the first Tower. When they saw the second plane hit, they decided that this wasn’t an accident, but something big, and they scrambled to get out of WTC 7 before it caught fire.

          There is so much made-up BS circulating about this, it’s sickening. People have fun making up crap and spreading it. But this is not a joke. A couple of thousand people died.

      • Jan 1, 2019 at 7:24 pm

        roddy6667,

        In terms of auditing the Fed (as I also pointed out to J457 below):

        The Fed’s finances are audited once every year, and the audit reports are posted online:

        https://www.federalreserve.gov/aboutthefed/audited-annual-financial-statements.htm

        The Fed also has been audit as an institution, twice since the Financial Crisis, about its doings during the Financial Crisis, by the GAO (Government Accounting Office). I covered the last audit in 2011. This wasn’t a financial audit (we already get those one a year), but more of an operational audit that found all kinds of stuff. Here is my article on this at the time:

        https://wolfstreet.com/2011/10/21/the-gao-audit-of-the-fed-doesnt-call-it-corruption/

        • Gadi
          Jan 2, 2019 at 12:41 pm

          The ‘audit the Fed, and Fort Knox’ is just a Rand Paul trope trying to push us back to a Gold backed currency.

    • earl d
      Dec 31, 2018 at 10:52 pm

      An added factor is the almost universally poor economic/market analysis in the West. China does make a tremendous amount of economic and policy information available, including forward looking planning commitments. Yet, for reasons I have yet to find an adequate explanation of, much that is reported in the trade and financial press is ignored, misinterpreted or is simply factually mistaken.

      • a citizen
        Jan 1, 2019 at 11:12 am

        Yup, the Ministry of Information issues forth a deluge of cold, hard, unvarnished, incontrovertible, bankable, tradeable fact.

    • Jack
      Jan 1, 2019 at 12:54 am

      … that “Something “ really bad , is really Just around the corner and it will hit you hard you won’t know it until the dust settles…

      The “Dust” though can take years to settle.

      Happy new year!

      Jack

    • Bradley Halfacre
      Jan 5, 2019 at 8:49 pm

      Agreed , I would add that China is a criminal enterprise from the top to the very bottom.

  3. OutLookingIn
    Dec 31, 2018 at 5:33 pm

    There is a fly in your ointment Wolf.
    GOLD.
    And not the “gold” that is traded on the comex or by the LBMA.
    Actual physical gold bullion.
    It has reasonably been shown, that China now owns +22,000 tonnes.

    Any monetary reset thats in the offing will involve gold.
    Remember the golden rule: “They who have the gold, rule”.

    • michael
      Dec 31, 2018 at 10:07 pm

      Wolf is comparing FIAT, not real money. His point is there is no alternative to the FRN.

      • Spooked
        Jan 1, 2019 at 3:24 pm

        Does Wolf believe gold is ‘real money’? Maybe I missed it..

        • Jan 1, 2019 at 3:42 pm

          Spooked,

          No, Wolf thinks gold is gold, and “real money” is what society decides it is.

          In the US, society has decided that “real money” is the dollar. The “FRNs” (Federal Reserve Notes) that Michael mentioned are the cash part of that money that I carry in my wallet. Works just fine. But when I pay someone electronically, I don’t send them FRNs in an envelope. I make an electronic transfer denominated in dollars. That works fine too. I also make transfers in euros and yen. It’s pretty easy, actually.

          I’m pretty practical about this :-]

    • Patrick
      Jan 1, 2019 at 3:01 am

      All of these countries’ endgame for gold is not to back their currency, it’s initially to stabilize confidence in the their (unbacked) fiat currency; which will continue to be printed without restraint. And, failing that, the gold will be used to DUMP into markets to drop it’s price like a rock and cause a panic ‘back’ into the fiat currency. There’s no scenario were governments return to honest money; the motive for them to print up currency out of thin air to buy gold is purely dishonest.

      That 10K to 50K price tag on gold that stackers keep claiming is just around the corner not only isn’t coming anytime this decade but will be accompanied by enough inflation for $10K to be equivalent to $1000 in today’s dollars.

      But look at the USD reserves held by foreigners in the 1st chart without blinders on. The USD isn’t going anywhere and won’t be collapsing anytime this decade and almost certainly not the next. This is true EVEN if the Fed prints like there’s no tomorrow to prop up and bailout assets yet again to create another big fake bull market. Sure the Dollar index will fall and Gold might even see $2600/oz but DXY will head right back up (and Gold fall in USD) as soon the other CB’s ramp up their QE even bigger. We’ll certainly see inflation continue to leak into the real economy but wages will rise with it. The only people dumb enough to think hyperinflation is coming to the US over the next 20 years are the same folks who will miss out (again) on the next big fake central bank created stock bubble.

      • OutLookingIn
        Jan 1, 2019 at 5:10 pm

        Never say never.
        Historically, when currencies fail because of massive amounts of debt, inflation is the remedy chosen. Print until the currency is destroyed and thus the debt along with it. This means hyper-inflating the currency.
        What good is gold priced in such a currency, when it will take a wheel barrow of notes to buy a loaf of bread? Good luck attempting to buy an ounce of gold with such currency!

      • RagnarD
        Jan 3, 2019 at 10:23 pm

        @ Patrick
        Basically you are saying we didn’t have inflation / hyperinflation, because we didn’t have inflation / hyperinflation. If we’d had it, then Jim Grant, and other learned folks like him who forecasted it, would have been right. But it didn’t, so they are (currently) wrong.

        There certainly have been times where populations lose faith in the currency and switch towards hard assets. Why didn’t that happen this time? It didn’t happen because it didn’t happen.

        When it does happen, we’ll write the story as to why it happened. But really, in fact it will have happened because it happened.

    • Paul
      Jan 1, 2019 at 6:11 am

      There might be evidence that there is that much in China, but it is quite unclear, as far as I know, as to who owns most of it.

      Last I knew, the government only claimed some 1800 tons.

      • JZ
        Jan 1, 2019 at 4:40 pm

        Gold has NO chance in front of USS carriers. But if every country has enough carriers, then gold will emerge as the means of trade. That’s why China is building the carriers and fire powers. Before that becomes a light challenge to USS fire power, any analysis on who has how much gold is useless.

        • rosco
          Jan 2, 2019 at 6:47 am

          NO, USS carriers are just very expensive large targets, US ist fighting the war of last century.

