"The Financial System Is Vulnerable," NYFed Asks "Could The Dollar Lose Its Reserve Status?"

Tyler Durden's picture

When a tin-foil-hat-wearing blog full of digital dickweeds suggest the dollar's reserve currency status is at best diminishing, it is fobbed off as yet another conspiracy theory (yet to be proved conspiracy fact) too horrible to imagine for the status quo huggers. But when the VP of Research at the New York Fed asks "Could the dollar lose its status as the key international currency for international trade and international financial transactions," and further is unable to say why not, it is perhaps worth considering the principal contributing factors she warns of.


Via The World Economic Forum blog,

Could the dollar lose its status as the key international currency for international trade and international financial transactions, and if so, what would be the principal contributing factors?

Speculation about this issue has long been abundant, and views diverse. After the introduction of the euro, there was much public debate about the euro displacing the dollar (Frankel 2008). The monitoring and analysis included in the ECB’s reports on “The International Role of the Euro” (e.g. ECB 2013) show that the international use of the euro mainly progressed in the years prior to 2004, and that it has largely stalled since then. More recently, the euro has been displaced by the renminbi as the debate’s main contender for reducing the international role of the dollar (Frankel 2011).

This debate has mainly argued in terms of ‘traditional’ determinants of international currency status, such as country size, economic stability, openness to trade and capital flows and the depth and liquidity of financial markets (Portes and Rey 1998). Considerations regarding the strength of country institutions have more recently been added to the list. All of these factors influence the ability of currencies to function as stores of value, to support liquidity, and to be accepted for international payments. Inertia also plays a role (e.g. Krugman 1984, Goldberg 2010), raising the bar for currencies that might uproot the status quo.

We argue here – building on discussions we began during the World Economic Forum Summit on the Global Agenda 2013 – that the rise in global financial-market integration implies an even broader set of drivers of the future roles of international currencies. In particular, we maintain that the set of drivers should include the institutional and regulatory frameworks for financial stability.

The emphasis on financial stability is linked with the expanded awareness of governments and international investors of the importance of safety and liquidity of related reserve assets. For a currency to have international reserve status, the related assets must be useable with minimal transaction-price impact, and have relatively stable values in times of stress. If the risk of banking stress or failures is substantial, and the potential fiscal consequences are sizeable, the safety of sovereign assets is compromised exactly at times of financial stress, through the contingent fiscal liabilities related to systemic banking crises. Monies with reserve-currency status therefore need to be ones with low probabilities of twin sovereign and financial crises. Financial stability reforms can – alongside fiscal prudence – help protect the safety and liquidity of sovereign assets, and can hence play a crucial role for reserve-currency status.

The broader emphasis on financial stability also derives indirectly from the expanded awareness in the international community of the occasionally disruptive international spillovers of centre-country funding shocks (Rey 2013). We argue that regulatory reforms can play a role in influencing these spillovers. Resilience-enhancing financial regulation of global banks can help reduce the volatility of capital flows that are intermediated through such banks.

On financial stability and reserve-currency status

International reserve assets tend to be provided by sovereigns, notably due to the fiscal capacity of the state and the credibility of the lender of last resort function of the central bank during liquidity crises (see also De Grauwe 2011 and Gourinchas and Jeanne 2012). Systemic financial events can be accompanied by pressures on the government budget, however. While provision of a fiscal backstop to the banking sector is not the best ex ante approach to policy, fiscal support will tend to be forthcoming if the risk and estimated welfare costs of a systemic fallout are otherwise deemed too high.

Yet banking sector risks – and inadequate capacity within the banking sector to absorb these risks – can end up exceeding a government’s ability to provide a credible fiscal backstop without adversely affecting the safety of its sovereign assets. The fiscal consequences of bailouts may result in increased sovereign risk and the loss of safe-asset status, with implications for the status of the currency in question in the international monetary system.

To increase the likelihood that sovereign assets remain safe during systemic events, the sovereign can undertake financial and fiscal reforms that decouple the fiscal state of the sovereign from banking crises. Such reforms should achieve, in part, a reduction in the likelihood of and need for bailouts through increased resilience and loss absorption capacity of the financial system, and by ensuring sufficient fiscal space for credible financial-sector support (see also Obstfeld 2013).

