7 ms·

I would argue: the only reason the US Dollar is the world's reserve currency is because it was created like that at the Bretton Woods conference shortly after t

by runeks 10y ago

I would argue: the only reason the US Dollar is the world's reserve currency is because it was created like that at the Bretton Woods conference shortly after the end of World War II. This was only accepted by the other allied nations because US Dollar was declared convertible to gold, at $35 per troy ounce. This, however, only remained the case for foreign central banks until 1971, when the promise was defaulted on. So the dollar, in its current form, was born a gold certificate, that then transmuted into a currency. I doubt the Yuan -- or any other currency at all -- can replicate this, and I think that would be necessary. I see no reason any central bank would want to swap out their Treasury bonds with Chinese government bonds (Treasury bonds are already too illiquid in times of crises, which is when we really need it), or any reason either consumers or merchants would want to start using the Yuan, other than to pay for imports from China.

John23832 10y ago
Another note, Marshall Plan funds were given in USD. So it was in the European nation's favor to have a strong dollar. Strong dollar == more resources == more (better) reconstruction
akhatri_aus 10y ago
It's also that the US doesn't play games with it's currency, there was alot learned from the 1850s experiments with 'free banking'. Since the collapse of Bretton Woods they've let the USD freely float without intervening or controlling it in any way. There's hardly much in the club as such: the GBP, JPY, CHF (broke all trust early last year, simply because they didn't do it on a weekend), USD, EUR and CAD. Fun fact with CHF, they've had 2.2% inflation on average since 1880, unrivalled, it's crazy they threw that stability away. It's not as simple as just being in existence. There's alot of 'trust' to it too, Countries could easily diversify against the USD on their reserve baskets. The CNY isn't a significant proportion of any basket because of the lack of trust & free liquidity with it.
- John23832 10y ago
  The US kept the value of the dollar down in 2008 with QE. We manipulate too, just more in the open.
  - akhatri_aus 10y ago
    QE is debatable, in a sense it's 'printed' loans that need to be returned, there's no direct influence on the exchange rate. If the US ends up having inflation as a result, it'll be damaging and countries will need to find a way to deal with it by switching their reserve currencies away somewhat. Russia is doing this with gold, but who knows that could be political. All in all, full employment matters more than currency perception overseas, at least if its done using free market forces, such as the purchase of bonds in the secondary market for QE.
    - John23832 10y ago
      I was addressing this: >It's also that the US doesn't play games with it's currency, Let's call a spade a spade. Sure, the US wasn't directly affecting rates. But a the time the financial world was burning, and people were flocking to (and holding) the Dollar for shelter. QE 1 2 and 3 were 600B, 600B and a monthly 85B. That much money put into the market keeps rates down simply because of supply influx.
      - akhatri_aus 10y ago
        Yes that's not good, but there's been no inflation as a result and the bonds the fed buys are freely tradable on the open market. Further the fed only trades on the secondary market so they wont directly bid in a Treasury auction. This isn't too bad picturing it. I assume if there is inflation there will be a problem so long as its not overdone like in the late 1970s. There's more vexing things that would affect this perception such as the credit rating, especially with so much debt. Yet History says the managers in government, and the Fed are good at their jobs. So even despite the QE perception on money printing the issues with this haven't been much of an issue, or it would have shown up with a weaker dollar/diversification away from USD on central bank's balance sheets
- DominikR 10y ago
  > It's also that the US doesn't play games with it's currency I would never consider buying Yuan over Dollars but I simply cannot agree with this statement. What the FED has been doing since 2008 and the ECB with the Euro is a massive experiment in gaming the markets which could possibly lead to catastrophic event. At least in the case of the EU I have no doubt that this will happen. Today when you buy commodities or currencies your success or failure is not determined anymore by what the market believes is valuable or not, but instead by what governments and bureaucrats have decided should be valuable or what should go down in value. I am fundamentally opposed to this because it creates a lot of bad behaviour, corruption and governments ending up owning previously privately held property and companies. It is not inconceivable that we could see various Western governments ending up owning most of the property in their countries in the next decades. That'd certainly be a creative way to implement Communism, I'll give them that.
- runeks 10y ago
  > It's not as simple as just being in existence. There's > alot of 'trust' to it too, Countries could easily > diversify against the USD on their reserve baskets. The > CNY isn't a significant proportion of any basket > because of the lack of trust & free liquidity with it. I'm not quite sure what you're referring to here. What are countries' "reserve baskets"? Central banks hold bonds as assets on their balance sheet, not medium of exchange. These assets are what the medium of exchange is issued against in the first place. I'm arguing that it is not possible for foreign central banks to just choose to switch out US Treasury bonds with Chinese government bonds, because the Chinese bonds have terrible liquidity -- and bond liquidity isn't particularly good in times of crisis to begin with.