    • JZ
      Jan 1, 2019 at 1:56 pm

      Out looking in, those who own GUNS RULE!
      Those who own GOLD PERSUADE and win TRUST.
      USD will be dead when the world turn their faces away from US carriers and trade each other using persuasion. Make NO mistake, NO countries trust each other. So they will trade through gold. But US carriers will NOT allow it.

  4. HR01
    Dec 31, 2018 at 5:50 pm

    Wolf,

    Renminbi as a reserve currency? Even the Chinese people don’t trust it. Why should anyone else?

    The Euro? Please don’t make me laugh so hard. European banks in worse shape than they were 10 years ago. 2019-2020 going to be a brutal period for the Continent with lower tax receipts coupled with higher interest rates.

    $US wildly undervalued and will be last man standing.

    A healthy 2019 to you and yours.

    Slainte.

  5. Sadie
    Dec 31, 2018 at 6:30 pm

    Wolf, good information. Maybe you could also explain the Special Drawing Rights.

    • Jan 1, 2019 at 10:41 am

      the new world reserve currency silently backed by gold. let’s pay off all of the countries debt😀 with it.

  6. jest
    Dec 31, 2018 at 6:32 pm

    The amount of USD-denominated exchange reserves was $6.63 trillion. Total global foreign exchange reserves, in all currencies, came in at $11.4 trillion .This amounted to 61.9% of total foreign exchanges reserves held by central banks.
    wooo hoo now i know how that 2.3 Trillion vanished!

    • Rosebud
      Dec 31, 2018 at 6:47 pm

      The dog 8 it

    • Dec 31, 2018 at 7:41 pm

      jest,

      $2.3 trillion? No idea how you came up with this. But it goes like this:

      61.9% of $11.4 trillion = $7.06 trillion total USD reserves, vs $6.63 trillion “allocated” (disclosed) USD reserves. The remainder ($0.43 trillion or $430 billion) is “unallocated.” For an explanation of “allocated” and “unallocated” please read the paragraph under the last chart.

      • rich
        Dec 31, 2018 at 8:06 pm

        Since Fed money is ex nihilo creata est, not sure what your numbers mean, especially when the Fed had allocated something in the neighborhood of $29 trillion to bail out the world’s big banks. Who even knows how much of that “loaned” money was ever paid back?

        • Dec 31, 2018 at 10:39 pm

          Your $29 trillion to “bail out the world’s big banks” is way off. The number that was disclosed was $15 trillion, but that was the sum of all loans for all banks and companies, spread out over time, including many short-term loans that were quickly paid back. So the maximum outstanding at the peak was much lower than $15 trillion.

          And all of these loans have been paid back.

        • J457
          Jan 1, 2019 at 1:32 pm

          Fed has never been audited, so no one knows the true numbers. Why people in US are dumb enough to allow a private bank control their currency baffles me. Trump needs his own version of EO11110 very soon.

        • Jan 1, 2019 at 3:50 pm

          J457,

          “Fed has never been audited,…”

          The Fed’s finances are audited once every year, and the audit reports are posted online:

          https://www.federalreserve.gov/aboutthefed/audited-annual-financial-statements.htm

          The Fed also has been audit as an institution, twice since the Financial Crisis, about its doings during the Financial Crisis, by the GAO (Government Accounting Office). I covered the last audit in 2011. This wasn’t a financial audit (we already get those one a year), but more of an operational audit that found all kinds of stuff. Here is my article on this at the time:

          https://wolfstreet.com/2011/10/21/the-gao-audit-of-the-fed-doesnt-call-it-corruption/

  7. Beverley L Kennedy
    Dec 31, 2018 at 6:41 pm

    Along with this waiting to be recognized for its true revaluation. The vietnamese dong rumoured to be ready to pop to two dollars US before settling back a tad.
    Of currencies not recognized but waiting in the shadows which would be part of this big reset are the old iragui dinar now out of circulation and the gold backed Zimbabwe bond
    There thing with these alternative currencies is that they are actually asset backed eg oil and or gold unlike our fiat. The kuwiat currency had some years ago a positive reset of a multiple of eight.
    In ancient times Rome’s lost its grip on its empire and ability to pay the troops in its adjustments of its own currency which increasingly diluted the ratio of silver….and we know how things ended for that empire.
    China is fast forwarding it’s economy toward’s a more consumer post industrial set up at a much faster rate than Europe and North America. Japan did similarly Canada has sold off most of its gold reserves and at present its oil and gas can’t get to market and thus are heavily discounted
    There are many destructive to the way we know things to be already in motion.

    • Soupcon
      Dec 31, 2018 at 7:10 pm

      Canada has sold all of its gold reserves and the Cdn dollar is now, like the US dollar, just a journal entry.

    • a citizen
      Jan 1, 2019 at 11:28 am

      Ah, yes… Dongs and rumors of dongs… Right.

  8. Beverley L Kennedy
    Dec 31, 2018 at 6:45 pm

    Talk to Italians and Greeks as to what adjusting to the euro did to their costs of living and valuations of property. Don’t just look at this from a North American centric point of view.
    Even the pound sterling per confederation in Canada had a wide range of exchange value depending on where the transaction took place
    Silver used to be just as valuable as gold.
    History provides many interesting slants on what may happen….inflation in Germany. Remember those wheel barrows…to buy bread? Or in Venezuela now?

    • nick kelly
      Dec 31, 2018 at 9:36 pm

      Silver has never been as valuable as gold, at least in recorded history.
      However it has been much more valuable in terms of gold than it is now.

      The Latin Union was a sort of precursor to the EU in the l9 th century. Its main job was to fix a stable exchange rate between gold and silver. This was a time when coins were a main means of exchange. It set silver very high at something like 12 or 15? parts silver being worth one part gold. I haven’t looked at the ratio recently but it’s something like 60 to one.

      Towards the end of the Latin Union a familiar problem arose when Greece and the Papal States began coining debased silver coins, which is much easier to do than with gold.

      Silver simply occurs much commonly than gold. This didn’t matter as much before mining began to be done by machines.

      The cost of production, obviously below the market price, is a few dollars per ounce, while the cost at the (major) gold producers is closer to a thousand.

    • a citizen
      Jan 1, 2019 at 11:32 am

      As a US citizen paying more in taxes in A MONTH than most of the rest of the world EARNS IN A YEAR, I’ll keep my North American perspective, thanks.

  9. Citizen AllenM
    Dec 31, 2018 at 6:58 pm

    Always so much fear about the dollar.

    The dollar is going to be too strong for quite a while, yet the children of the 70s perpetually feAR inflation inflation inflation.

    Wages are dead, inflation outside of medical insanity is dead, and even energy is well below record highs.