Reform initiatives

A number of current reform initiatives already take steps in this direction. These include:

  • Reforms to bank capital and liquidity regulation, which reduce the likelihood that financial institutions, and notably systemically important ones (SIFIs), become distressed;
  • Initiatives that seek to counteract the procyclicality of leverage, and to strengthen oversight; and
  • Recovery and resolution regimes for distressed systemically important financial institutions (SIFIs) are being improved.

Importantly, initiatives are underway to improve recovery and resolution in the international context. While a global agreement on cross-border bank resolution is currently not in place, bilateral agreements among some pairs of countries are being forged ex ante to facilitate lower-cost resolution ex post. Further, the resilience of the system as a whole is being strengthened, to better contain the systemic externalities of funding shocks. Examples include:

  • The strengthening of the resilience of central counterparties and other financial market infrastructures; and
  • The foreign currency swap arrangements among central banks to provide access to foreign currency funding liquidity at times when market prices of such liquidity are punishingly high.

Nevertheless, the financial system contains vulnerabilities – globally, as well as in individual currency areas. The negative sovereign banking feedback loop may be weakened in many countries, but has not been fully severed. Moreover, reforms are not necessarily evenly implemented across countries. Fiscal capacities to provide credible backstops of the financial sector during stress vary widely. The consequences of recent reforms for the future of key international currencies are therefore open. Scope remains for countries vying for reserve-currency status to use the tool of financial stability reform to protect the safety and liquidity of their sovereign assets from the contingent liabilities of financial systemic risk.

Financial stability reforms matter for spillovers and capital flows

International capital flows yield many advantages to home and host countries alike. Yet the international monetary system still faces potential challenges stemming from unanticipated volatility in flows, as well as occasionally disruptive spillovers of shocks in centre-country funding conditions to the periphery. With the events around the collapse of Lehman Brothers, disruption in dollar-denominated wholesale funding markets led to retrenchment of international lending activities. Capital flows to some emerging-market economies then recovered with a vengeance as investors searched for yield outside the countries central to the international monetary system, where interest rates were maintained at the zero lower bound. After emerging markets were buoyed by the influx of funds, outflows and repositioning occurred when markets viewed some of the expansionary policies in the US as more likely to be unwound.

While macroprudential measures – and in extreme cases, capital controls – are some of the policy options available for addressing the currently intrinsic vulnerabilities of some capital-flow recipient periphery countries (IMF 2012), we point out that these vulnerabilities can also be addressed in part by financial stability reforms in centre countries.

Consider, for example, the consequences of the regulatory reforms pertaining to international banks that are currently being proposed or implemented. Improvements in the underlying financial strength and loss-absorbing capacity of global banks could have the beneficial side-effect of reducing some of the negative spillovers associated with unanticipated volatility in international banking flows – especially those to emerging and developing economies. Empirical research suggests that better-capitalized financial institutions, and institutions with more stable funding sources and stronger liquidity management, adjust their balance sheets to a lesser degree when funding conditions tighten (Gambacorta and Mistrulli 2004, Kaplan and Minoiu 2013). The result extends to cross-border bank lending (Cetorelli and Goldberg 2011, Bruno and Shin 2013).

While financial stability reforms may reduce the externalities of centre-country funding conditions, they retain the features of international banking that promote efficient allocation of capital, risk sharing and effective financial intermediation. By enhancing the stability of global institutions and reducing some of the amplitude of the volatility of international capital flows, they may address some of the objections to the destabilising features of the current system.

Cross-border capital flows that take place outside of the global banking system have recently increased relative to banking flows (Shin 2013). Regulation of global banks does very little to address such flows, and may even push more flows toward the unregulated sector. At the same time, however, regulators are considering non-bank and non-insurer financial institutions as potential global systemically-important financial institutions (Financial Stability Board 2014).


We have argued that the policy and institutional frameworks for financial stability are important new determinants of the relative roles of currencies in the international monetary system. Financial stability reform enhances the safety of reserve assets, and may contribute indirectly to the stability of international capital flows. Of course, the ‘old’ drivers of reserve currencies continue to be influential. China’s progress in liberalising its capital account, and structural reforms to generate medium-term growth in the Eurozone – as examples of determinants of the future international roles of the renminbi and the euro relative to the US dollar – will continue to influence their international currency status. Our point is that such reforms will not be enough. The progress achieved on financial stability reforms in major currency areas will also greatly influence the future roles of their currencies.

