4 ms·

I'm not educated in the economics of reserve currencies [1] so would be interested to hear what informed minds think. If we look at the top 5 reserve currencies

by wenc 6y ago

I'm not educated in the economics of reserve currencies [1] so would be interested to hear what informed minds think. If we look at the top 5 reserve currencies in the world today (USD 62%, EUR 20%, JPY 6%, GBP 4%, CNY 2%), the USD is entirely dominant but it also means that any perturbations to it might destabilize the global economy. What is the alternative? [1] https://en.wikipedia.org/wiki/Reserve_currency https://en.wikipedia.org/wiki/Reserve_currency

nine_zeros 6y ago
There is none and that's the only reason the dollar is still a reserve. The only two competing currencies who have large enough economies are Euro and Yuan. Euro can't be reserve because they are not an industrial powerhouse any longer and also a vessel of US for the most part. Yuan can't be reserve because of lack of faith in Chinese government and currency controls. The yuan still has the best shot though as many developing countries are in agony and the US has decidedly receded from the world stage, which means it's status as reserve currency is questionable at best.
- aNoob7000 6y ago
  I keep hearing people mention the Yuan as a reserve currency, but why would any country do that? China's economic and financial data reporting seems to be spotty at best. Also would you put your faith in the rule of law in a communist country? I'm not saying the United States or European Union are perfect, but I think their courts are more balanced and independent than in China.
  - econcon 6y ago
    >but why would any country do that? China's economic and financial data reporting seems to be spotty at best. If yuan is good enough for china then it's good enough for other countries with lower GDP than china. China is where mega GDP numbers are happening, it's much better to use the currency of place where services/products are actually being produced rather than places where money is coming out of thin air with clever financial engineering.
  - nine_zeros 6y ago
    > I keep hearing people mention the Yuan as a reserve currency, but why would any country do that? China's economic and financial data reporting seems to be spotty at best. Good question. And the answer to that is no serious country accepts Yuan as a reserve even after 10 years of China's GDP being number 2 in the world. People really don't trust Chinese government and it shows. The only reason the Yuan has a chance is because America chooses to not be a world leader in matters that affect the world (Paris agreement, UN, WHO etc). This leaves a power and money vacuum which disproportionately affects poorer countries. Think Sri Lanka or poorer African countries or sanctioned countries like Iran, Russia. These countries have only one country offering them development or aid or help. And that country's currency is Yuan and are happy to trade in Yuan. So slowly and steadily, yuan gets a place in their reserve mix and then becomes dominant because that's the only major country trading anything with them.
  - LatteLazy 6y ago
    If you trade a lot with a country or borrow a lot from a country it makes sense to maintain at least some reserves in that countries currency. But yeah, it makes no sense to build up reserves and run a trade surplus with them without hedging into a currency that is reliable in the long term.
  - AnimalMuppet 6y ago
    Their central banks are more independent than in China. (The courts are too, but for these purposes it's the central banks that matter.)
nickthemagicman 6y ago
Why are reserve currencies needed?
- LatteLazy 6y ago
  It's a safe place to store value and take out loans because it won't rise or fall in value a lot suddenly. It's useful for setting prices for the same reason. It's sort of the same reason you don't want to be paid or keep your money in bitcoin: you agree a salary today or you put an amount of value in today. They when you come to spend that money you suddenly find bitcoin has fallen in value... (there are other reasons too, but this is the big one)
  - thephyber 6y ago
    Those are all desirable properties of a currency. What distinguishes any given local currency from a reserve currency?
    - wenc 6y ago
      https://en.wikipedia.org/wiki/Reserve_currency https://en.wikipedia.org/wiki/Reserve_currency
    - LatteLazy 6y ago
      There is no real difference, the reserve currency is just better at those things than a local currency. Reserve currencies exist when your currency or that of your trade partner(s) is not able to do the job. This is why countries with stable currencies and small trade imbalances don't hold much in reserve currencies.
redis_mlc 6y ago
The Euro won't even exist in 5 years, if that.

by wenc 6y ago

nine_zeros 6y ago

There is none and that's the only reason the dollar is still a reserve. The only two competing currencies who have large enough economies are Euro and Yuan. Euro can't be reserve because they are not an industrial powerhouse any longer and also a vessel of US for the most part. Yuan can't be reserve because of lack of faith in Chinese government and currency controls. The yuan still has the best shot though as many developing countries are in agony and the US has decidedly receded from the world stage, which means it's status as reserve currency is questionable at best.

aNoob7000 6y ago
I keep hearing people mention the Yuan as a reserve currency, but why would any country do that? China's economic and financial data reporting seems to be spotty at best. Also would you put your faith in the rule of law in a communist country? I'm not saying the United States or European Union are perfect, but I think their courts are more balanced and independent than in China.
- econcon 6y ago
  >but why would any country do that? China's economic and financial data reporting seems to be spotty at best. If yuan is good enough for china then it's good enough for other countries with lower GDP than china. China is where mega GDP numbers are happening, it's much better to use the currency of place where services/products are actually being produced rather than places where money is coming out of thin air with clever financial engineering.
- nine_zeros 6y ago
  > I keep hearing people mention the Yuan as a reserve currency, but why would any country do that? China's economic and financial data reporting seems to be spotty at best. Good question. And the answer to that is no serious country accepts Yuan as a reserve even after 10 years of China's GDP being number 2 in the world. People really don't trust Chinese government and it shows. The only reason the Yuan has a chance is because America chooses to not be a world leader in matters that affect the world (Paris agreement, UN, WHO etc). This leaves a power and money vacuum which disproportionately affects poorer countries. Think Sri Lanka or poorer African countries or sanctioned countries like Iran, Russia. These countries have only one country offering them development or aid or help. And that country's currency is Yuan and are happy to trade in Yuan. So slowly and steadily, yuan gets a place in their reserve mix and then becomes dominant because that's the only major country trading anything with them.
- LatteLazy 6y ago
  If you trade a lot with a country or borrow a lot from a country it makes sense to maintain at least some reserves in that countries currency. But yeah, it makes no sense to build up reserves and run a trade surplus with them without hedging into a currency that is reliable in the long term.
- AnimalMuppet 6y ago
  Their central banks are more independent than in China. (The courts are too, but for these purposes it's the central banks that matter.)

nickthemagicman 6y ago

Why are reserve currencies needed?

LatteLazy 6y ago
It's a safe place to store value and take out loans because it won't rise or fall in value a lot suddenly. It's useful for setting prices for the same reason. It's sort of the same reason you don't want to be paid or keep your money in bitcoin: you agree a salary today or you put an amount of value in today. They when you come to spend that money you suddenly find bitcoin has fallen in value... (there are other reasons too, but this is the big one)
- thephyber 6y ago
  Those are all desirable properties of a currency. What distinguishes any given local currency from a reserve currency?
  - wenc 6y ago
    https://en.wikipedia.org/wiki/Reserve_currency https://en.wikipedia.org/wiki/Reserve_currency
  - LatteLazy 6y ago
    There is no real difference, the reserve currency is just better at those things than a local currency. Reserve currencies exist when your currency or that of your trade partner(s) is not able to do the job. This is why countries with stable currencies and small trade imbalances don't hold much in reserve currencies.

redis_mlc 6y ago

The Euro won't even exist in 5 years, if that.