[vtsnowedin]

Since we both know those things will not be done to any significant extent - or increasing revenues either, I take it you mean it's better to just kick the can over the cliff.

No need to kick it. The winds of change will blow it off the edge soon enough.

[Fiddlerdave]

If China and Russia get away with this; the idea of reserve currency becomes almost obsolete. ...

"Get away with this"!? I am not sure the implication of this phrase that they are "breaking the law" is intentional, but the viewpoint is certainly entirely American.

The rest of the world is quite happy to see the USA stop "getting away with" the wealth and benefits from being the world's reserve currency.

If US currency simply dropped another 10%, that could be a very painful but good thing, but the reserve currency status has allowed us to print an enormous amount of money without the usual inflationary consequences. This, losing reserve status means those consequences will impact very fast to an enormous extent. As others have pointed out, prices on imported products will rise, and interest on foreign debt service will rise. It will take decades for the USA to rebuild domestic manufacturing, assuming it had the money, but it won't. Foreign companies will provide the investment to rebuild the USA domestic production over a few decades, and US citizens will earn comensurate income as Chinese workers do now, none of the ownership wealth will stay here - it will flow back to the home countries.

In the couple of intervening decades, given that in the course of a USA citizen's day, most would be hard pressed to find something that is NOT imported, Americans will redefine their definition of "inflation" in the same way people in New Orleans redefined their definition of "hurricane" when Katrina hit, and the effects will be quite similar.

[Pops]

I'm digesting an article which argues the view that when we cross over into a world of recognizably declining energy the economy will cross a tipping point of systemic collapse, basically the Fan and not the Slide.

I'm feeling a little like we'd be lucky to have an excuse like the end of "Dollar Hegemony" to adjust our sights downward instead walking into the situation blind.

Link in my sig...

[SeaGypsy]

If China and Russia get away with this; the idea of reserve currency becomes almost obsolete. ...

"Get away with this"!? I am not sure the implication of this phrase that they are "breaking the law" is intentional, but the viewpoint is certainly entirely American.

The rest of the world is quite happy to see the USA stop "getting away with" the wealth and benefits from being the world's reserve currency.

If US currency simply dropped another 10%, that could be a very painful but good thing, but the reserve currency status has allowed us to print an enormous amount of money without the usual inflationary consequences. This, losing reserve status means those consequences will impact very fast to an enormous extent. As others have pointed out, prices on imported products will rise, and interest on foreign debt service will rise. It will take decades for the USA to rebuild domestic manufacturing, assuming it had the money, but it won't. Foreign companies will provide the investment to rebuild the USA domestic production over a few decades, and US citizens will earn comensurate income as Chinese workers do now, none of the ownership wealth will stay here - it will flow back to the home countries.

An accurate summation IMO.

There do seem to be a lot of American economists who talk as if there were some legal basis for USD$ hegemoney; but reserve currency status is based on a previous era's need for simplicity and the dollar's pre-eminence as mega currency. Now the euro, yuan/ renimbi, ruble and even rupee are becoming more recognised and stable; simultaneously to the Fed's QE program roll out.

QE basicly licenses bankers/ traders to endeavour to find another currency for trade; even pushes them to.

Your statement on reserve status licensing huge amounts of effortless profit is spot on. For those who don't yet understand how this works; it's the same as when you go overseas and you have to change money, then when you come home you change back. You buy at the buy rate and sell at the sell rate, losing a percentage on each transaction based on the stability or lack therof in the traded currency. The exchanger can't lose unless there is an instantaneous drop in the value of a held currency, beyond his/her margin for loss.

Thus the USA has been acting as money changer for the entire world's primary resources; making money for jam on every transaction where the price is set in dollars. This again explains why growing economies like China, want to hold huge amounts of their own dollars; to be the middle man on exchanges done in dollars. The USA has already surrendered much of this free profit by bond dumping around the globe. Where it used to loan money to assist (and profit from) international transactions; it now borrows and leaves chits in the form of bonds which are supposed to be as good as cash.

It is enough of a sign of trouble that the USA does not have a leg to stand on when arguing for continuation of it's reserve hegemoney; let alone that it is willingly surrendering it's biggest cash cow without a wimper so far.

[radon]

If you are going to issue the world reserve currency, you need to issue enough to satisfy demand, right?

And since countries don't usually fly around and dump currency from planes, you'll need a way to get that money out into those international markets, right?

The only way to do that is to run a trade deficit.