  - akhatri_aus 10y ago
    Central Banks usually have to hold reserves of other countries currencies, or more generally a basket of reserves that it can use with another Central Bank for the purposes of trade or moving capital beyond the border. Say I buy a container of iron ore from Australia from the US, the process needs money to flow to Australia. In this flow the Federal Reserve would provide to the Reserve Bank of Australia (RBA) some of the assets in this currency basket to back its claim, it simply says the RBA is owed that (and subsequently the RBA can use that against USD trade, or use that against some other trading partner). So this way that the person I buy ore from in Australia has his credit in his account backed by something intrinsic (owed to him by the RBA, owed to the RBA by the Fed). No money has really flowed between countries, just the Fed owes the RBA assets in this currency basket as a result. This communication is done using the Bank for International Settlements which allows these reserves to be exchanged between other countries when they trade amongst each other. Hence it's important the basket contain assets that are universally acceptable and can store value. It used to be Special Drawing Rights, and before that Gold. The Federal Reserve's gold hoard is also amongst this basket. The terminology remains from the basic function of exchange accounting under the Bretton woods system, in principle using fiat instead of Gold. This method was devised to avoid countries having to ship gold to each other. They could simply owe it to another Central Bank and trade against that. The bonds are stored in a different form as part of their monetary policy, the functions in this sort of basket is part of the Fed's function with international settlements.
- NotSammyHagar 10y ago
  The obvious reason why the rmb could become a global currency is lots of companies buy and sell stuff from china, imports and exports, so they come to accumulate it. They want to trade it for other things, so the rmb comes to be used and more. Of course it doesn't float free, and the country limits transactions across borders. But I could see it slowly becoming more used as a universal currency, if they stop controlling the exchange rate and stop limiting capital flows. Those are 2 big changes, but the more they slowly relax those controls, the more likely they will succeed.
kchoudhu 10y ago
TBonds are hardly illiquid during crises -- as a matter of fact, they are among a select few securities that trade heavily when bad things happen. Source: looked on in dismay as the (legacy) treasury trading system at an investment keeled over and died the day after Lehman ate shit.
erichocean 10y ago
> So the dollar, in its current form, was born a gold certificate, that then transmuted into a currency. It's convertible into (crude) oil today ("petro dollars"), although obviously, that varies quite a bit in price (technically, so does the price of an ounce of gold).
- runeks 10y ago
  You're confusing two things. Before 1971, the US Dollar was worth exactly 1/35th troy ounce of gold. Foreign central banks could redeem their dollars for this amount of gold. The USD gold price did not vary back then. The USD gold price only started floating after 1971, which is just a fancy way to say that the market (surprisingly!) didn't consider a 0% haircut acceptable for a defaulted debt obligation. Oil being traded primarily in USD doesn't make the USD backed by oil, just as the dollar is no longer backed by gold even though gold is primarily traded in dollars.
  - erichocean 10y ago
    I'm arguing that just like gold pre-1971 "stabilized" the price of the US dollar, post 1971, oil is serving the same stabilization function: setting a "real world value" for the US dollar. > Since the agreements of 1971 and 1973, OPEC oil is exclusively quoted in US dollars. This created a permanent demand for dollars on the international exchange markets.[0] [0] https://en.wikipedia.org/wiki/Petrocurrency https://en.wikipedia.org/wiki/Petrocurrency
  - redcalx 10y ago
    > Before 1971, the US Dollar was worth exactly 1/35th troy ounce of gold Sort of. The US gov committed itself legally to redeeming gold at a fixed stated price. It was an untenable position since by 1971 there wasn't anywhere near enough gold to back all of the dollars in existence. A floating gold price would have been higher than the legally defined price, and this created an arbitrage situation whereby one could exchange dollars for gold at the legally defined price, sell gold on an open market for more money, buy dollars, and repeat. This arrangement ends when the US gov runs out of gold or goes bust... or figures out beforehand what the end states are and annuls the law in question, which is what Nixon did. The root of the problem was the increase in dollar money supply without a matched increase in gold reserves, noting that you only have to match narrow (M0) money, rather than broad money from fractional reserve banking (i.e. loans). Why? because most broad money is inaccessible, it's a number in a ledger, to get actual dollars to redeem you have to withdraw that money, and to do that at scale requires banks to claw back loaned money, thus reducing broad money supply right to back nothing, leaving just M0 money (i.e. dollars created directly by the central bank).
banku_brougham 10y ago
treasury bonds are not illiquid at times of crisis, we recently had one and the treasury market operated smoothly throughout. all the other markets however...
banku_brougham 10y ago
treasury bonds are not illiquid at times of crisis, we recently had one and the treasury market operated smoothly throughout. all the other markets however...

