USD as Reserve

By pjain      Published Aug. 5, 2019, 9:56 p.m. in blog Invest   

-- XFR-- Fundamentals behind reserve currencies

Country % Reserves GDP(gpp) %Trade Military
USA 66%
China 2%
India 66%
* as per IMF 2020

SDRs will rise

Rise of Bilateral Trade priced in Majors EU/RMB

Gulf countries already accepting Euro for oil pricing

RMB as an alternative to USD - in China-Russia trade, $500b Iran deal at 20% discount

Accepted as large reserves of other countries

US State Capture by Billionaires - Irrationality and Invasions

George W. Bush lies us into an invasion against WMD and false "intel", shocking and bombing occupation of Iraq, kills hundreds of thousands people killed and what are the consequences? Nothing.

Apple gets away with paying very little tax by using double tax exemptions in Ireland - doing it blatantly. Despite sharp reductions by Trump very little overseas money has come back to USA.

Our political system has been captured by the wealthy elite. The political parties are controlled by the wealthy elite; the GOP completely, Democrats partially. The sick little man in the White House, who 63 million voters said "I want HIM to have the power.", might be "Putin's puppet"!

Large part of Global Trade

Effective Global Military Influence, Trade Routes Support

Downfall of USD, Problems

US debt is growing in all areas

  • Everyone is indulging in debt —federal, state, and local governments, too-big-to-fail banks, some major corporations and hedge funds, and consumer student, homeowner, and credit cards.

Bubble in US Stocks esp. Big Tech - Another crash will hurt reputation

The stock market is rising far above growth in the domestic economy and productivity, from stock buybacks, mergers and acquisitions, and speculative ventures—electronic money for the 1 percenters.

In the 2008 financial meltdown, $22 trillion disappeared, much of it our homes, wages, social services, and retirement funds. This time, Trump and Mnuchin can’t afford to bail out banks and print money as Obama did without devaluing the dollar; and who believes they know what to do?

Inequality - Vanishing Middle Class - prior strength of US

Extreme inequality has left American consumers unable to buy goods and services to support a thriving economy.

Problem - Fed is monetizing US Deficits - as EU,China not willing to do it anymore

Waste National Treasure PROBLEM

PROBLEM: Letting Nation Decay on low taxation of Billionaires and Corporations

  • However, for last 50+ years (after Reagan's anti-tax), of destroying America's roads, bridges, airports, education system, mass transit, reputation and national treasury, the dollar is the perhaps the one piece that politicians haven't destroyed completely.

Fundamentals behind USD reserve currency in the Past

TINA so far

TINA or There Is No Alternative currency in the world that can do what the dollar does. We still do have - "the Almighty Dollar."

China - fraud, lack of rule of law, massive State corruption, CCP tyranny

The dollar isn’t strong— China doesn’t want to give up control by internationalizing its currency.

China can't because no one really knows what goes on in that country.

Mistrust. For China, do you really want communist dictators in charge of your financial system?

Things that are blocked by CCP include -search the internet freely -peacefully protest against anyone and anything in public -have a right to trial by jury - sadly accused may never see your money, or that matter, your family again.
-start a business in fair competition with local firms

Euro has no central bank or policy.

The dollar isn’t strong—the Euro is weak

The Euro lacks the political coherence which is necessary to become THE major reserve currency.

Japan wants to beggar its Yen to keep favorable trade as it suffers from persistent savings glut, low demand, aging and severe Deflation

Rest of globe too small or fragmented

  • Russia can't because it is not an advanced economic society and it too, like China, is corrupt.
  • Those with more circumspect ambitions (eg; Canada,)
  • Britain is just too small.
  • Conservative Northern EU, Switzerland, Germany, etc. want to protect their economies from profligacy.