Couldn't you, for example, lend the currency instead of creating trade deficit?

[SeaGypsy]

The reason the USA needs to lend currency (cash futures/ bonds @ 0%) all over the show is to support a trade deficit; largely based on oil dependency. Better do a little more reading before jumping in here.

[radon]

The reason the USA needs to lend currency (cash futures/ bonds @ 0%) all over the show is to support a trade deficit; largely based on oil dependency. Better do a little more reading before jumping in here.

I did not query why the USA has to lend currency in the specific circumstances. What I questioned, was the postulate, that the only way to satisfy demand in the world reserve currency is to create trade deficit. Why would not you (the US) be able to satisfy the demand in the [world reserve] currency (USD) by lending the US dollars? If there is indeed demand, other countries would borrow. I would not go as far as to say that this is sustainable, but at least theoretically this is an alternative (other alternatives also exist - investments eg.).

Trade deficits are more likely the result of the domestic demand for foreign goods exceeding foreign demand for the domestic goods. You do not have to be a reserve currency issuer to run trade deficits.

[Pops]

You do not have to be a reserve currency issuer to run trade deficits.

Certainly, but since WWII there has been no "agreement" on a reserve currency only a default based on the strength of the US.

But a "supranational" currency is what Keynes suggested back then and China has been calling for expansion of the IMF SDRs way before this...

[radon]

But a "supranational" currency is what Keynes suggested back then and China has been calling for expansion of the IMF SDRs way before this...

Good links, thank you. Triffin, who introduced the idea of the "supranational currency", and formulated Triffin's Dilemma - that the reserve currency status implies trade deficits for the issuer - arrived at his conclusions in specific circumstances (the "free market" assumptions in place) and in a specific country (the US). He observed (at the bottom of the page):

"A fundamental reform of the international monetary system has long been overdue. Its necessity and urgency are further highlighted today by the imminent threat to the once mighty U.S. dollar."

Robert Triffin
November 1960

But the US ran trade surpluses for quite a few years after 1960.

1. It would be nice to define what the concept of "a world reserve currency" means. I formal accounting terms, if the US lends dollars to a country, than this country should not post these dollars as "reserves" to its balance sheet, it should rather post them as a liability.

So to finance continuously that other country's dollar "reserves" qualifying as such on the balance sheet basis, the US is left with few viable options other than generate a trade deficit with this country (other options being: capital investment - limited in scope/protectionist issues; "dropping dollars from helicopter" - ...).

However, one other option is to disburse the dollars in exchange for that other country's currency. The US would then avoid the trade deficit expansion, but would have to hold a basket of other countries' currencies with all the risks associated with this holding. I do not know the mechanics of SDRs , but probably they are not very dissimilar from this currency basket mechanism. To assume all these risks would be too audacious a proposal for the US (or any other country), and this is why the reserve currency management is preferred to be delegated to a "supranational" body, which would assume appropriate monitoring, regulation and risk-hedging.

But this thread seems to be more concerned with the role of a world reserve currency as medium for settlement of cross-border transactions, rather than with the formal accounting treatment of FX flows. To provide a such a "medium" currency, the issuer country could act as the world's central bank and could therefore lend its currency (USD in the case of the US) to other countries. Unlike a central bank, the issuer country could however charge differentiated interest rates to different countries, and could altogether refuse to lend to some countries.

The issuer country would likely be prone to the same vicious circle of: rising interest rates - overvaluation of the currency - trade deficit expansion - production base erosion - rising indebtedness - bubbles - crisis - print money - surrender the reserve currency status to a contender, BUT.. this is in a "free market" economy with a powerful electorate. The electorate would be temped to live on borrowed money (why work if I could borrow against our strong currency), and the politicians would have to give in. If however, the issuer country is capable to impose discipline on the population/electorate, than it would have an opportunity to try and carry on a FX/interest rate policy so as to keep the production base intact and the trade balance in check. In other words, the country will make its workers sweat for a smaller piece of pie, but will hold them employed. (China?)

2. With regard to the cause and effect relationship between the reserve currency demand and trade deficit expansion:

The Chinese primary objective should have been building a strong production base rather than accumulation of reserves. There was no demand for the FX reserves as such on their part actually, at least not on such a huge scale as it looks when reviewing the reserves amounts. Their accumulation was incidental to their industrialization policy. So was the US trade deficit expansion. The Chinese FX reserves is the price that they paid for the industrialization - they financed all sorts of deficits of the consumer countries by these reserves.