    Just over priced assets, and a lot of boomerz about to try and cash in, lol.

    What could happen to those asset prices but eternal growth outstripping inflation?

    lulz.

  10. safe as milk
    Dec 31, 2018 at 7:31 pm

    “he US dollar’s role as global reserve currency is defined by the amounts of US dollar-denominated assets – US Treasury securities, corporate bonds, etc. – that central banks other than the Fed are holding in their foreign exchange reserves.”

    this is true but it shouldn’t be taken to mean that central banks are in control here. the global reserve currency must remain stable. if it loses it’s price stability, international trade trade will settle by means of something else.

    this is why our lips are glued to the saudi’s a**.

  11. R Davis
    Dec 31, 2018 at 7:46 pm

    “But the Euro Debt Crisis ended that dream”
    They behaved like they’d never had any real money before & they gambled it away.
    Many lotto winners do exactly that.

  12. R Davis
    Dec 31, 2018 at 8:02 pm

    The thing with the euro is this – after the 2008 GFC – there needed to be a correction – a reigning in of the beligerant EU banks & a cull – & brutal if necessary – to show that the EU was serious about being responsible & accountable & therefore could be trusted.
    Then of course we had the governor of the Bank of England – Mark Carney – god bless his little heart – emphatically determined for BAIL-IN to be implemented globally – his grubby little fingers all over our savings.
    Now what kind of image did that send to the global audience – a desperate EU no less.
    Then came AUSTERITY – looting the 28 member nations & their populations wealth.
    Truthfully, I am surprised that the euro is doing as well as it is.

  13. R Davis
    Dec 31, 2018 at 8:06 pm

    Why did the ECB introduce austerity as a solution & it is still in play 11 year later ??
    Desperation – they panicked – did not know how to handle the situation & knee jerked austerity into play.

    Happy New Year to EVERYONE.

  14. max
    Dec 31, 2018 at 8:38 pm

    happy new year 2019 to all.

    For as long as export mercantilism is dominant in the thinking of Asian politicians, the U.S. dollar will continue to be the reserve currency of choice.

    The world is being led by politicians and central bankers who have no interest in the one viable solution to the world’s monetary problem: the closing of all central banks and the opening of all markets to free market coinage. This would mean getting government out of the money business.

    They have no interest in re-establishing an international gold standard, with open coinage and free markets in money.

  15. Maximus Minimus
    Dec 31, 2018 at 8:47 pm

    At the turn of the nineteenth century, the British pound was used as a reserve currency, probably exclusively. It took a century and two Pyrrhic wars to go to 4.5%.
    The Bretton Woods system established dollar as a reserve currency, exchangeable to gold at a fixed rate.
    My understanding is (and correct me if I am wrong ), deficits/surpluses could be evened out by transferring gold between two country’s accounts stored with the FED. This resulted in Germany’s export driven economy accumulating a second largest amount of gold (after being stripped naked post-WW2).
    After closing of the gold window, the dollar still remained the reserve currency, but implicit to that status is that the US runs an open economy. That means, foreign entities or individuals, having accumulated dollars, have an implicit access to buy US assets/entities.
    Oligarchs from around the world like this arrangement, at least compared to investing their dollars in their ***hole country.
    It will take a lot of political push, to change this arrangement.

    • R Davis
      Jan 1, 2019 at 12:53 am

      “transferring gold between two countries” must have been a nightmare for the establishment & a spirited challenge for adventurous deviants –
      The Italian Job – the movie.
      Of course today they sip their martini as they digitally rob banks & transfer their booty around the world in the blink of an eye – with no effort at all.
      Hooray for technological advancement !!

      • R Davis
        Jan 1, 2019 at 12:57 am

        Matt Monro – On Days Like These (The Italian Job 1969) Youtube.

      • Mel
        Jan 1, 2019 at 9:47 am

        Not really a nightmare. Just something they had to do. The gold standard meant built-in currency controls. If you wanted to attract foreign gold into your economy, it wasn’t enough just to offer an attractive rate of return. The offered rate had to be high enough to cover the cost of shipping the gold to your country — had to include freight costs.
        This is mentioned in J.M.Keynes’ monograph _Indian Currency and Finance_ (https://www.gutenberg.org/ebooks/49166) .

    • HMG
      Jan 1, 2019 at 12:59 am

      “Implicit access to buy US assets” and until recently little likelihood of confiscation by the US.

      Is this a new replacement for the Gold Standard ?

      Similarly with the £ . Implicit access to buy London Property and send your children there to get a UK education ?
      The €. Property in Amsterdam and Paris for wealthy non Europeans ? Education at the Sorbonne ?

      An even better investment for some than Gold ?

  16. Kevin
    Dec 31, 2018 at 9:21 pm

    The world we live in is unending fiat. No rule of law and absolutely no accountability by the banks. I will take my gold and silver 24 7 thank you.

  17. Bobber
    Dec 31, 2018 at 9:51 pm

    It seems that being a reserve currency gives you a one-time currency gain as other central banks accumulate your currency. Once the other central banks have enough of it, however, they don’t want any more of your currency. There’s only downside from there.

    Of course, other factors come into play as well.

    • James Levy
      Jan 1, 2019 at 9:40 am

      Two huge advantages for the USA: we don’t let foreigners buy up most of our most valuable assets (tech, defense, oil and gas companies) so as foreigners accumulate dollars, they are forced to buy our debts, not our assets, which allows the US to live above its means; the US doesn’t have to earn currency to buy foreign goods and services–it simply prints the stuff electronically, thus, again, allowing the US to buy more than it sells and again live above its means. The benefits of the dollar are staggering.

      • mikey
        Jan 1, 2019 at 2:07 pm

        They have been buying a lot of US real estate and high priced college degrees for their offspring. We should be handicapping them pretty effectively by letting them attend our colleges but these days colleges are mainly for the ruling elite kids to meet each other so less Americans in next generation as they don’t expand the number of students in top colleges much.

  18. Tom
    Dec 31, 2018 at 10:21 pm

    Is there a chance the next reserve currency will be a gold backed crypto not controlled by any government?

    • safe as milk
      Dec 31, 2018 at 10:31 pm

      no

    • Dec 31, 2018 at 10:45 pm

      No.

      Neither crypto, nor gold backed, and least of all, both at the same time :-]

      • Howard Fritz
        Jan 2, 2019 at 9:24 pm

        Fun fact there have been multiple (failed) cryptos based on gold.

    • Mark
      Dec 31, 2018 at 11:58 pm

      No.

