Guest Post: How Much Longer Will the Dollar Be The Reserve Currency?

Tyler Durden's picture

Nothing lasts forever... (especially in light of China's earlier comments)

 

Submitted by Patrick Barron via The Ludwig von Mises Institute,

We use the term “reserve currency” when referring to the common use of the dollar by other countries when settling their international trade accounts. For example, if Canada buys goods from China, it may pay China in US dollars rather than Canadian dollars, and vice versa. However, the foundation from which the term originated no longer exists, and today the dollar is called a “reserve currency” simply because foreign countries hold it in great quantity to facilitate trade.

The first reserve currency was the British pound sterling. Because the pound was “good as gold,” many countries found it more convenient to hold pounds rather than gold itself during the age of the gold standard. The world’s great trading nations settled their trade in gold, but they might hold pounds rather than gold, with the confidence that the Bank of England would hand over the gold at a fixed exchange rate upon presentment. Toward the end of World War II the US dollar was given this status by international treaty following the Bretton Woods Agreement. The International Monetary Fund (IMF) was formed with the express purpose of monitoring the Federal Reserve’s commitment to Bretton Woods by ensuring that the Fed did not inflate the dollar and stood ready to exchange dollars for gold at $35 per ounce. Thusly, countries had confidence that their dollars held for trading purposes were as “good as gold,” as had been the Pound Sterling at one time.

However, the Fed did not maintain its commitment to the Bretton Woods Agreement and the IMF did not attempt to force it to hold enough gold to honor all its outstanding currency in gold at $35 per ounce. The Fed was called to account in the late 1960s, first by France and then by others, until its gold reserves were so low that it had no choice but to revalue the dollar at some higher exchange rate or abrogate its responsibilities to honor dollars for gold entirely. To it everlasting shame, the US chose the latter and “went off the gold standard” in September 1971.

Nevertheless, the dollar was still held by the great trading nations, because it still performed the useful function of settling international trading accounts. There was no other currency that could match the dollar, despite the fact that it was “delinked” from gold.

There are two characteristics of a currency that make it useful in international trade: one, it is issued by a large trading nation itself, and, two, the currency holds its value vis-à-vis other commodities over time. These two factors create a demand for holding a currency in reserve. Although the dollar was being inflated by the Fed, thusly losing its value vis-à-vis other commodities over time, there was no real competition. The German Deutsche mark held its value better, but German trade was a fraction of US trade, meaning that holders of marks would find less to buy in Germany than holders of dollars would find in the US. So demand for the mark was lower than demand for the dollar. Of course, psychological factors entered the demand for dollars, too, since the US was seen as the military protector of all the Western nations against the communist countries for much of the post-war period.

Today we are seeing the beginnings of a change. The Fed has been inflating the dollar massively, reducing its purchasing power in relation to other commodities, causing many of the world’s great trading nations to use other monies upon occasion. I have it on good authority, for example, that DuPont settles many of its international accounts in Chinese yuan and European euros. There may be other currencies that are in demand for trade settlement by other international companies as well. In spite of all this, one factor that has helped the dollar retain its reserve currency demand is that the other currencies have been inflated, too. For example, Japan has inflated the yen to a greater extent than the dollar in its foolish attempt to revive its stagnant economy by cheapening its currency. So the monetary destruction disease is not limited to the US alone.

The dollar is very susceptible to losing its vaunted reserve currency position by the first major trading country that stops inflating its currency. There is evidence that China understands what is at stake; it has increased its gold holdings and has instituted controls to prevent gold from leaving China. Should the world’s second largest economy and one of the world’s greatest trading nations tie its currency to gold, demand for the yuan would increase and demand for the dollar would decrease. In practical terms this means that the world’s great trading nations would reduce their holdings of dollars, and dollars held overseas would flow back into the US economy, causing prices to increase. How much would they increase? It is hard to say, but keep in mind that there is an equal amount of dollars held outside the US as inside the US.