After WWII - USD was only stable country - willing to support global systems

The U.S. as its Navy came out on top globally. This is represented by its domination in the Battle of Midway 1942 showing its uncontested power over the Pacifica Ocean bordering three of the worlds top national economies - Japan, China and the US. Like earlier UK control of the seas, US control enabled trade freedom of navigation and commercial shipping from the Aden to the Malacca to the Taiwan Straits. The U.S. Navy and Military guaranteed world commerce. No wonder the US gets paid in being able to borrow in its own currency at the world lowest interest rates.

The U.S. dollar took up a needed role "international reserve currency." It became the main currency the world uses to trade and save.

The US has demonstrated that it will, for the most part, do, what's necessary to preserve the integrity of the financial system. The Euro keeps attempting to collapse.

The PEG of "old hard currency" countries exchange rates to the dollar, making it the central spoke of the system.

Gold priced in dollars

USA then controlled most of the world's gold, pledged at Bretton Woods to fix the value of the dollar to gold at $35 an ounce.

Global Reserves Kept for Trade Reasons

Hard currencies need Economic Power, Stability and Strength

The foundation of a strong reserves ultimately must rest on the foundation of a strong economy.

  • The impact of the launch of US on world economic stage was throughout 1800s, it basically acted deflationary to rest of the worlds, as food and natural resources poured out to the world.

  • The U.S. has the most stable governance and the most resilient economy in history. Even in 2020, USA is the most respected country in the world in terms of its rule of law-and-order (inspite of BLM protests), its fundamental laws, institutions, banking system, and judicial system.

  • Geographically it has the best waterways and harbors across it’s coasts and deep into it’s hinterlands. It has the most extensive highway and rail system in the world. It has the most able public administration as well. It has the most productive and diversified agriculture and natural resources. It’s had the most reasonable governance of any country able to adapt to every challenge. It’s the safest and most reliable place to invest in the world.

Beggared Currencies Yuan, Yen, Europe to keep strong Trade Imbalances - and Buy T-bonds

  • Yen, Europeans kept currencies low

Dollars and dollar-backed securities like U.S. Treasury bonds — which is how the government issues debt — are much more attractive. Many countries, for instance, save by buying U.S. debt. China holds over a trillion dollars of it! Since all these major exporters really, really want to hold US debt, and keep currency rates low - else they would not be "neutralized".

That means it's very easy for the USA to issue debt at much lower rates than other countries.

In return, US Federal govt deficit spending is far more affordable.

The United States also has the privilege of borrowing in its own currency. If the United States devalues its currency, that means it devalues its debt.

When Argentina, for example, borrows in dollars, it is at the mercy of whichever direction dollars are moving in. Like the federal government, American companies benefit from this system, doing transactions in dollars without having to pay the costs of converting into another currency.

FED strong role and Open Currency

Open Currency

Problem: Very low savings rates compared to East Asia and Europe

4-year Election cycles, Presidential Re-elections disruptive - Stimulate business cycles!

PetroDollars - Oil is priced in Dollars

Oil is priced in dollars - initially as US consumed 25%+ of all world's oil. But still priced in dollars.

The reason most energy (specifically oil and natural gas) purchases are made with dollars is because Saudi Arabia made a deal with the US during the Nixon administration, brokered by Treasury Secretary William Simon. By the terms of the agreement, the Saudis transact oil sales in dollars, and use the proceeds to purchase US debt (Treasury bonds and bills) to finance our budget deficits. In turn the US provides military equipment to the House of Saud. The list of countries that have made moves to sell oil in currencies other than the "petrodollar" makes for very interesting reading. The lesson seems fairly obvious: remain hostage to the petrodollar or face crippling sanctions and/or "regime change". -- from NYTimes perceptive comment by Charles referral tobook "The Oil Kings: How the U.S., Iran, and Saudi Arabia Changed the Balance of Power in the Middle East".