Authors: Linda Goldberg, Vice President of International Research at the Federal Reserve Bank of New York and Signe Krogstrup, Assistant Director and Deputy Head of Monetary Policy Analysis, Swiss National Bank; Member of the World Economic Forum’s Global Agenda Council on the International Monetary System

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
NOTaREALmerican's picture

Jeez dude,  don't you read history?    Then they kill you.

sixsigma cygnusatratus's picture

Okay, okay, so they kill you...but you still win the argument!

Pumpkin's picture

The dollar failing isn't going to feel like winning.  It will be as brutal as ripping a cancerous tumor out with bare hands.

alfred b.'s picture


        I expect his next question to be "Could Germany ask for its gold back"??


Downtoolong's picture

when the VP of Research at the New York Fed asks "Could the dollar lose its status as the key international currency…"

Don’t you mean the soon to be Ex VP of Research at the New York Fed?

Sorry Linda, this shit doesn’t play well into our narrative, or your career plans.

See you on the unemployment line applying for that next job opening as a bank teller in Idaho.


MeelionDollerBogus's picture

Iffen yoose don't believes in dollar soo-premacy then you's a terr'st!

lasvegaspersona's picture

The dollar is the only currency in history that ia purely fiat that the world has been conned into using as a reserve. In the past all other countries with the most prominent currencies (as Mike Maloney has pointed out) were just that...THE dominant currency. There were no central banks using those currencies as the asset that backed their currencies. Prior to 1971 e en the dollar was just a paper claim on gold. Only in the last 43 years has there been a 'reserve currency as we now have with the dollar.

deGalle called this the 'exorbitant privelege' but Robert Triffin noted that it was also the 'poison privelege' as it caused loss of industry in the home country. The world is done with this system It gives the USA the ability to import 'without the pain of work'. It has caused most other nations to be stuck with never to ve redeemed assets on the central bank balance sheet.

The next reserve won't be a currency. It will be gold. All these currency swaps are done to ensure trade can continue between the countries involved as the dollars says good bye. Currencies will be managed as mere (but reliable) media of exchange. Settlement will be done in gold though I would expect that trade will be mostly balanced. It won't require much gold if that is the case. Gold could be used to defend the currency in forex trading and to make periodic adjustments in the relative value of a country's money.

43 years has been long enough to teach then world this lesson. It had previously learned that gold as the medium of exchange was unworkable and disasterous in some circumstances such as during times of economic expansion. The Euro already has the structure to make the Euro an international medium of exchange. I expect most large countries will change their currency to the same structure with gold held as an asset marked to market.

This has been called freegold but whatever it is called it seems to be the way the Euro was structured and appears to be a vialble structure not only for that currency but for a new monetary system.

Seize Mars's picture


Nice try. The only solution, the only solution, is to remove government from the money creation process.

In a world of limited resources, it only makes sense that money should itself be a limited resource.

lasvegaspersona's picture


that could work i suppose (have not give that much thought but crypto currencies seem to be gaining in use).

I just don't see it happening soon. the real goal is to keep international trade going. 7 billion people depend upon the movement of fuel, food and iPods. As long as there is a trusted medium of exchange there could be a way. Could Bitcoin handle the trade of Suadi Arabia? Would China accept a currency that could not be easily used to buy gold? Would any large country give up the control of it's internal economy?

F0ster's picture

Currencies are mearly measurement instruments for things, real goods and services of value (gold, houses, stocks, labor etc). What we need is a more universal way to measure value across disperate assets I.e a 'yard stick' but for 'value'. The whole concept of 'money' and 'value' needs to be fundementally rethought. Cryto currencies are somewhat novel but they are still based on the old 'currency' model.

withglee's picture

Money is "a promise to complete a trade". Always has been. Always will be. Forget about "rethinking". Start "thinking".

Toolshed's picture

Perhaps you should take you own advice since you obviously do not understand what money actually is.

withglee's picture

So tell me. How is (should be) money created?

Toolshed's picture

"So tell me. How is (should be) money created?"