President Obama’s imminent appointment of career bureaucrat Janet Yellen as Chairman of the Federal Reserve Board is evidence that the US policy of continuing to cheapen the dollar via Quantitative Easing will continue. Her appointment increases the likelihood that demand for dollars will decline even further, raising the likelihood of much higher prices in America as demand by trading nations to hold other currencies as reserves for trade settlement increase. Perhaps only such non-coercive pressure from a sovereign country like China can wake up the Fed to the consequences of its actions and force it to end its Quantitative Easing policy.

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Pladizow's picture

"Suspicion towards a currency, once awaken, develops insomnia." - James Dines

Spastica Rex's picture

It will prevail until the centurions come home and the aircraft carriers are converted into public housing.

Ahmeexnal's picture

"until ... the aircraft carriers are converted into public housing"

Sunken vessels always make good public housing for marine life.

TwoShortPlanks's picture

How much longer?.....a few years at best!

It has already been agreed upon and planned for many years.
http://twoshortplanksunplugged.blogspot.com.au/2013/08/chinese-gold-accumulation-and-bis-hksar.html

And China's a lot further ahead than everyone thinks (except for Jim  Willie perhaps).
http://twoshortplanksunplugged.blogspot.com.au/2013/06/chinas-goldreserves-how-big-is-elephant.html

TSP

Keyser's picture

If the idiots in DC don't get their act together, I give the USD about 3 days before it is de-throned as the world's reserve currency. 

 

gold-is-not-dead's picture

Until the first aircraft carrier sinks.

Keyser's picture

An excuse for war or yet another false flag will not save the USD this time. The gig is up when your largest investor calls for the de-Americanization of the world and for a new reserve currency to be created. 

As for the down arrow I got for my post above, it appears someone can't handle the truth. If the US defaults on it's debt, the game is over. 

 

 

Socratic Dog's picture

Decommissioned capital ships were used as prisons in England for many years.  That is a more likely use for the aircraft carriers.

caconhma's picture

For the present geopolitical US$ reserve currency to work without escalating into a hyperinflation the excess/printed US$ must be removed from circulation. It is accomplished by Brazil, China, Japan, Russia, India, etc., buying the US Treasury papers, therefore, reducing the amount of US$ in the circulation.

The problem is that Brazil, China, Japan, Russia, India, etc., and the other countries cannot forever keep their own people starving so the USA and EU have the present high standards of living. So far, the elite of these countries were willing and/or forced to play this game. Just look at the communist China hypocrisy where former chairman Mao family members are US$ multi-billionaires and hundreds of millions Chinese have just a daily ball of rice. The Chinese, Russian, etc., elites are terribly corrupt having major problems controlling their citizens.

It is important to understand that the USA has no desire to pay back their international debt. This is just another form of the old colonial system. However, the pressure is building up in these countries. The US and EU elite arrogance and reckless behavior have made this system very unstable. Internet also has revealed that this system is very unfair to everybody outside of the US and few EU countries and local elite mafia running these countries.

Consequently, the Chinese elite is starting to look for ways to change the present situation.

Now about Gold. As long as China, Russia, etc., will not substantially reduce their US Treasury obligations buying the system will continue to function with gold staying in a doghouse.

DoChenRollingBearing's picture

Other than prestige, it only matters a little bit if any country's currency is NOT the reserve currency.  I believe that losing that status for the US$ would only raise our transaction costs (converting to Yuan or Euros) some 1%.

 

Save in gold.  Conduct business in FIAT$.

SpykerSpeed's picture

What if you want to leave the country with your gold?  How would you get through the checkpoints?

Croesus's picture

Legally. 

Declare it, do the paperwork that comes with it, and smile as I wave "adios"...

Pure Evil's picture

Well, the safest way is to move family first, then shipped the declared gold to said family, then wave as your jetliner takes off wisking you to safer havens.

Never leave at the same time as your gold. The TSA may want to see your gold member.

Silveramada's picture

Then Gold rare coins in plastic slab by PCGS or NGC in high grade will do the trick: you can leave the coutry with lot of whealth in your pocket that way...

barliman's picture

 

Normally we concur but on this topic we are at opposite ends of the spectrum.

If America was STILL a manufacturing superpower, your assertion would likely prove true.

If America was the LEAD source for high end electronic components, your assertion would likely prove true.