Iraq (tried to switch to Euro in 2001 and got brutally invaded) - broken country despite Bush Jr burning well over $2T 
Libya (attempted to establish a gold-backed currency) -bombed by rabid Hillary/French, leader Ghaddafi was brutally murdered
Iran - sanctioned - severely opposed by most of mideast, yet holding on
Syria - decimated
Russia - sanctioned, yet continues to supply most European gas, and success in Nord Strem II Pipelines with Germany
Venezuela - massively sanctioned...

EuroDollars - Oil, Gold priced in Dollars

  • Oil priced in Dollars - emergence of Trillions of Petro-Dollars

  • Gold priced in Dollars - correlation of USD

France, US, UK, Saudis welcome funds from Corrupt Elites

  • Corrupt Elites kept their billions of ill gotten gains in

=== 1700s, 1800s - Run up to USD as Reserve - US Empire

1770s - 1910 Hamiltonian US Struggles to Develop Internally, Build a Strong Currency

1863: US NATIONAL BANK ACT - Federal Bank Notes

Congress during the Civil War creates a system of nationally chartered banks with authority to issue notes backed by U.S. government securities. State banks continue to issue their own notes.

1907 US Bank PANIC - JPMorgan intervention, 1908 Bank Authorization

One of a series of financial crises, the Panic of 1907 results in numerous bank runs and closures. J.P. Morgan and other wealthy financiers make personal loans to return solvency to the system.

In 1908 with the ALDRICH-VREELAND ACT. Congress passes a bill forming a group of banks with authorization to issue temporary currency. The idea is controversial to some because, while seen as a remedy for a banking system in need of reform, control of the group is still in private hands.

1913 FED ACT+ How USD became Reserve Currency to World

The Federal Reserve Act creates a decentralized central bank with 12 districts. The system is seen as balancing the interests of private banks and the public.

1929-36: Stock Market Crash, Trade/Tariff wars GREAT DEPRESSION

The collapse of U.S. stock prices and subsequent global economic turmoil result in international banking crises that lead the U.S., Britain and France to abandon the gold standard.

1930: BANK FOR INTERNATIONAL SETTLEMENTS Created to resolve trade wars

The Bank for International Settlements is created to oversee reparations payments from Germany. The Switzerland-based BIS would become in effect the central bank for some 60 central banks around the world, helping pursue, in its words, “monetary and financial stability.”

  • 1936: TRIPARTITE AGREEMENT. The U.K., France and the U.S. sign an agreement to stabilize exchange rates. The agreement soon falls apart with the advent of World War II.

1933 Rise of the FED and Fractional Reserve Banking - USD becomes a "controlled" asset

US emerged as only superpower and Aid plans for Rest of World

The US soon propped up both Western Europe, esp. rebuilding UK, as well as "allies" of Japan, S. Korea and Taiwan. In addition to giving massive loans, it used its agricultural and industrial space capacity to feed and rebuild these countries.

1944 Bretton Woods Collapse of Rest of World - Sets up USD and Forex Fixed Rates

As World War II nears its end, the Allied nations reach an agreement in Bretton Woods, N.H., in which each country’s central bank promises to maintain fixed exchange rates between their currencies and the dollar. The agreement effectively makes the dollar a substitute for the world’s supply of gold.

At Bretton Woods in 1944, participants had agreed to keep their currencies fixed to the dollar, and the dollar was fixed to gold.

  • Out of Bretton Woods came the
  • World Bank
  • The International Monetary Fund

1960s-1980s USD abuses huge deficits, till Reagan breaks USSR, fixes inflation

US printed HUGE amounts of Money

  1. After huge Vietnam era deficits on Military-Industrial deep suck

  2. Reserve-Envy

    The special role for the dollar has long made other countries jealous. In the 1960s, French Minister of Finance Valéry Giscard d'Estaing coined a special term for their contempt: The dollar, he said, had an "exorbitant privilege."

