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As long as much of the world’s trade is settled in US dollars, there is a demand for them, and some demand for US treasuries. The merry-go-round of the Fed inc

As long as much of the world’s trade is settled in US dollars, there is a demand for them, and some demand for US treasuries. The merry-go-round of the Fed increasing the money supply and buying US government debt with the newly created money can keep going for a while, but it will lead to a steady decline in the value of the dollar vs other currencies and some official inflation over time, as the cost of imported goods rises. And there is already high inflation in other areas not measured in official inflation. The other component of inflation is increasing wages, but I don’t see that happening soon. In terms of government debt - while the nominal value of US government debt rises, some of it is also somewhat eroded as the real value of the dollar decreases. So it looks like the plan is to monetise the debt, at least somewhat. I am not sure if paying the government debt back over time through increased taxes is on the agenda - I doubt it. There is a trend of increasing de-dollarisation of world trade, which can already be seen in trade between countries like Russia and China moving to using their own currencies and the euro for a larger portion of trade. I think in the future more world trade will be settled with some type of bancor type basket of currencies where USD is one component, rather than the only component.

xxpor 6y ago
Folks like to talk about what really keeps the world at peace (relatively speaking compared to pre-ww2), and while I think nukes are a large part of it, another huge part is dollar based settlement and the absolute devestating sanctoning power the US derives from it. That isn't to say sanctions are morally pure: they exact a huge cost on the regular people who live in the countries subject to them. However, they're still probably better than being bombed. The more things that are not settled in dollars means the reduced effectiveness of sanctions and the higher likelyhood conflicts will escalate into hot wars. On the other hand, the US not being able to dictate to everyone else is probably a good thing itself, so I'm not sure on net what the best outcome is.
- cercatrova 6y ago
  Pax Americana is the term you're looking for.
- dharma1 6y ago
  Absolutely, the result of de-dollarisation of world trade will be a shift in the world’s power dynamics. I think it’s pretty inevitable by now. I hope we have learned enough about history to be able to have economic competition/conflict without military conflict. As a silver lining for some parts of America - a weaker dollar together with onshoring of some industries probably means some jobs will return to the US.
  - xxpor 6y ago
    I do wonder what will really end up as the alternative though. The yuan and euro both have major structural issues of their own.
    - toomuchtodo 6y ago
      A synthetic basket of the top currencies. Such a product exists (SDR aka Special Drawing Rights), but it’s niche. When you consider securities indices (SPY, for example), it’s not that outlandish. https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/14/51/Special-Drawing-Right-SDR https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/14...
      - skissane 6y ago
        > Such a product exists (SDR aka Special Drawing Rights), but it’s niche The primary reason that SDRs are niche is that only governments are allowed to hold them. If the IMF allowed them to be bought and sold by private investors they might see more use.
        toomuchtodo 6y ago
        Agreed, but I'm unaware if there is any regulatory constraint preventing commercial financial entities from offering a similar product. The IMF doesn't need to provide approval if there is no regulation preventing financial institutions from providing the same currency mix to retail and institutional as a product (with the provider managing the abstraction between individual currencies and the basket).
throw0101a 6y ago
> As long as much of the world’s trade is settled in US dollars, there is a demand for them, and some demand for US treasuries. Which is also why the US tends to have a trade deficit: > The Triffin dilemma or Triffin paradox is the conflict of economic interests that arises between short-term domestic and long-term international objectives for countries whose currencies serve as global reserve currencies. This dilemma was identified in the 1960s by Belgian-American economist Robert Triffin,[1] who pointed out that the country whose currency, being the global reserve currency, foreign nations wish to hold, must be willing to supply the world with an extra supply of its currency to fulfill world demand for these foreign exchange reserves, thus leading to a trade deficit. * https://en.wikipedia.org/wiki/Triffin_dilemma https://en.wikipedia.org/wiki/Triffin_dilemma
nly 6y ago
Printing dollars to buy treasuries won't work forever. China has already started tilting away from treasuries and holds almost a trillion dollars less than they did a few years ago. Now there is talk of the Fed issuing notes with durations longer than 30 years... There will be consequences eventually
- dcolkitt 6y ago
  The counterpoint is Japan, which has 280% debt-to-GDP ratios (about double the US), and is still selling government bonds at 0% interest rates. I'm not saying demand is infinite, but it very well could be significantly higher than the current supply. In particular older demographics tend to heavily favor low interest rates and high money supplies. Old people tend to have high savings, and are risk-averse enough that they'll park it in liquid sovereign bonds even at negative real yields. And the continuing aging of American and world demographics isn't changing for the next century.
  - Aperocky 6y ago
    The bank of Japan literally to hold half of that. It's just printing cash with extra steps.
    - ArnoVW 6y ago
      Exactly. Once you factor in "who owns that debt" the picture changes. See 'external debt by country' https://en.m.wikipedia.org/wiki/List_of_countries_by_external_debt https://en.m.wikipedia.org/wiki/List_of_countries_by_externa...
tudorconstantin 6y ago
> but it will lead to a steady decline in the value of the dollar vs other currencies. That would be true if the other currencies weren't printed like crazy also. Have a look at past year's increase in M2 circulating supply of the EUR or GBP. They're very similar to the one of the USD (percentage wise). That might be the reason why the dollar didn't collapse compared to them. The dollar (and the other currencies) collapsed though, when compared to assets that didn't increased in quantity at the same pace: real estate, stocks, gold and bitcoin. None of which is part of the CPI, hence the low reported inflation in the developed world economies.