If our debt ceiling was HALF of what it is now, your assertion would likely prove true.

If the American President was STILL seen as the pre-eminent world leader, your assertion would likely prove true.

Loss of the USD as the world reserve currency, given the current FACTS ... will push the American economy into third world status.

DoChenRollingBearing's picture

I don't think it will take too much longer to find out when we become a third-world country.

barliman's picture

 

Agreed, public denunciation today by China (see below) sets the stage for more open disagreement.

If Europe has a harsh winter, will Gazprom miss the opporunity to restrict the flow of natural gas to the EU because they are being paid in USD?

Meanwhile, the Kabuki on the Potomac will blind the sheeple that sometimes you are better off taking the pain NOW than waiting until some other entity can choose for you.

zhandax's picture

The dollar is very susceptible to losing its vaunted reserve currency position by the first major trading country that stops inflating its currency.

Indeed  Just who is this mystic country who will selflessly stop inflating it's currency before the US?  China?  Hell, they are pegged to the dollar.  EU?  Wrong again.  Japan?  Give me a break.  The reserve charade will continue just as long as every other ponzi scheme on the planet tries to kick the can faster than the benchmark. 

barliman's picture

 

You didnt take your meds today, did you?

If you wish to take issue with the original post - try finding someone who is supporting the point you want to take issue with - it's just that simple.

FYI, when ANY ponzi scheme starts inflicting real PAIN on the participants, the ponzi scheme is doomed. The schedule may be sooner or later but the outcome is a foregone conclusion.

The direct currency exchange idea is a NEW ponzi scheme with the sadistic twist of promising the countries that "get in on the ground floor" the opportunity to FUCK the countries not in on the scheme.

jughead's picture

"If there must be trouble, let it be in my day, that my child may have peace."

-- Thomas Paine

barliman's picture

 

"If there must be trouble, let it be the problem of YOUR children & grandchildren."

-- Ben Bernanke & the Elites

MeBizarro's picture

This is a ridiculously stupid comment. 

DoChenRollingBearing's picture

I should have been clearer: I do not think that losing US$ Reserve Currency status would, on its own, make America a poor country.

We can do that even with reserve status.  Once we are poor, we can then figure what happened.

Keyser's picture

My only comment is that all intents and purposes, the US is already a 3rd world country by virtue of emmigration. Millions of immigrates have come to the US in the last two decades and for the most part, they brought their culture with them and have not assimilated. I know latinos that have been in the US for 25 years and still don't speak a word on English. Hell, in the city where I live, there is a section of town where the street signs are in Chinese. I shit you not. 

banzai401's picture

When I was a kid in the Military, the first thing they taught us was "The USA is a 3rd world country with nukes", and that was almost 50 years ago.

 

The USA was a failed penal-colony, that went plantation slavery, and then industrial slavery, and now information-slavery, and but it was ALWAYS a slave-colony, aka 3rd world nation.

 

Kirk2NCC1701's picture

Some people use BTC in place of fiat $ (as medium of exchange) for doing business, and save in PM.

lasvegaspersona's picture

DCRB

true but if there is no purchase of bond (or a selling) the USG will immediately be seen to be printing naked!  They need to borrow 40% of what they spend a year and even though in reality we are close to 'just printing money' now we are at least clothed by the fig leaf of treasury sales.

DoChenRollingBearing's picture

All true, lasvegas!  But, I assert that we would not suffer horribly if we lose our reserve status for the dollar.  Suffer some?  Yes.  But 1% or so seems about right.

I did not claim that there would not be other effects (incipient hyper-inflation if they DO print vs. borrow).

Peru has no trouble importing & exporting with dollars (their currency is the sol).  Just a little conversion at the bank, and off the $$$ go to Korea.  I suspect that is the way it is for many hundreds of other Peruvian businesses.

Bay of Pigs's picture

The sad thing is, most Americans won't believe it until it actually happens.

GOLD & SILVER Bitchez...

fonzannoon's picture

I own PM's BOP, but put me in the camp of not believing it until I see it happen. This artice is big on fluff and light on facts. 

