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US may lose reserve currency status: I thought this was big; Bernhard says it's HUGE

I came across this yesterday, thought I should post it, but there wasn't much else around on the meaning of the move. Now, Bernhard at Moom of AL lays out the import here.

Being the reserve currency gives the US a big economic advantage, per Bernhard:

So far the U.S. could borrow cheaply and pay back less in real value than the original loan. That privilege is now going away. The trillions the U.S. currently needs to borrow from abroad will have to be payed back in full. That is a major change in its global power status and will seriously decrease its influence in international policy questions. (My emphasis)

Now, must run. Do read.

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bringiton's picture
Submitted by bringiton on

Here.

This is likely a good thing, and long overdue. There are dangers, including not least a possible heightened ability of the moneyed class to more easily control the flow of capital globally, but there are safeguards in the sense that not every nation's interests will align and out of that discord some pattern of fairness and stability may arise in a semi-organized and relatively transparent way. Certainly, carrying on as we have is a plan for disaster.

Submitted by jawbone on

in our own currency means we pay back those debts in dollars which are, usually, due to even low inflation, lower in value than the dollars we borrowed. Should we choose to devalue the dollar, our debtors are definitely repaid in dollars which are deflated in actual value to the borrower (but not to us, in most ways).

If the dollar is not the reserve currency, those trillions are going to have higher interest rates.

It is not going to happen overnight--so we shall see.

And, as a econ dummy, I'm no expert on this to say the least.

TreeHugger's picture
Submitted by TreeHugger on

my understanding of the subject is limited, but it seems that I have been hearing about this danger at least since the euro started rising against the dollar two years ago. Just about the same time peak oil talk reached a fever pitch, no? The point is that no international group or organization can decide what the world's default currency reserve will be. Instead, it seems to be a bit of a scrum....individual central banks and private investors deciding where to place their bets.

True, we would not have been able to get away with the financial shennanigans of the past--oh, how many years--were it not for the unique status of the USD$ as the default reserve currency.

Hyperinflation could take care of that pretty quickly though.

bringiton's picture
Submitted by bringiton on

Then maybe we shouldn't borrow so much.

Once we started to disconnect from gold under FDR, we allowed creeping inflation to subsidize the repayment of loans from outside the country.

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(Original graph and dollar value data in red from Sterling Newberry, can't at the moment lay my hands on the link. Annotations in black are mine.)

That shift in national economic strategy has been one of the key elements in accumulating wealth for the US.
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(Juxtaposition of graphs is my doing.)

Distribution of that wealth within the US has been, of course, decidedly and increasingly unequal.

Our failure to maintain restraint over our indebtedness has led us to become a debtor nation in every regard, internally as well as externally, to ever-increasing levels, a process fueled in no small measure by steadily inflating our own currency. That string has been run out about as far as it will go.

With a change in the reference currency, probably to an artificial "breadbasket" denomination because nothing else out there approaches the dollar even in its current ragged state, we will not have that luxury and hopefully we will stop - or at least slow - building up so much debt.

Instead we will be forced to actually produce valuable goods and services instead of deceptive financial pyramid schemes. That would be good. That need will in turn force us to invest instead of spend, and those investments will have to be in things like education, infrastructure, R&D and citizen health care because that's where the rate of return is both substantial and sustainable.

Keynes saw the need for this approach 65 years ago. If we had listened then instead of being greeedy and imperialistic, we might not be any better off today in terms of wealth but we surely wouldn't be in any worse shape going forward in terms of debt.

Mandos's picture
Submitted by Mandos on

Precisely, BIO. The strategy of the USA has been to maintain a strategy based solely on import. The global effects of this trade imbalance have been negative. The only positive benefit has been the temporary enrichment of some segment's of Asia's nonwealthy. But we could have accomplished that anyway through more controlled trade---without the massive enrichment of a few.

Despite being an exporting country, my own country of birth, Canada, is really subject to the same thing. What it exports is raw materials. Take that away and you still have a massive imbalance. Canadian hardware stores still contain goods mostly made elsewhere.

bringiton's picture
Submitted by bringiton on

Exactly so, Mandos.

Canada is a wierd one. Enormous natural resource wealth, protected from outside exploitation due to the collapse of the British Empire and a natural suspicion of the rebellious colonials to the South, Canadians instead embarked on a pattern of behavior that can best be described as self-rape.

Requires considerable contortionism and a split personality, but there you go; Canadians have a remarkable capacity for cognitive dissonance under that outward sheen of politeness and equanimity. Still a lot of wealth around, but it appears to me that the future of the whole thing now rests on the profitability of the tar sands and that is becoming a very shaky proposition indeed.

Past time for real domestic infrastructure investment in other areas instead of squandering the wealth by shopping across the border. Surely the pro-business conservative Harper government has adequate long-term plans in place. (A jest, that.)

[You really do want to be careful agreeing with me so openly, Mandos; next thing you know my personal house troll herb will show up and say something foolish in an attempt to disparage you. Last time he compared us to Jack Nicholson, teh silly; we are both of us better looking, sexier and more talented than that creaky old fart.]

herb the verb's picture
Submitted by herb the verb on

He misses me I guess, lonely: I've had him on ignore for quite awhile. It's an ego thing for some to imagine people care what they write. Don't worry BIO, we'll play again soon I'm sure. Maybe when you actually have something interesting to say. Calling out to me on some kind of thin gruel Canada history is rather sad actually.

For example could you tell us again how that awesome Gitmo closure thing is coming along? Looks like they were finally able to repatriate one person back in February.

Just the one so far as best I can tell. Apparently it's "hard work", as in tough. Tough choices for the tough boys. So that would be right up your alley, explaining to us just how much we don't understand about the tough choices.

Submitted by jawbone on

From Democracy Now transcript:

PAUL KRUGMAN: You know, there have been millions of plans—well, I’m exaggerating, but there have been many plans along those lines. That’s not a decision that can be taken by an international body. The dollar is the reserve currency because people think it’s the safest place to park their money. The euro is a natural competitor, except that the Europeans are as messed up in their policies as we are, if not more so, right now. But the way to deal with that is not to have some body agree that we’re going to do something different, but to simply have the world—have the natural competitors to the dollar make themselves worthy of the competition.

bringiton's picture
Submitted by bringiton on

I like Krugman, generally, but sometimes....

Of course this is something that can be implemented by an international body and agreed to by treaty. The same thing was said about an international league of nations, the same thing was said about an aglomeration of European nations for unified defense, and on and on. Hell, the same argument was raised against a US Constitutional Convention.

Krugman argued vehemently for NAFTA and other such free-trade agreements, essentially open markets for goods that as implemented have cost the US citizenry enormously in trade imbalance and jobs, but has also argued for being highly restrictive when it comes to international capital flow. Resetting the reference currency to a highly buffered international standard will provide just such a restriction, and is also a useful way to damp the insatiable drive of the US for greater and greater debt. On this topic, Krugman needs to grow a pair.