      Provided we (Americans) don’t do something incredibly stupid, the US Dollar will be the reserve currency for the rest of my lifetime and that of my kids and probably their kids too. We lose stable, democratic governance with the rule of law and secure property rights…who knows? A vastly reduced quality of life I’m sure of though.

    • medialAxis
      Jan 1, 2019 at 2:36 am

      I don’t think it’ll be a gold, or commodity, backed crypto, they’re pretty much rubbish, IMO. Worst of both worlds. How do you know the gold it’s backed by actually exists? You’re back to trusting 3rd parties. Bitcoin’s about not trusting anyone. Its maxim is, “Don’t trust, verify”. We’ve seen time and time again, you cannot trust the hand that controls the money printing press. The QE (in not just one country) following the 2008 crash is the latest witness to that truth.

      Crypto, in particular bitcoin, may not become the official world reserve currency but may well become the one people use to trade world wide, especially over the internet and phone network[1], and that’s what matters[2]. It’ll succeed to that (unofficial) role in part because it’s censorship resistant. Unlike centrally controlled payment systems, governments cannot stop bitcoin payments, it’d just cost too much to do so.

      Anyway, I’ll leave it at that[3], as all arguments, for or against bitcoin, amount to little. What matters is what actually happens in the long run. Only time can tell.

      [1] Blockstream has bunged up a few satellites, so you don’t even need the internet to send bitcoin! DuckDuckGo “blockstream satellite” to find articles about its latest launch, if you’re interested.

      [2] And not what the IMF, or whatever body (that none of us voted for), declares is the world reserve currency.

      [3] Apart from mentioning the Lightning Network, which is worth DuckDuckGoing, as is Elizabeth Stark, CEO of Lighting Labs. She’s a real live wire, an inspiration to today’s youngsters looking to build a better system than what exists (which wouldn’t be too difficult but for the incumbents)

      • Saltcreep
        Jan 2, 2019 at 6:06 am

        I really like the concept of cryptocurrencies given sufficient surplus energy in society, and the potential they hold to develop into more of an efficient barter type system where the currencies represent the stuff we trade individually and in baskets. But as I see it, the big issue is that I reckon we’re fairly soon going to be facing an energy crisis as the current debt bubble deflates, and I can’t see cryptos doing well in a world of declining energy.

  19. Sinbad
    Dec 31, 2018 at 10:27 pm

    Global reserve currencies are an anachronism.
    There is no need for any reserve currencies in today’s world.

  20. earl d
    Dec 31, 2018 at 10:31 pm

    All things being equal, a strong dollar has a depressing effect on the quantity of dollar denominated assets held by foreign banks since it increases their cost. It also has the effect of suppressing exports and increasing imports through the same mechanism.

    That’s what makes Trump’s trade wars incoherent. Trump wants a strong dollar, he also wants to boost exports, reduce imports and needs to sell $ trillions of US treasury yearly. Those are competing goals and can’t be simultaneously achieved through re-configuring trade policies, even if China were to become 100% servile and compliant, only secular macro economic growth. The only possible way Trump’s world trade intervention could be a net positive would be if it were narrowly focused on a specific policy objective and conducted with discipline and diplomatic finesse.

    What’s shocking is the degree to which there’s unanimous agreement among business leaders and policy people about the above. So, everyone involved with the current trade negotiations is being dishonest, they know that overall it will be detrimental to the US, but they’re hoping to bend the ear of the administration to have their own agendas promoted, giving the impression that there is at least a minority of knowledgeable people who agree with Trump that the US is being taken advantage of by China and needs to retaliate against China, when in fact there is no one who remotely agrees with Trump’s assessment of US trade policy and his remedial prescription.

    • Bobber
      Jan 1, 2019 at 12:01 am

      The point of the trade war is to increase US jobs and wages. Of course, business will have to fund that, which should be no problem at today’s profit levels. The US comes out ahead because US labor comes out ahead.

      • earl d
        Jan 1, 2019 at 1:57 am

        But that’s exactly my point. Jobs and wages, from a trade perspective, are in opposition to each other, you can increase exports, by making making them cheaper, i.e. weakening the dollar and implicitly reducing wages by making the dollar less valuable. By the same token you can increase wages by making the dollar stronger, but at the cost of exports. But you can’t do both unless you increase overall economic growth, which is the opposite outcome of a trade war.

        • Escierto
          Jan 1, 2019 at 3:26 pm

          You are making way too much sense, Earl. Clear rational thinking is going to get us nowhere.

      • Paul
        Jan 1, 2019 at 6:22 am

        What will increase most is consumer prices, and consumers will fund that, not businesses.
        Wages are already way too high for most manufacturing oriented businesses to compete, and that is precisely why high tariffs are needed, and I am not talking about 25%.

      • James Levy
        Jan 1, 2019 at 9:55 am

        Without powerful unions to back their demands, corporations are never, out of the supposed goodness of their hearts, going to raise wages–it has never happened, it never will happen. Unless Trump pushes for mass unionization (which he is never going to do) you will see corporations do what they have done with the tax cut he gave them–give it to stockholders or buy back their own stocks. Trickle-down doesn’t work to any significant degree. Trump would “like” the corporations to give their workers hefty raises the way that Obama would have “liked” the banks to take the vast monies the Fed poured into them from Bush II onward and invest it in the productive economy. That never happened, either. This is all just an exercise in socializing losses while privatizing gains. Democrats do it primarily for banks and the financial sector, while Republicans like to hand out the largess to defense contractors and extractive industries, while each gins up their base pretending to be fighting for YOU.

    • WES
      Jan 1, 2019 at 7:33 pm

      Earl d: Yesterday I left a reply for you in an attempt to enlighten you to what is really happening with US trade policy under President Trump

      Unfortunately I could not post. I doubt this will post either!

      Guess you will just have to remain in the dark!

      • Jan 1, 2019 at 9:43 pm

        WES,

        My apologies. It was too much “Trump” and other politicians. By the seat of my pants, I deemed this level of discussion of partisan politics inappropriate here, especially on a financial topic like currencies.

    • Saltcreep
      Jan 2, 2019 at 5:49 am

      earl,

      I suspect the point of the trade war is actually more about attempting to suppress Chinese power ambitions. I guess it’s also why there is so much emphasis on intellectual property, as its transfer cedes technological advantages.

      The US has held a position of global near hegemony since the fall of the Soviet Union, and without serious counterbalancing forces has been the sole power able to implement regime change, impose unilateral sanctions and enforce behaviour on other entities around the globe without real fears of high level retribution.