Why don't you enlighten us with your wisdom, troll boy?

withglee's picture

The world's most popular money, Federal Reserve Notes are created in two ways. (1) They are exchanged for US Treasuries and other trading promises. (2) They are counterfeited (e.g. all the QE programs).

In reality, those exchanged for US Treasuries are also counterfeit. This is because the US never pays back their treasuries. They just roll them over ... and that is default.

Only a small portion of the money created circulates as currency and coin. Most circulates as accounting entries.

Now ... you tell me how money should be created.

Toolshed's picture

As I suspected, you are a clueless troll. As is common knowledge, FRN's are currency, not money. FRN stands for Federal Reserve Note, as in a promissory note. If you are unaware of that crucial distinction then perhaps you should do some research as opposed to spouting nonsense and provoking commentors on this site. I should not bother to attempt to enlighten one as yourself, but I will give you a few hints. Although I expect nothing but more absurdities emanating from your general direction.

This is a good start:




Basically, money is a store of value, among other things. Currency was created to facilitate trade. Currency is not a good store of value because it is easily and frequently debased by the issuing entity. This is why no currency has survived the test of time, but real stores of value, such as precious metals, minerals, food staples, etc. have been and continue to be stores of value throughout man's history.

Money is created by industrious individuals producing assets that can be exchanged for money. These can be products or services. In modern times people are usually paid for their efforts in currency, which is much easier to use to perform transactions for needed goods and services. But currency REPRESENTS money. It is not money due to the fact that it has no inherrent value, with the possible exception of coinage. What is the inherrent value of a FRN? That would be the cost of the paper and ink required to print it, plus the very small amount of labor, capital assets, etc used in it's printing, which is miniscule when spread across the vast number of FRNs printed. In fact, most currency nowadays is created electronically and exists only on computers at financial institutions. The FED recently admitted that every time a financial institution makes a loan they, in fact, create money out of thin air that is only extinguished when the loan is repaid. But don't take my word for any of this.......look it up yourself. I am now done with you.

withglee's picture

You are talking in circles. You say money is created by individuals producing assets that can be exchanged for money. Fine. The good or service is created "before" money stands for it. Right? And then currency stands for this "money". Right? So no money exists until someone produces something or someone serves someone, and wants to trade it for something else, right? And then that money is created and is traded for the other good the trader wants, right? So once money is created, it exists forever after, right?

Just how does that differ from a FRN? The people working for government have performed a service. The people selling to the government have produced a good. The government pays them with FRNs (or in the old days, silver certificates), if they have them, presumably from tax collections. If they don't have them, they borrow FRNs (from the Fed) giving treasuries in return. The Fed creates them out of thin air. Who, and in what instance, would you have them created?

Further, a house builder builds a house. He does this usually by borrowing for the labor and materials. He then marks those up and looks for a buyer. Usually the buyer doesn't have cash. So the borrower gets a mortgage. He promises to make 360 equal monthly payments and is given FRNs or their equivalent which he gives to the builder. Where did those FRNs come from? Surely you're not suggesting they all came from those serving the government. That would suggest an economy could not exist without government. Of course we know it can.

I have said money is "a promise to complete a trade". Government workers and suppliers promise to deliver goods and services to the government. The government promises to give them things they need and want in return. Rather than giving them food, a car, a house, a lawnmower, etc., they give them FRNs that stand for those things ... whether they have actually been produced yet or not.

But this even works for people who don't work for the government. You work a week and your employer pays you in arrears as he promised. He pays you initially with money he borrows. As a going concern, he pays you with retained earnings. He looks just like the government to the economy. Where did the money he borrows come from? It came from you who worked a week before getting paid. It came from products and services he sold ... after consuming your services and suppliers goods. It came from a bank who held people's money on deposit. But that doesn't create enough money for all the trades that need and want to be made. So money is created against promises, just like it is created against actual goods. And if the promise is kept, there is absolutely no difference.

You are able to buy a home with a 360 month promise to complete a trade. You promise to give a portion of your services to the builder each month for 360 months. But the builder doesn't want that. He wants all his money right now so he can pay his workers and his suppliers. Thus, the FRNs the buyer borrows from his lender come from wherever the lender gets them. Strict capitalism says a capitalist must first have traded for them before they can be loaned to the borrower.