  3. As the U.S. started racking up huge deficits and running out of its gold reserves in the 1960s, the government found it too expensive to maintain the promise. And so, in 1971, President Nixon arranged a divorce between the dollar and gold. The dollar's value is now set by a mishmash of political and economic forces, ranging from central bank decisions to the frenetic buying and selling of traders around the world. The original arrangement set at Bretton Woods is long dead, but the dollar still remains the international reserve currency.

1970s LONG Decline of US Empire - Imports/Globalization boom

  • Nixon kills Gold Standard, UK ends Pound-Gold - BRETTON WOODS COLLAPSES

U.S. President Richard Nixon ends the convertibility of dollars to gold. In 1973, the U.S. officially ends its adherence to the gold standard. Britain ends sterling’s official link to gold in 1972.

The US dollar is "Not backed by anything". It is only backed by the “Full Faith And Credit Of The US Federal Reserve”. Basically it is now backed by hot air!

1980s Reagan breaks USSR, fixes inflation

Rise of MNCs with tax/HQs in US, UK-FTSE, Ireland, etc.

1990s 30+ years European ECB Euro emerged

2000 Technology Leader dot-comm

9/11/2001 US takes over international settlements - what is BIS/Swift role?

  • SWIFT, and other Money laundering prevention schemes - US

Russia, China, Iran Fight Back without USD trade

Moving away from PetroDollars

Putin has been working to end Russia's own reliance on dollars? China has been importing oil direct trading for its manufactured exports ie using yuan instead of dollars!

70 years of Beggar-my-currency by BoJ, Asian countries to EXPORT more

PIIGS Crisis - to Italy now, after Spain, Greek crises

2008 CDOs Great Recession hurt USD reputation

The United States was the major cause of the 2008 crisis where the “Toxic Assets” were made of of US worthless mortgages. This hurt USD reputation. As it stands most of the world's largest banks by assets are now outside the US esp. in Europe, Japan and China due to their huge export surpluses.

Currency Swaps keep USD alive as Global/Eurodollar liquidity

  • One little appreciated aspect of USD as reserve currency is that global trade is done in USD exchange. So when liquidity dries up, eg when global debt engines stall. As the "TOO BIG TO FAIL" global banks hit issues on derivatives, there was a shortage of USD to facilitate transactions.

The Fed stepped in by using swaps, taking in Euros, Yen, and Pound sterling - issuing USD in return. This allowed liquidity to close transactions like before.

2011 Obama Fiscal Cliff jeopardized USD

In 2011, the world discovered the President of the United States could disrupt the value of the USD. The US “Fiscal Cliff” happened when Obama refused to sign a bill for the US to pay it’s debts to foreign countries. President Obama in his liberal stubbornness to get his Social Reforms passed, but he did not understand the impact of loss of credibility for the US and it briefly jeopardized the USD as a reserve currency in the eyes of countries around the world.

2017+ Trump Legacy

2020 Trump Pisses off the world

Euro Unlimited Loans, NIRP - GILTs at negative rates for 0-30 years

Iran sanctions nail in coffin of US International Settlements

Flight to Security, Negative Rates in BoJ/ECB => US 10yr rates super low <2%

Tariff Wars, Cold War with China

European Duties on Steel, Aluminium

Dollar Trap - USD Reserve weakens but Keeps On Ticking

2019 Conundrum of US 10yr rates higher than Italian - Offshore Dollars Control USD

U.S. has less power to devalue its currency than it otherwise would. "When there's a big international role for your currency, you lose control over it," she says. A prime example is during global economic crises, when scared investors come scrambling for U.S. assets in a "flight to safety," and the dollar, as a result, appreciates. With so much demand for dollars, she says, the dollar is stronger than it would otherwise be. And a stronger dollar means foreign imports are cheaper to U.S. consumers and U.S. exports are more expensive to foreign consumers, which is not great for American manufacturing or our trade deficit.

2020 Covid-19 Emerging Countries Weaken

2020 Euro support Cracks - Shared "Free Money"

The Dollar Trap - How Reserve currencies work

References


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