      As the world gradually rebalances, the hegemonic influence of the US declines. But power is never surrendered without resistance, so we therefore see the increasing tensions as China and others attempt to gain relative power and the US attempts to maintain it.

  21. Dec 31, 2018 at 10:57 pm

    I wish you all a healthy, happy, and prosperous 2019.

    And thank you for having made 2018 the most successful year ever for WOLF STREET!!

    Cheers!!

    (I’m going to log off now to spend the rest of 2018 and the beginning of 2019 with my wife.)

    • HMG
      Jan 1, 2019 at 1:04 am

      Good Idea Wolf.

      My 2019 New Year’s Resolution.

      Get a wife, preferably a nice obedient Asian one.

      • Goldie
        Jan 1, 2019 at 2:14 am

        Lordy lordy, if only you knew anything. Jolly good year to you dear fool and to all!

        • HMG
          Jan 1, 2019 at 6:39 am

          Point taken,

          I’ll keep the wedding ring in the safe for emergencies and buy her a nice genuine gold Rolex in order to keep her Happy for another year.

          Thanks for the implied advice.

    • Les Francis
      Jan 1, 2019 at 7:18 am

      Have a great New year celebration Wolf.

      I’m sure your blog will go onto greater things in 2019. I see you getting mirrored and linked in more and more financial blogs not to mention getting your talking presence on more and more video news outlets and blogs.
      I hope it’s going to more prosperous for you.

      Keep up the good work.

    • RD Blakeslee
      Jan 1, 2019 at 12:57 pm

      …and may your progeny increase…

  22. Jan 1, 2019 at 4:12 am

    “…There is a theory circulating that the US, as the country with “the” global reserve currency, “must have” a huge trade deficit with the rest of the world. This “must have” is patently not the case because the Eurozone, which has the second largest reserve currency, has a large trade surplus with the rest of the world. …”

    I’ve heard this theory, particularly in arguments defending free trade. Love your argument debunking it.

    • Realist
      Jan 1, 2019 at 7:15 am

      I wouldn’t claim “must have” but I dare to claim that “can have” a trade deficit because of the fact that the reserve currency is coveted as trade currency, thus causing foreign demand for the currency in question. This enables the issuing country to use IOU’s they can produce in large numbers to buy foreign assets and products.

      You have to keep in mind that rules did change in a fundamental way when Tricky Dick did introduce the fiat dollar, but Spain and Britain are excellent study cases of the processes that cause a currency to loose its status as the currency of choice.

  23. Realist
    Jan 1, 2019 at 7:03 am

    Currently the US dollar is the reserve currency of choice, it in turn did replace the British sterling, which did replace the French currency, which did replace the Dutch gilder, which did replace the Spanish real, which did replace the Portuguese currency. There has always been a currency of choice back to the Roman denarius or the Athenian tetradrachm.

    The reserve currency of choice has always been tied to the issuing power’s status as a great power, militarily and economically, when the old hegemon has entered into lasting decline, the currency it issued has lost its status as reserve currency as other currencies has replaced it as preferred trade currencies.

    One fact is, something will replace the dollar one day, because nothing last for ever.

    • Les Francis
      Jan 1, 2019 at 7:22 am

      The reserve currency generally goes hand in hand with the “Rule of Law”.

      I don’t see any other individual country or group of countries with any spec of “Rule of Law” in the near distant future.

      The EU is a law less bunch of bureaucrats

      • Paulo
        Jan 1, 2019 at 8:46 am

        Not a very plausible argument regarding the US as a bastion for the ‘rule of law’ and a land of sound currency. Should have read, “rule of litigation and promoting the special interests of the connected”. Just saying. Did any bankers of 2008 infamy receive any penalties? And what prison will Michael Cohen reside in? Club Fed, of course.

        from Wiki: In June 2008 Conde Nast Portfolio reported that numerous Washington, DC politicians over recent years had received mortgage financing at noncompetitive rates at Countrywide Financial because the corporation placed the officeholders in a program called “FOA’s”–“Friends of Angelo”, Countrywide’s Chief Executive Angelo Mozilo. The politicians extended such favorable financing included the chairman of the Senate Banking Committee, Christopher Dodd (D-CT), and the chairman of the Senate Budget Committee, Kent Conrad (D-ND). The article also noted Countrywide’s political action committee had made large donations to Dodd’s campaign.[1] The largest recipient of campaign contributions from Countrywide, though, was Rep. Ed Royce (R-CA), House Financial Services Committee), who has received $37,500 since 1989.[2] Dodd has advocated that the federal government, through the Federal Housing Administration, insure up to $300 billion in refinanced mortgages for distressed homeowners.[3]

        and: (from the New Yorker)
        “In January, Senator Charles Schumer, a member of the Senate banking committee, who had for many months remained silent on the subject of the Wall Street bankers who are his major contributors, declared that he wanted to see Mozilo “boiled in oil. Figuratively.”

        “These days, Mozilo, who is seventy, spends most of his time at home, in a large Spanish-style house in a guarded, gated community at the Sherwood Country Club, near the golf course where Countrywide used to co-sponsor the Target World Challenge with Tiger Woods. ”

        All this in “a period in which more than eight million Americans lost their jobs, nearly four million homes were foreclosed each year, and 2.5 million businesses were shuttered.”

        If the US and US Dollar is the cleanest shirt in the laundry basket of currencies maybe people should make additional preps. For some on WS site it is owning PM, and for others it is eschewing debt. Land and paid for housing property, tools, stores, health, community relationships etc, is to me a far wiser course for real and sound personal security. And while it might be a big kick to have the fanciest bling in town, ostentatious living paints a large target on one’s back in tough times. This mindset can be extrapolated to countries. When people state the US Dollar is the Reserve Currency due to military might I believe the end is not only possible, but coming ever closer.

        The east and west US coasts are booming, and on the surface all appears well especially if people use averages and other groupings for statistical analysis. But I think there is a different reality out there for most; of being over-extended and in debt up the wazoo just to keep keeping on. Current Govt gridlock, poor leadership, slogan solutions, income disparity, unaffordable post-secondary education, unaffordable housing, and the medical industry insurance rackets are all symptoms. As a whole, this (incomplete list) does not support a plausible Reserve Currency for the World to rely on. It may be the cleanest currency shirt currently out there, but it’s way past being welcome. If I had a suitcase full of US dollars the first thing I would do is try and exchange it for something else while someone will still trade for it. To be honest, really honest, I think most readers would do the same.