by runeks 10y ago

John23832 10y ago

Another note, Marshall Plan funds were given in USD. So it was in the European nation's favor to have a strong dollar. Strong dollar == more resources == more (better) reconstruction

akhatri_aus 10y ago

It's also that the US doesn't play games with it's currency, there was alot learned from the 1850s experiments with 'free banking'. Since the collapse of Bretton Woods they've let the USD freely float without intervening or controlling it in any way. There's hardly much in the club as such: the GBP, JPY, CHF (broke all trust early last year, simply because they didn't do it on a weekend), USD, EUR and CAD. Fun fact with CHF, they've had 2.2% inflation on average since 1880, unrivalled, it's crazy they threw that stability away. It's not as simple as just being in existence. There's alot of 'trust' to it too, Countries could easily diversify against the USD on their reserve baskets. The CNY isn't a significant proportion of any basket because of the lack of trust & free liquidity with it.

John23832 10y ago
The US kept the value of the dollar down in 2008 with QE. We manipulate too, just more in the open.
- akhatri_aus 10y ago
  QE is debatable, in a sense it's 'printed' loans that need to be returned, there's no direct influence on the exchange rate. If the US ends up having inflation as a result, it'll be damaging and countries will need to find a way to deal with it by switching their reserve currencies away somewhat. Russia is doing this with gold, but who knows that could be political. All in all, full employment matters more than currency perception overseas, at least if its done using free market forces, such as the purchase of bonds in the secondary market for QE.
  - John23832 10y ago
    I was addressing this: >It's also that the US doesn't play games with it's currency, Let's call a spade a spade. Sure, the US wasn't directly affecting rates. But a the time the financial world was burning, and people were flocking to (and holding) the Dollar for shelter. QE 1 2 and 3 were 600B, 600B and a monthly 85B. That much money put into the market keeps rates down simply because of supply influx.
    - akhatri_aus 10y ago
      Yes that's not good, but there's been no inflation as a result and the bonds the fed buys are freely tradable on the open market. Further the fed only trades on the secondary market so they wont directly bid in a Treasury auction. This isn't too bad picturing it. I assume if there is inflation there will be a problem so long as its not overdone like in the late 1970s. There's more vexing things that would affect this perception such as the credit rating, especially with so much debt. Yet History says the managers in government, and the Fed are good at their jobs. So even despite the QE perception on money printing the issues with this haven't been much of an issue, or it would have shown up with a weaker dollar/diversification away from USD on central bank's balance sheets
DominikR 10y ago
> It's also that the US doesn't play games with it's currency I would never consider buying Yuan over Dollars but I simply cannot agree with this statement. What the FED has been doing since 2008 and the ECB with the Euro is a massive experiment in gaming the markets which could possibly lead to catastrophic event. At least in the case of the EU I have no doubt that this will happen. Today when you buy commodities or currencies your success or failure is not determined anymore by what the market believes is valuable or not, but instead by what governments and bureaucrats have decided should be valuable or what should go down in value. I am fundamentally opposed to this because it creates a lot of bad behaviour, corruption and governments ending up owning previously privately held property and companies. It is not inconceivable that we could see various Western governments ending up owning most of the property in their countries in the next decades. That'd certainly be a creative way to implement Communism, I'll give them that.
runeks 10y ago
> It's not as simple as just being in existence. There's > alot of 'trust' to it too, Countries could easily > diversify against the USD on their reserve baskets. The > CNY isn't a significant proportion of any basket > because of the lack of trust & free liquidity with it. I'm not quite sure what you're referring to here. What are countries' "reserve baskets"? Central banks hold bonds as assets on their balance sheet, not medium of exchange. These assets are what the medium of exchange is issued against in the first place. I'm arguing that it is not possible for foreign central banks to just choose to switch out US Treasury bonds with Chinese government bonds, because the Chinese bonds have terrible liquidity -- and bond liquidity isn't particularly good in times of crisis to begin with.
- akhatri_aus 10y ago
  Central Banks usually have to hold reserves of other countries currencies, or more generally a basket of reserves that it can use with another Central Bank for the purposes of trade or moving capital beyond the border. Say I buy a container of iron ore from Australia from the US, the process needs money to flow to Australia. In this flow the Federal Reserve would provide to the Reserve Bank of Australia (RBA) some of the assets in this currency basket to back its claim, it simply says the RBA is owed that (and subsequently the RBA can use that against USD trade, or use that against some other trading partner). So this way that the person I buy ore from in Australia has his credit in his account backed by something intrinsic (owed to him by the RBA, owed to the RBA by the Fed). No money has really flowed between countries, just the Fed owes the RBA assets in this currency basket as a result. This communication is done using the Bank for International Settlements which allows these reserves to be exchanged between other countries when they trade amongst each other. Hence it's important the basket contain assets that are universally acceptable and can store value. It used to be Special Drawing Rights, and before that Gold. The Federal Reserve's gold hoard is also amongst this basket. The terminology remains from the basic function of exchange accounting under the Bretton woods system, in principle using fiat instead of Gold. This method was devised to avoid countries having to ship gold to each other. They could simply owe it to another Central Bank and trade against that. The bonds are stored in a different form as part of their monetary policy, the functions in this sort of basket is part of the Fed's function with international settlements.
NotSammyHagar 10y ago
The obvious reason why the rmb could become a global currency is lots of companies buy and sell stuff from china, imports and exports, so they come to accumulate it. They want to trade it for other things, so the rmb comes to be used and more. Of course it doesn't float free, and the country limits transactions across borders. But I could see it slowly becoming more used as a universal currency, if they stop controlling the exchange rate and stop limiting capital flows. Those are 2 big changes, but the more they slowly relax those controls, the more likely they will succeed.