Bay of Pigs's picture

I wasn't referring to this particular article fonz. Fact is, the BRICS are, and have been, moving away from the USD in regard to international trade.

It also appears the FED is well on its way of destroying the USD all on it's own anyway. Yellen is the worst of all possible worlds for USD holders.

fonzannoon's picture

Agreed BOP. That's the thing that I find interesting. It is the BRIC countries that end up having currency crisis and starved of dollars. Not the other way around, 

The fed has made it clear that they have every intention of owning the bond market to anyone who is not brain dead. In effect severely cutting down the opportunity of a bond vigilantee showing up a little more each day. While that has happened the price of gold has gotten killed. I see some vault red meat articles on here  and elsewhere, but nothing that ends up having any real impact in the way ZH would want it to. 

All I see is the banks getting money piled onto their books and the ability to pick and choose what assets they want to own while the wages and quality of life for the rest of us goes down the toilet.

6 months ago there was a hundred cash for gold places within 10 miles of my house. I see more and more closing each week that goes by. So I guess something is up, i'm just not sure what.

Everybodys All American's picture

(Fonz) ... 6 months ago those cash for gold places started closing where I live as well and I see more and more closing each week just like you. Maybe no one is willing to sell any of their gold especially at these artificially low prices. I don't see a decrease in gold demand that's for sure.

fonzannoon's picture

I think it is safe to say that the knockdown did a good job of getting a lot of weak hands to part with their stash, and now it is just a matter of who has the means to hold it and is willing to deal with watching the stock market go up while PM's get the shit kicked out of them daily. I also wonder if, like the bond buying program, the more gold the fed has taken out of circulation, the firmer their grip on the price movement has become.

So that leaves China etc. to try to pull the plug on the dollar. So I ask myself, how are the 1% in China doing under our current system? Because is they are doing pretty well, I'm not sure I see an incentive for them to attempt to throw the world into chaos

 

centerline's picture

I think your train of thought here Fonz is right on.  It isn't the Chinese 1%'ers that want this party to end.  The rhetoric speaks volumes to me.  Any real moves of significance are going to happen behind closed doors and we will find out in afterwards.

fonzannoon's picture

I mean shit Centerline, it's possible that move has already been made, and this horseshit theatre we are watching right now is China just allowing the politicians script the ending. I just doubt it. I think if China made that bold call and relayed it to the U.S we would just drone someone's ass to send a message. If China had the balls to do it, they better not telegraph it.

So like you say, it's not the Chinese 1%ers or the U.S 1%ers we are talking about here. It's the U.S midle class and the chinese middle class. I just would not put too many chips on them, although everytime I look at my little stash, I am reminded that I have.

olto's picture

Fonz,

The first article with the piece from xinhou-----I read as a light hint that China is preparing a bigger annoncement, but i don't see any market action yet that lead to such a conclusion. Maybe, they don't need to DO a thing---they already have the currency swaps and bi-lateral trade agreements with all of their major trading partners-----

The 1%ers are in every nation---they might be behind the scenes, but this is too good of an opportunity to pass up for those who think the US presidency is what it is and that the US is weak-----even the vets are marching on crutches against the status quo

does any of the above make sense? I feel like I am in the same damn only on a different day---can't make sense of anything

fonzannoon's picture

I mean this politely but I think you are reaching here. I hear you though. Who really knows?

olto's picture

Fonzannon:

Thanks for putting some ground under my feet----I am reaching.

Alexandre Stavisky's picture

Paraphrasing here and invoking King David who said, "Almighty, bless me sufficiently with talent by which I may earn my daily bread such that I may provide for my daily needs.  Bless me that I not earn through coercion but by free will offerings in the markets with my fellow man.  Watch over me that I obtain through peaceable and manly means and not through extortion or oppression."

Modern economic theory is now infested with the supposition that economies can be made and maintained by coercion of law, extortion by command, compulsion through threat and menace.

It is a time of sackcloth and ashes, universal mourning for a misspent republic and a people that might have been.

http://www.biblegateway.com/passage/?search=psalms%2037&version=KJV

" The wicked plotteth against the just, and gnasheth upon him with his teeth.  The Lord shall laugh at him: for he seeth that his day is coming.