        • RD Blakeslee
          Jan 1, 2019 at 12:53 pm

          1. “If I had a suitcase full of US dollars the first thing I would do is try and exchange it for something else.”

          2. “Land and paid for housing property, tools, stores, health, community relationships etc, is to me a far wiser course for real and sound personal security.”

          A wise course of action for a young person is to not bother to collect the dollars (1.),

          Collect 2., instead

  24. timbers
    Jan 1, 2019 at 8:32 am

    Perhaps also relevant along with the status of reserve currency, is the growing trend of nations to set up alternatives to the USD as reserve currency.

    Yes, there is no visible collapse of the USD as reserve currency in plain sight, but that doesn’t mean something is afoot…the list of nations totally bypassing the USD and it’s payment system is
    growing. And along with it, the ability to thwart US power.

    These nations still use the USD as reserve currency to variances degrees but have in some cases gone to considerable lengths developing payment alternatives totally beyond the reach of the US for the express purpose of not complying with the U.S. dictates.

    Russia, China, Europe have or are creating alternative payments system beyond the reach of USD and are increasing their use.

    India and other nations use direct currency swap to defy orders from the U.S. – like buying Russia’s superior and much cheaper S-400 and other better rated military equipment.

    Iran, Syria, Venezuela, Turkey are much smaller but also employ ways around the USD.

    And the trend of nation by passing/creating fully independent payments systems from the USD is growing over time.

    This means something that is maybe not being capture by reserve currency data.

    • Jan 1, 2019 at 11:21 am

      Alternative payment systems are a good thing. Why should Russia and China (neighbors) trade lumber, oil, and consumers goods via the dollar? In the modern world, it makes no sense.

      The problem arises in long-term contracts when one or both currencies are unstable and tend to fall sharply, for example, 30% in six months. Then long-term contracts are hard to price in those currencies, with the seller potentially losing a ton of money, while the buyer gets something for cheap.

      So you can price the contract in dollars, and execute the payments in local currency at the exchange rate in effect on that day. If you sell Russia a big piece of equipment that takes a year to build and deliver, you’re not going to price this transaction in rubles, because if the ruble dives 30% during that time, you just lost a big part of your revenues as measured in your own currency. Instead, you’re going to price this deal in a stable currency (i.e. the USD), and if you want, you can executive the payments at the exchange rate in effect on that day that the payment is made. So no actual dollars are exchanged.

      There are other methods to deal with trading in a currency that is unstable, and modern systems make this possible.

      Iran, Argentina, etc. have currencies that have collapsed – and will continue to do so. No one is going to sign a long-term contract denominated in those currencies, not even locals. This includes leases that are denominated, for example, in dollars, but payments are made monthly in local currency at the exchange rate in effect on that day.

      • Jan 1, 2019 at 1:36 pm

        We are exorcised about tariffs but pay no attention when shaky EMs denominate debt in dollars? I don’t get it, that creates (non trade originated) demand for our currency, and prevents the US from conducting a sound dollar policy as we must issue enough money to cover EM debt. Borrowing in someone else’s money leads to greater hegemony which is circumvented with economic sanctions (political tariffs) here have some dollars, you, you, but not you. (So NK makes their own?) Crypto can’t come soon enough.

  25. Gandalf
    Jan 1, 2019 at 10:24 am

    Wolf, looking at your graph, there’s three time points that you didn’t really discuss in detail:

    1978- USD begins a precipitous drop from being over 80% of world’s reserve currency to below 60%

    1984- After stabilizing around 60%, USD goes into another down period

    1991- USD bits rock bottom at 41% of world reserve currency. Then it starts to climb back up in status to over70%. Introduction of euro in 1999 causes barely a blip, a 10% drop

    I haven’t done much research on what caused the two successive down periods. Dropping down to 41% is as close to losing status as the world reserve currency as you can get. Had the slide continued another 10-20%, the USD would have indeed no longer been regarded as the world reserve currency- it would have been just one of many currencies being traded around the world.

    The only events that I recall are that the late 70s were when inflation began skyrocketing in the US, the price of oil shot up, and people suddenly realized that American manufacturing was being surpassed by Japan and Germany, especially in things like cars and electronics.

    And then in the 80s, the Reagan administration began an active policy of intervention to devalue the USD, to aid American manufacturing and exports, which had started to decline. Germany and Japan were the main competitors then. I suspect the Yen and Deutsche Mark were the dominant alternatives as world reserve currencies in 1991

    Germany never got any further though, as reunification proved to be a huge economic burden, and the Euro has been a disaster for them as the single currency has been abused by their lazier and wildly profligate neighbors and debased in ways that could never have happened with the Deutsche Mark. Japan, meanwhile, got whacked by the double whammies of its demographics decline and the entry of China into the world economy.

    I think it’s important to remember what happened though, because it’s clear that the dominance of the USD is not going to be permanent. It automatically gives the US an economic advantage over weaker nations and the first viable alternative to the USD that comes around which is equally safe and verifiable will replace it

    The more I read about it, the more I think distributed ledger technology will eventually replace the entire need to have a world reserve currency, and that’s what will knock off the USD. And no, DLT does not mean Bitcoin or any cryptocurrency – if you think of DLT in the same vein as the public key encryption technology that was first developed in the 1970s and is now incorporated into all sorts of mundane communications and exchanges, including Bitcoin, it’s just another advance in setting up a secure and verifiable system of exchanging information, money, whatever

    • a citizen
      Jan 1, 2019 at 11:50 am

      Your description of DLT and fraudulent analogy thereof to PKE replacing an entire currency mechanism is analogous to saying Amazon Smart Door-bells will obviate the need for doors.

      Seriously.

      • Gandalf
        Jan 1, 2019 at 11:42 pm

        A citizen,
        I have no idea what you are babbling about. Doors?

        DLT is fundamentally just a technology, a math and computer algorithm, same as public key encryption. PKE allows two parties to communicate securely and verifiably over a distance. DLT has a far broader range of uses than PKE, however.

        Fundamentally DLT is a secure, verifiable database, or “ledger”, that can be carried around securely by its users, who can exchange it with other users, add to it, or withdraw from it. As such, its uses can extend into every sort of record keeping you can think of besides merely keeping accounts of money.

        Humanity’s first economic system was bartering. Farmer A brings his chickens and trades them to Shoemaker B for shoes. That was obviously clunky, and so raw gold and silver, which had intrinsic value, became intermediate “physical ledgers” that could be carried around more easily and traded. This evolved into minting gold and silver coins, then into paper money, and now credit cards and electronic money.