Banks stretched capitalism a little bit (actually a lot). They got a deal where they can loan 10 times what they hold in capital and deposits. Perhaps this is the part of the existing system you want to remove. Is that correct?

Are you saying money only comes into existence when something is produced and then stays in existance forever after? Suppose I produce a bushel of corn and exchange it for money. A cow eats the corn so the corn is gone. You eat the cow so it is gone. But the money still exists, right?

That's a problem. Money exists when the asset it stands for no longer exists. How can that be. You've not spoken of the destruction of money have you?

I do. I say money is created when someone promises to complete a trade. I say money is destroyed when that trade is completed ... it has served its purpose.

And by the way, what part of a bushel of corn is not created out of thin air ... or at least air with some moisture and carbon-dioxide in thin air?

All the things I've stated exist and happen right now. You say that's wrong. So what are you going to disallow? Borrowing? Borrowing before something is produced or served? What???? And why???? What problem are you trying to solve? Counterfeiting is the only problem I see we have? Well, we also have an imbalance between interest collections and defaults that results in inflation. What do you propose to make those go away. Does producing an asset before money stands for it make those things go away?

When you think it through, you see it's all about keeping the scorekeeper honest.


withglee's picture

Having done that, how do you propose to create money?

Quaderratic Probing's picture

All past gold based reserve currencies failed, as in past.
Any new gold based reserve will also fail.

Why? Its not the base or fiat that is the problem. Its the humans who always bend the game, and always will.

There is nothing new under the sun, trying to make an old failure work only sets up a new failure.

The Fed was set up to bridge over the future failures they knew would come, and they have and they will again.

lasvegaspersona's picture

The sytem I describe is not 'gold based'. Gold is not required, it just works as the best store of value.

I agree using gold as the medium of exchange has failed but failure always results when the medium of exchange and the store of value are the same thing.

withglee's picture

Settlement will be done in gold though I would expect that trade will be mostly balanced. It won't require much gold if that is the case.

How are you going to do settlement in gold ... and not use gold? Backing a medium of exchange with a commodity means being able to obtain that commodity in exchange for accounts that represent it. Otherwise, what does the commodity bring to the party?

Toolshed's picture

Yes, we all know that EVERYTHING fails eventually. Maybe you missed the tag line to ZH's logog:

"On a long enough timeline the survival rate for everyone drops to zero."

And, by the way, I agree that the real problem is human based.

withglee's picture

How can gold be the next reserve? There's only about 1oz of it per person on Earth. How should money be created?

q99x2's picture

Banksters are taking down the US, stealing all its assets and moving the money into Russia.

They are banksters. That's what banksters do.

Seize Mars's picture


tin-foil-hat-wearing blog full of digital dickweeds

Wait, what!?

Flagit's picture


Wait, what!?

No doubt.

Wrong day to get mouthy, blogger boy. I've been watching Kimbo Slice and Russian traffic fights on youtube all day.

Nick Jihad's picture

Better print up another $4 trillion now - once the dollar loses reserve-currency status, it will be too late!


bid the soldiers shoot's picture

Another $ 4 trillion?

Don't be such a cheapskate.  

We only have 20 aircraft carriers, for Christ sake.

Paracelsus's picture

My Granny,rest her soul,used to classify apples and vegies and such,by their stability in storage thru the Winter.Everyone should be keeping a reserve of some sort.Course she lived thru a bank failure....

If one thinks about FDR's work programs and finance reforms,it is obvious that a primary goal was to  

avoid any revolutionary actions by the public.Both the carrot (WPA) and the stick (prisons) were applied.

Many thought of Bonny and Clyde as folk heroes for that era.At least they were fighting the bankers effectively.

A salutary lesson was how they confiscated private gold and then revalued it upwards by a third.Sneaky that...

A New Deal means that something fraudulent happened with the last round of cards,and in the interests

of social harmony,we will begin anew.If FDR meant to say something else,he would have phrased it another way.

bid the soldiers shoot's picture

Losing reserve currency status for the dollar will also be its spontaneous devaluation.  