[SeaGypsy]

1/ The reserve currency is in physical trade much what it is in forex; the hub through which all spokes in the wheel connect. The disconnect is in the fact that there can be forex runs on the basis of rumour, percieved risk in the forex market itself or on that of real physical trade, interest rates and trade deficits.
The physical commodity market is tiny compared to forex but forex has no other real basis. In the long run the better a trade balance sheet looks, the better the currency will do. The inverse is the current situation in much of the developed world. Actual currency movement in any form does not alter the balance sheet until a mark up or down occurs in aquisitions, apart from the direction of interest flows; much the same as private persons conducting international business. Shifting money around is a very novel way of making a profit in that it produces nothing. This has made it a very popular form of gambling among governments, banks, corporations and wealthy individuals; the profits of which are futile waste/ ghost money.

In the long run the only way to close a trade gap is to increase efficiency/ productivity. When your key competitor operates infinitely more efficiently than you do, you are in big trouble. You can trick them into lending to your consumers to keep them buying easy enough for a time; but eventually the fundamentals of prodctivity and efficiency must overwhelm temporal games over currecy valuations/ speculation. In this case the more efficient player will always end up holding the best hand. 'Reserve currency demand' is a hangover from the cold war period; soon to be outdated by free direct currency exchange. The more QE goes on, the more the deficit grows, the longer zero interest or negative interest loans go on, the thinner the veneer of wealth, the more unstable the dollar, the sooner other currencies become percieved as a better risk.

So far reserve status probably adds about 40% to the real value of the USD$; the quicker this status fades the quicker the dollar fades.
No amount of financial product trickery will undo the fundamental equation.
China may have been suckered into aquiring so much US debt; or it may be a risk they can easily afford to take, buying a stakes in their biggest customers.
Chinese growth barely sputtered through the GFC so far, it doesn't look like their moves were too stupid.

I just keep coming back to the efficiency equation, which I see as increasing in intensity in the peak oil period. Chinese efficiency is ruthless when compared to western countries. Working conditions are horrific: 6 12 hour days/ 1 week to 2 weeks off/ minimal medical cover/ minimal representation/ survival wages. That is what the world has to compete with, especially industrialised countries with high consumption to resource ratios like the USA.
The days of fat cat wages for service jobs are coming to an end world over.
The middle class is dieing.
1st victim of peak oil.
Once thoroughly dead, we will see who comes next.

[Keith_McClary]

Well.. let's not overstate this.

This is a deal for them to exchange their own currencies more when trading with each other. I read somewhere that Russia alone actually has more US hundred dollar bills in circulation than exist in the US itself -- talking paper money here, that's in addition to their large on-the-books reserves.

Let's not understate this.

By dealing direct in each other's currencies, both countries will have ??? billions of USDollars they no longer need to hold to accomplish trade, nor will they need to pay the commission to buy USDollars and pay the trade markup.

There is less than $1 trillion in paper currency in the world.

EDIT: US$, that is.

[SeaGypsy]

Not counting bonds, which are supposed to be as good as cash.
Does anyone know the official current total circulation of $USD? Cash, bonds, certificates and electronic deposits? I am guessing the figure would be astronomical next to the cash only number. I googled around a bit but could only get a 2008 figure of 850 billion $USD cash in circulation.

[vtsnowedin]

Not counting bonds, which are supposed to be as good as cash.
Does anyone know the official current total circulation of $USD? Cash, bonds, certificates and electronic deposits? I am guessing the figure would be astronomical next to the cash only number. I googled around a bit but could only get a 2008 figure of 850 billion $USD cash in circulation.

try this.
http://www.shadowstats.com/charts/monet ... ney-supply
I read M2 as about 8.7 trillion. shaded area right side scale.

[Ibon]

Interesting article on the ramifications of this topic

http://www.financialsense.com/contribut ... -us-dollar

Chinese Premier Wen Jiabao and Russian President Vladamir Putin announced in St. Petersburg, Russia, on November 23, 2010, that they will stop using the U.S. dollar to settle bilateral trade and instead use the ruble or the yuan, according to a report in the state-run China Daily. Bilateral trade between the two countries stands at roughly $60 billion. Put in perspective, assuming two-thirds of international trade is transacted in U.S dollars, this accounts
for 0.3% of dollar usage in a global economy valued at roughly $30 trillion. This agreement, then, is not particularly meaningful in terms of U.S.-dollar utilization, but when we consider the exponential implications, the effects are huge