        Whether you are carrying around gold dust, silver coins, dollar bills, or a credit card, these are ALL distributed physical ledgers. All are subject to theft, destruction/loss, and inflation.

        Yes, all you fiat money gold bugs, gold and silver are subject to inflation and market forces of supply and demand also.

        Gold is more valuable than silver because it is more rare at the surface of the Earth. When the Spanish conquistadors started bringing back massive quantities of gold and silver from the New World, this set off a raging inflation in Spain just like overprinting paper money and other modern over expansions of the money supply. This could happen again as technologies improve to extract more gold out of the deep earth

        World reserve currencies in the end are just ledgers, records, of a widely agreed upon value of holdings, whether physical such as gold coins or dollar bills, or electronic records kept by banks and credit companies as promissory notes in a country’s currency.

        Distributed ledgers hold the promise of getting rid of the intermediate ledger keeper/maker whether it’s the US Treasury, banks, or gold mines

        The big problem for the US is that if the USD stops being the world reserve currency, it will need to finance most of its massive Federal debt internally, which is almost certainly going to increase interest rates, constrict the money supply and constrain business growth in the US

        That’s more or less what happened to Great Britain post WWII. It saw the British pound replaced by the USD as the world reserve currency at the same time it was in debt up to its ears, mostly to the USA for the costs of the war

  26. IronForge
    Jan 1, 2019 at 10:37 am

    We should see a gradual shift in Currency Reserves moving forward as the Shanghai IEX and the Corresponding PetroCNY/PetroAu Exchange Mechanisms take hold and Usage Volumes increase.

    Considering that the EUROZONE and CHN are Each Others’ Largest Trading Partners, with IRN offering Major Currencies, Au, and Bartering as Petroleum/NatGas Payment Options – the USD should be less relied upon within the “World-Island/OBI” Areas.

    • Nicko2
      Jan 1, 2019 at 11:46 am

      At this rate, global transactions in USD MIGHT be reduced to around 50% in 20 or 30 years. Yes….things will change, but not the status quo.

      Long live KING DOLLAR.

  27. Laughing Eagle
    Jan 1, 2019 at 4:36 pm

    Paulo-If there was one executive that should have been jailed from the 2008 crisis it was Angelo Mozilo. But because he was connected to many corrupt Congressman, he was allowed to skate. He could have more easily procecuted than many others in my opinion. He lied to Congress when he testified in his congressional committee meetings. But in time he will see justice in the other world.

    • Spooked
      Jan 2, 2019 at 1:14 am

      “But in time he will see justice in the other world.”

      So will we all.. What goes around really does & will come around ( not religiosity, I only enter cathedrals for the architecture and lovely windows, and if I pick up a widow’s mite that the cleaners missed, that’s a plus).

      The proof is everywhere if you open your eyes. But sunk deep as we are in the Kali Yuga, the Age of No-Reason, don’t breathe a word of the truth.

      If I stood in my CBD and shouted, “There Are No Accidents In the Universe” I would be howled down/stoned to death/sectioned. And quite right too.

      (submitted only because the caravan has moved on ..and maybe the Wolf Man can’t be bothered hitting ‘delete’ for insubstantial , ZH like nonsense. …oh wait… Aaaaagghhh!)

  28. LouisDeLaSmart
    Jan 1, 2019 at 6:08 pm

    \\\
    Just as many have predicted the dollar demise, and as many predict the demise of modern China, let’s be real; they are both here to stay. Yes, they are unstable, yes they have their issues, but at this point of time they are both indispensable and the demise of either would trigger a premature termination of the other. They are simply intertwined in a sort of symbiotic relationship. I have nothing against the dollar becoming the world trade currency, or staying around another 100 years…5000 years for all I care. The issue is not with the dollar, it’s with the people who govern policies pertaining to the same (Here I am referring to a wide range of economic & financial policies including but not limited to the recent 2008 fiasco of negative interest rates and QE, “Glass-Steagall act” repeal, and the termination of the dollar “Gold standard”).
    \\\
    I mean if you play a game and see you are done, and can’t get any further, you simply go and load the last known “good save”. Then you try to go around the mistakes you made previously. How hard can it get?
    \\\

  29. Reinhard
    Jan 2, 2019 at 1:46 am

    “There is a theory circulating that the US, as the country with “the” global reserve currency, “must have” a huge trade deficit with the rest of the world”

    Its the other way round: Only a country with a “global reserve currency” is in a position to finance the trade deficit with its freshly printed IOUs for long periods of time. Every other country will either have to “earn” foreign currency or print and thus devalue its own currency. Best example is Zimbabwe, which still has not learned its lesson.

  30. Tej
    Jan 2, 2019 at 6:15 am

    It seems if US Treasury offers bail out package to pvt banks then it is great n wonderful, (and understand most of it was “paid back” in full earnest), the bail out solution is more than just, if some other country adopted bail out practices the problem crisis could be of more value to trading economies than the bail out practices n their local currency would devalue. This is double standard at best.

  31. Hugs
    Jan 2, 2019 at 8:18 am

    Michael Pettis (you can find his books on Amazon) has written convincingly that having the global-reserve-currency isn’t desirable in the long run. Case-in-point is that countries are threatening war because the US is shutting them out from USD.

  32. Atu
    Jan 2, 2019 at 10:12 pm

    There are many components that go towards the meaning fiat currency carries , be it law, political endeavour, social cohesion, financial know how, productivity of host nation, possession of military might/neutrality, composure on trade, etc. etc. etc.

    The fiat currencies are political counting chips on the world stage, in fact little dollar cash is held as reserve, most reserves are in the form of US debt, which is paid for by the issuer in the form of taxation and by diluting the value of the dollar in favour of the debt holders interest.

    So there are reasons that the world stage is arranged as it is. People above catch truths but often miss in the interpretation, only giving a limited and incomplete perception. How could it be otherwise, because the framework is incredibly complex, and by the time you start incorporating other factors you find all the previous values are changed by them, and so on endlessly.

    To be a country that has reserve currency status is a privilege, it means that other countries trust in the future credibility and worth of your country’s currency, it means they are willing to trust trading with you, that they trust the accounting you present. It also means they see opportunity for themselves in investing in your country, and they do not care if it is win-lose or win-win, as long as they feel they are the winning side.