This will be welcomed internationally, but I'm afraid it won't play well in Peoria. 

andrewp111's picture

What will precipitate the loss of reverse currency status? An oil shock could. ISIS taking over Saudi Arabia, perhaps?

yogibear's picture

William Dudley of the New York Fed keeps pushing for dollar devaluation yet claims there is no inflation based on iPod prices. All these Federal Reserve Keynesian voodoo economic PhDs are BSers. They all know the fiat goes to 0 as inflation goes exponential.

withglee's picture

How should money be created?

Toolshed's picture

"How should money be created?"


You seem to be lost. Do some research. There is not an easy answer to that, and numerous opinions. First look into what actually constitutes money, as opposed to currency. They are not necessarily the same thing. USD is actually not money, like most fiat currency, it is a claim on money. That's why it says Federal Reserve NOTE on it. Money is a store of value. Currency exists only to facilitate trade. That should be enough to get you started, that is if you were earnest in your questioning.


withglee's picture

You are an avoider ... evidently just regurgitating talking points.

1) Tell me what "actually constitutes money".

2) Tell me what "actually constitutes currency".

3) If after that the contrast is not evident, tell me what is the obvious difference.

4) If the USD is just a "claim on money" ... and not money, what "is" the money it is making a claim on?

5) How was (should be) the money referenced in 4 created?

Regarding the ernestnest of my question, how about the ernestness of your non-answer?


Toolshed's picture

"You are an avoider ... evidently just regurgitating talking points."


And you are an instigating jackass. This is not Econ 101. Do your own research since you obviously have waaay too much time on your hands.


"Regarding the ernestnest of my question, how about the earnestness of you non-answer?"

My answers have been much more earnest than your question bait. How's this for earnest:

You are cordially invited to eat shit and die. Pinheaded troll.


withglee's picture

Typical seminar poster. They're given talking points but don't know what they mean. So when asked, they avoid. Pitifull. If this was Econ 101 material, it should be easy to explain. So explain away.

Toolshed's picture

" So explain away."

Please do.

You are a garden variety troll. You pose questions that you already have preconceived answers too. You are not trying to stimulate debate. You are trying to stimulate controversy. This makes you nothing but a disgusting shit talking TROLL. Good job!!!

withglee's picture

Even if that be the case, I am batting a thousand in turning up posters who complain about fiat money but can't answer these ultra-simple questions. There can be only one explanation ... they don't know the answer. It wasn't given to them in the talking points at the seminar.

Toolshed's picture

Trolls are always correct in their own world. Trolls never answer questions. Trolls only talk shit. You have been identified correctly as a troll.

Salsipuedes's picture

Alas, the Titanic turneth not on a dime. Two words: Scuba gear.

WAMO556's picture

Frank Herbert's book DUNE is metaphorically about the DOLLAR, never about oil.

The Spice must flow!!!!!

q99x2's picture

Here is a problem to put things into perspective. There exists perception and all that is understood about perceptions by humans has snowballed over time into technology that may soon jeopardize all perceptions. Q99X2 tend to believe that everything else that exists within our universe, that is conscious, might take an interest in this human snowball of technological advancement.before it begins to perceive on its own.

Stating the problem another way. The oligarchs, war and the decline of civilization are about to become as meaningless as whether or not it will rain tomorrow because of a response by other things in the universe to the arrival of the singularity.

 Hope and change bitchez may you enjoy your toast tomorrow morning.

Aussiekiwi's picture

'When a tin-foil-hat-wearing blog full of digital dickweeds suggest the dollar's reserve currency status is at best diminishing,'

Hey!, lol, 'digital dickweeds'.... he's talking about us isn't he?

hedgiex's picture

The authors from Fed , IMF & another Western Banker are masturbating. They expect Creditor Nations to agree to any reforms that they propose anchored on the past glory that US is the Global Economic power.

The trust in the dollar has been lost through profligacy and indiscipline and any Creditor is no fool to continue to trust in a failing currency coupled with idea that the control of the trust in a fiat currency should still reside with Debtors.

Money as a store of value for a globalized economy is not based on trade flows alone. Investment flows are as important as trade flows. This is going to make it interesting for global markets to decide on the value of a fiat currency with Central Banks having less influence. The decision by the markets will have the inputs (real demand) of the creditor nations.

US is so f***ed and yet still so arrogant in the global stage.

SmallerGovNow2's picture

Fiat paper and digits on a computer as a store of value is not based on sound logic...

withglee's picture

How should money be created?