xxpor 6y ago

Folks like to talk about what really keeps the world at peace (relatively speaking compared to pre-ww2), and while I think nukes are a large part of it, another huge part is dollar based settlement and the absolute devestating sanctoning power the US derives from it. That isn't to say sanctions are morally pure: they exact a huge cost on the regular people who live in the countries subject to them. However, they're still probably better than being bombed. The more things that are not settled in dollars means the reduced effectiveness of sanctions and the higher likelyhood conflicts will escalate into hot wars. On the other hand, the US not being able to dictate to everyone else is probably a good thing itself, so I'm not sure on net what the best outcome is.

cercatrova 6y ago
Pax Americana is the term you're looking for.
dharma1 6y ago
Absolutely, the result of de-dollarisation of world trade will be a shift in the world’s power dynamics. I think it’s pretty inevitable by now. I hope we have learned enough about history to be able to have economic competition/conflict without military conflict. As a silver lining for some parts of America - a weaker dollar together with onshoring of some industries probably means some jobs will return to the US.
- xxpor 6y ago
  I do wonder what will really end up as the alternative though. The yuan and euro both have major structural issues of their own.
  - toomuchtodo 6y ago
    A synthetic basket of the top currencies. Such a product exists (SDR aka Special Drawing Rights), but it’s niche. When you consider securities indices (SPY, for example), it’s not that outlandish. https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/14/51/Special-Drawing-Right-SDR https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/14...
    - skissane 6y ago
      > Such a product exists (SDR aka Special Drawing Rights), but it’s niche The primary reason that SDRs are niche is that only governments are allowed to hold them. If the IMF allowed them to be bought and sold by private investors they might see more use.
      - toomuchtodo 6y ago
        Agreed, but I'm unaware if there is any regulatory constraint preventing commercial financial entities from offering a similar product. The IMF doesn't need to provide approval if there is no regulation preventing financial institutions from providing the same currency mix to retail and institutional as a product (with the provider managing the abstraction between individual currencies and the basket).

throw0101a 6y ago

> As long as much of the world’s trade is settled in US dollars, there is a demand for them, and some demand for US treasuries. Which is also why the US tends to have a trade deficit: > The Triffin dilemma or Triffin paradox is the conflict of economic interests that arises between short-term domestic and long-term international objectives for countries whose currencies serve as global reserve currencies. This dilemma was identified in the 1960s by Belgian-American economist Robert Triffin,[1] who pointed out that the country whose currency, being the global reserve currency, foreign nations wish to hold, must be willing to supply the world with an extra supply of its currency to fulfill world demand for these foreign exchange reserves, thus leading to a trade deficit. * https://en.wikipedia.org/wiki/Triffin_dilemma https://en.wikipedia.org/wiki/Triffin_dilemma

nly 6y ago

Printing dollars to buy treasuries won't work forever. China has already started tilting away from treasuries and holds almost a trillion dollars less than they did a few years ago. Now there is talk of the Fed issuing notes with durations longer than 30 years... There will be consequences eventually

dcolkitt 6y ago
The counterpoint is Japan, which has 280% debt-to-GDP ratios (about double the US), and is still selling government bonds at 0% interest rates. I'm not saying demand is infinite, but it very well could be significantly higher than the current supply. In particular older demographics tend to heavily favor low interest rates and high money supplies. Old people tend to have high savings, and are risk-averse enough that they'll park it in liquid sovereign bonds even at negative real yields. And the continuing aging of American and world demographics isn't changing for the next century.
- Aperocky 6y ago
  The bank of Japan literally to hold half of that. It's just printing cash with extra steps.
  - ArnoVW 6y ago
    Exactly. Once you factor in "who owns that debt" the picture changes. See 'external debt by country' https://en.m.wikipedia.org/wiki/List_of_countries_by_external_debt https://en.m.wikipedia.org/wiki/List_of_countries_by_externa...

tudorconstantin 6y ago

> but it will lead to a steady decline in the value of the dollar vs other currencies. That would be true if the other currencies weren't printed like crazy also. Have a look at past year's increase in M2 circulating supply of the EUR or GBP. They're very similar to the one of the USD (percentage wise). That might be the reason why the dollar didn't collapse compared to them. The dollar (and the other currencies) collapsed though, when compared to assets that didn't increased in quantity at the same pace: real estate, stocks, gold and bitcoin. None of which is part of the CPI, hence the low reported inflation in the developed world economies.