kchoudhu 10y ago

TBonds are hardly illiquid during crises -- as a matter of fact, they are among a select few securities that trade heavily when bad things happen. Source: looked on in dismay as the (legacy) treasury trading system at an investment keeled over and died the day after Lehman ate shit.

erichocean 10y ago

> So the dollar, in its current form, was born a gold certificate, that then transmuted into a currency. It's convertible into (crude) oil today ("petro dollars"), although obviously, that varies quite a bit in price (technically, so does the price of an ounce of gold).

runeks 10y ago
You're confusing two things. Before 1971, the US Dollar was worth exactly 1/35th troy ounce of gold. Foreign central banks could redeem their dollars for this amount of gold. The USD gold price did not vary back then. The USD gold price only started floating after 1971, which is just a fancy way to say that the market (surprisingly!) didn't consider a 0% haircut acceptable for a defaulted debt obligation. Oil being traded primarily in USD doesn't make the USD backed by oil, just as the dollar is no longer backed by gold even though gold is primarily traded in dollars.
- erichocean 10y ago
  I'm arguing that just like gold pre-1971 "stabilized" the price of the US dollar, post 1971, oil is serving the same stabilization function: setting a "real world value" for the US dollar. > Since the agreements of 1971 and 1973, OPEC oil is exclusively quoted in US dollars. This created a permanent demand for dollars on the international exchange markets.[0] [0] https://en.wikipedia.org/wiki/Petrocurrency https://en.wikipedia.org/wiki/Petrocurrency
- redcalx 10y ago
  > Before 1971, the US Dollar was worth exactly 1/35th troy ounce of gold Sort of. The US gov committed itself legally to redeeming gold at a fixed stated price. It was an untenable position since by 1971 there wasn't anywhere near enough gold to back all of the dollars in existence. A floating gold price would have been higher than the legally defined price, and this created an arbitrage situation whereby one could exchange dollars for gold at the legally defined price, sell gold on an open market for more money, buy dollars, and repeat. This arrangement ends when the US gov runs out of gold or goes bust... or figures out beforehand what the end states are and annuls the law in question, which is what Nixon did. The root of the problem was the increase in dollar money supply without a matched increase in gold reserves, noting that you only have to match narrow (M0) money, rather than broad money from fractional reserve banking (i.e. loans). Why? because most broad money is inaccessible, it's a number in a ledger, to get actual dollars to redeem you have to withdraw that money, and to do that at scale requires banks to claw back loaned money, thus reducing broad money supply right to back nothing, leaving just M0 money (i.e. dollars created directly by the central bank).

banku_brougham 10y ago

treasury bonds are not illiquid at times of crisis, we recently had one and the treasury market operated smoothly throughout. all the other markets however...

banku_brougham 10y ago

treasury bonds are not illiquid at times of crisis, we recently had one and the treasury market operated smoothly throughout. all the other markets however...