    So take China, it strikes a deal with the US where trade is opened, and surplus dollars are reinvested in the US to a particular theme. The effect is to return purchasing power to the US in the short term ( you can see this as buying on debt, or achieving agreed lower fx rates, or even as introducing seed cash to fuel asset inflation or enable the funding of political change/social spending). China in the meantime “enjoys” a technological, industrial and social revolution. The end goal though is not nescessarily a rebalancing towards western standards. China will be left with a surplus of industry and dollar funding to compete in the world market on equal terms with the US with. Saudi has its own story with the US, as do other countries.

    So when we look at reserve status countries, we see that they are the flavour of the time, most basically possessing a needed stability in terms of their economic machinations, and influence in their global positioning. To grant them reserve status is a recognition that is also inevitably tainted – we are talking nations and power and geopolitics after all, not a meetup over a cup of tea.

    I like Gandalf’s view, he understands the notions behind money and transaction. I am not sure that a free market in money/eq. is possible because there is no place for the state in it, the state necessarily being extractive to fund its own existence. Without enforced centralised currency there is no point/place of extraction, and if you consider a monitored blockchain economy that is taxable then you automatically need to use a common denominator to account, i.e. fiat.

    The notion you provide that the US will have difficulty servicing federal debt Gandalf, well step back and look at the economy without money and you will see it is resolvable. “All” that changes is that dollar outflows will return directly as investment in, or purchase from, the US, excluding treasuries, meaning? Meaning you still have the people you have in the country doing what they are doing. The fx changes maybe, inflation also, various other monetary paradigms in fact, as well as trade pattern, but you still have the same capability as a nation (minus some cheaper imports) and if chosen and not used for political gain, a free hand to literally write in a new set of values that keep the country otherwise unchanged. It is even possible the dollar would strengthen allowing looser policy and inflation to be used to mask the inconsistency in funding of national debt – but you know I don’t much like fiat so I don’t make out it is actually an ultimate solution to anything.

    Public ledger technology has caught the eye of many central institutions, in fact my own intuition is that there is a drive towards introducing patronised systems. Any independent system that were to take the place of fiat would need some unit (a coin) to relate prices across the market, either virtual or commodity tied, as I don’t think bartering by arbitrary notion of worth is going to allow for the sort of cross accounting nescessary in business calculation. Anyway here is another view

    https://stevenguinness2.wordpress.com/2019/01/01/monetary-policy-reset-from-rhetoric-to-actuality/

    As to whether the US retains global reserve currency status, or for how long – it is a guess. Probably for a while longer, but I see it as having used up much of any credit it had, and likely to cede its position, maybe intentionally, as it focuses its currency outflows to either a global management or a smaller environment. Just as the US economy and finance have become more technical, so also has the ground level influence lost much of its meaning – the rest of the world does not see anything exceptional coming from the US for quite a while but military, and that is not enough to win over the loyalty of the populations of the world… high level influence neither. It isn’t that the US is disliked or that other nations will rebel, it is just that many will turn away and to different grounds.

    • Cashboy
      Jan 2, 2019 at 10:30 pm

      I think that the US Dollar will remain strong on the basis of what is the alternative that is accepted by others?
      If you worry (one should) about FIAT you opt for gold but if you want to make a transaction you will most certainly have to convert the gold back into FIAT to make a transaction.

  33. Cashboy
    Jan 2, 2019 at 10:15 pm

    In my opinion against the US Dollar

    The GB Pound is vulnerable to falling more but if the UK leaves the EC, I would expect the GB Pound to go up, certainly against the Euro.

    The Euro will continue to fall over the next few years. I am surprised it is a strong as it is at the moment. Europe has no future economically.
    I am in the process of moving to live in Thailand as a result. I have my cash in Swiss Francs in the Bangkok Bank. I am under the impression that Thai banks are safe; well safer than Western Banks.

    It is surprising how strong the Swiss Franc is, SNB just prints Swiss Francs; changes them for US dollars and buys US shares from ineffect nothing.

    The US Dolar will stay strong and may even go up because nayone that has doubts about their local currencies will exchange for the US dollar.

    I have no idea about the Japanese Yen. Considering the Japanese economy is supposedly dead, the Japanese Yen has stayed strong relatively.

    Gold will move very slowly up. I have noticed that it often falls close to the quarterly settlement dates and then goes back up. Could that be because people have to sell it to cover positions?
    Gold could go up because of asset deflation as the only safe asset that might retain its value.

    • Josep
      Jan 6, 2019 at 2:47 am

      https://wolfstreet.com/2018/12/31/us-dollars-status-as-global-reserve-currency/
      http://www.mastercardadvisors.com/_assets/pdf/MasterCardAdvisors-CashlessSociety.pdf
      Once, I tried to look up “currencies with the lowest inflation”, and found Japan and Switzerland to have some of the lowest inflation rates.
      Until 1971 the Japanese yen used to be 5/18th of a penny of US currency, which meant that a hundred yen was 27.78 cents. Nowadays it’s 108.49 yen to the U.S. dollar (1.085 yen to a cent). Similarly, under the Bretton-Woods system, a dollar bought you four Swiss francs, while nowadays a franc is US$1.01.

      I have no idea about the Japanese Yen. Considering the Japanese economy is supposedly dead, the Japanese Yen has stayed strong relatively.

      I’m not sure how a country’s economy being “dead” means/indicates that its currency is strong or vice versa. I’ve even heard that some people feel that a strong currency could hurt it. Am I missing something?

      I dunno about you, but when I look for a currency to invest in, one of the factors I consider, aside from stability, is the longevity of the denominations, not just in dimensions (e.g. diameter of coins), but also with legal tender status.
      Some commentator, Allan, in another article on this site, said that after a new series of Swiss franc banknotes is released, the older ones start to lose their legal tender status and have to be replaced with the newer ones. To add to this, 1- and 2-centime coins haven’t been legal tender since 2007 and 1978, respectively, and, as the Swiss National Bank confirms, old issues of the other coins have also lost their legal tender status.
      I have yet to see the same happen with Japanese yen coins and/or notes; last time I checked, older series of yen notes are still legal tender, and the original 500-yen coin from 1982 is still in circulation even when vending machines no longer accept it. The 1-yen coin (equivalent to a cent/penny in American money) is also legal tender. Could it be something to do with Japan’s larger population and area compared with those of Switzerland?
      Then again, I’m not sure if you care about this to the extent that I do. I just prefer to have the ability to use old issues of currency alongside newer ones.

  34. mje
    Jan 3, 2019 at 9:44 pm

    Those countries will always prop up the dollar. China, Japan, and others need the U.S. consumer market for their industrial and consumer goods. thus, they will not be dumping the dollar.

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