The wicked have drawn out the sword, and have bent their bow, to cast down the poor and needy, and to slay such as be of upright conversation.

Their sword shall enter into their own heart, and their bows shall be broken. What little that righteous men hath is better than the riches of many wicked."

FreeMktFisherMN's picture

Amen, brother. I am thankful to God that I learned about Austrian economics and 'woke up' to what is going on, let alone at a relatively young age (22 right now). I'm thankful He has given me discernment and the conviction to speak truth to power in these PC environs at the university and in society in general. 

Teddy Tenpole's picture

 

 

Despite the 100,000+ boomer doomer posts on ZH no, it isn't in anybody's interest to throw the world into chaos.  Interestingly, chaos typically arises out of large seemingly controlled systems ;)

akak's picture

Your wording of the mind and throating of conventional ideas is definitely very much something, very crusty, but assuredly not very mattering.  Make me laugh.

Teddy Tenpole's picture

 

 

I am glad that you are following what I say, unlike the majority of the boomer doomer's on here it's not too late for you to figure things out.

Bed time though big guy.

 

Sweet dreams.

Sparkey's picture

Chaos isn't the goal, (usually) it is the unintended consequence.

Hey what happened?,,, It wasn't (supposed) to be like that,,now what do we do?

RockyRacoon's picture

...and gold should have taken off on Yellen's appointment, which is backdoor evidence that gold is manipulated on a massive scale.   Well, "backdoor" and "Yellen" should never appear in the same sentence.  Forgive me.

fonzannoon's picture

Gold should have went parabolic when Ben doubled down to 85 bil a month and never looked back. Since that point it's been going in the other direction....and has not looked back.

barliman's picture

(Caveat: This is NOT an argument in favor of fiat currencies. This is a discussion of the physical limitations gold suffers from as a currency baseline.)

I have suggested before that gold needs to be put in perspective to the objective trade levels when considering it as a "currency" or backing for a currency.

At known resource levels of gold, there simply is NOT enough physical gold available to sustain current world trade levels without pushing the value/ounce into stratospheric levels

Purely as a reference point see this link for A number saying there is $ 6.5 trillion USD gold in the world - http://www.onlygold.com/TutorialPages/All_The_Gold_In_The_World.asp 

Total Global GDP = $ 71.7 trillion USD  See link: https://www.google.com/#q=Global+GDP 

Just to cover global GDP - every ounce produced would have a notional value of ~ $ 14,000 USD/ounce - except this does NOT cover the shadow banking system & derivatives

Before blithley saying, "To HELL with the derivatives and the scum that spawned them!"  - thos scum control the people who control the presstitutes, the politicians, the militaries and the ability to start WARS.

Let's just ADD another order of magnitude to our working number - NOW every ounce produced would have a notional value of ~ $ 140,000 USD/ounce

And then there is the fact that regardless of how many ounces HAVE BEEN MINED throughout history - How many ounces will be acknowledged by their "owners" with a base price TWO orders of magnitude above current value?

Here's where the time honored tradition of the FUDGE factor comes into play - we'll justy make a conservative guess of BEGINNING spot price of $ 250,000 USD/ounce

When 4 troy ounces makes someone a millionaire, how many GOVERNMENTS are going to start CONFISCATING gold under the reason of "preserving public peace"?

[Which isn't far off the mark, who WON'T dig Grandma up for her fillings when they'll pay for a new car?]

The Point of all of this - We don't need a new reserve currency or a gold backed currency ...

We NEED a SET of BASELINE Trade Exchange Rates CONVERTIBLE INTO DIFFERENT COMMODITIES on a SPOT BASIS.

BEFORE we get to that point ... there are going to be some NASTY wars fought.

 

fonzannoon's picture

I just try to simplify it all. If the 1% that control each country out there are completely taken care of under the USD system while at the same time they occasionally get a glimpse of what happens (Libya etc) when you attempt to go off that system...it seems to me they would be hard pressed to change the status quo.

So it's not exactly like the world standing up and punching the bully in the mouth. It's more like the biggest bully paying the other smaller bullies to keep taking everyone else's lunch money.