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The US dollar’s hegemony is looking fragile
- kaliali 6y agoPick one: Hyperinflation, seizure of citizen assets, stagnant/declining business growth, or cryptocurrency
- 3np 6y agoI don't see why we can't have any combination of those
- dkjaudyeqooe 6y agoActually the Fed is well positioned to deal with a drop in demand for USD: it can make trillions of dollars disappear by adjusting its balance sheet. The recent money creation has given them a lot of flexibility going forward. They now have a huge reserve that can be used to fight inflation without having to raise interest rates sharply.
- RobertoG 6y agoIf adding trillions of dollars in reserves (QE) are not inflationary because they don't act in the real economy, taking that trillions of dollars of reserves of the system is not going to be deflationary neither.
- dkjaudyeqooe 6y agoYes, all other things being equal, but that's the point isn't it? QE in a deflationary environment and QT in an inflationary one. QE was very much inflationary and cancelled out the deflationary environment. QT will do the same thing in the other direction.
- RobertoG 6y agoQE per se is not inflationary, the only thing that does is to increase the number of reserves in the system reducing the interest rate (cheaper lending) but that doesn't have really effect if nobody is borrowing. Fiscal policy is the level that you want to use for increasing/decreasing inflation. Somebody have to spend more in the economy if you want to see inflation.
- rini17 6y agoOh, just be sure the "markets and policymakers are prepared for such a transition". /s
- hjfigkfkrkr 6y agoCryptocurrency might not be seizable, but it's also not spendable if the gov says so. Just try bartering for something with cocaine to see what I mean.
- seandoe 6y agoI know what you're saying, but that's not a great example. In the right crowd, cocaine is very fungible. So to your point, if gov makes crypto illegal will it still be difficult to use in black markets? Idk
- hjfigkfkrkr 6y agoCan you buy a house with cocaine? A car? Stuff from amazon? What if the person you sell cocaine to for dollars to spend on Amazon reports you? What if you get an IRS audit, how do you justify the funds used to buy the house? Yes, you'll be able to use crypto on black markets, but that is hardly covering all your needs.
- logicchains 6y ago>Can you buy a house with cocaine? A car? Stuff from amazon? A drug dealer certainly could.
- kaliali 6y agoIt is already legal to buy a house with Bitcoin and there are several on the market sold with Bitcoin. Unless you're snorting some right now, I'm not sure what cocaine has to do with it.
- kaliali 6y agoGovernment can't stop people from spending money and moving somewhere they can use cryptocurrency.
- HeadsUpHigh 6y agoTry using a deflationary currency for daily exchanges and see how it works out. Coins issued on top of a smart contract blockchain are a different story because they can be inflationary. The way it's goin, Ether will soon be just for gas. Crypto's real strength might just be the fact that we can issue tokens on chains that follow either a fixed inflation or adjusted for growth, essentially achieving what modern economic theory recommends, bur backed by code and thus not affected by corruption.
- _hao 6y agoThis article doesn't really say anything new. It's a matter of time the USD either shares the spotlight with other major currencies or gets replaced in time. Can't stay on top and unchallenged forever in anything and history is full of examples like this.
- Qiu_Zhanxuan 6y agoAgreed, but weaponizing the USD against other sovereign states may have backfired.
- RobertoG 6y agoIt's fascinating that they can say: "[..] the sustainability of its debt might be called into question" and this: "[..] backed by the Fed, which has unlimited capacity to issue currency in a crisis" in the same article and don't feel any cognitive dissonance. Because the dollar is used, for instance, to pay for oil, there is a strong demand for dollars outside the USA that has the effect of making USA imports cheaper. So, if the dollar lost international importance, that would put the USA in the same situation that the other nations. But going from there to the idea that the USA will have problems to pay a debt in dollars makes not sense.
- j4yav 6y agoI’m not an expert, but wouldn’t that be something like increasing supply to deal with a shortage of demand?
- RobertoG 6y agoAt the end of the day, this kind of discussion is about who have the power, "the markets" or the central banks. The answer, is obviously, the central banks. You can see it all around the world, in the current crisis, what decide the interest rate and the interest of the public debt is not "the markets" is the central banks. Otherwise you will not find demand for assets that, in some cases, have negative return. So, it's not the supply and demand in the markets what decide the price, but the policy of the monetary authorities (1). (1) - This only apply for countries that have its own floating currency.
- j4yav 6y agoThanks for the additional information.
- roenxi 6y agoNobody who lends money to the US cares that the US isn't technically defaulting. They're interested in the real value of those dollars. If someone lends the US enough dollars to buy a sandwich and gets back enough dollars for 2 pieces of bread - they don't smile ruefully and say "well, they fulfilled the letter of the contract so their debt must have been sustainable". They're going to say "the US basically defaulted! I should have seen this coming, their debt as of 2021 was totally unsustainable".
- chriselles 6y agoZipf’s Law still applies to the US Dollar, with 60% of the global currency distribution by value. But will Metcalfe’s Law kick in with the Digital Yuan over time? The Yuan has a long way to go from its current 2.5% share. But if Chinese digital superplatforms ever gain traction in the developing world, it would be relatively easy to swap the means of exchange on the platforms, especially if it offers superior purchasing power retention. Pushing Digital Yuan as part of both physical and digital One Belt, One Road efforts make sense. Perhaps the future is a battle between relative value propositions but with far lower switching costs than the Cold War. Apple versus Android, Dollar versus Yuan. Ultimately, it is the US’s game to lose far more than it is China’s game to win. But complacency kills. Especially when it falls beneath the velocity threshold of general population detection.
- the-dude 6y ago> the velocity threshold of general population detection. What?
- Arbalest 6y agoProbably most easily explained by the boiling frog I imagine.
- the-dude 6y agoThank you and siblings.
- adflux 6y agoI think he means that people are complacent when things degrade slowly
- unixhero 6y agoChina is sneaking in massive changes, which happen so slowly that complacent populations do not notice it before it is too late. This is my interpretation of what was said.
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- kristianc 6y agoPeople have been predicting the decline of US hegemony for over thirty years now. It rears its head nearly every time there’s a major US policy failure. Every time this argument is raised it’s now ‘Yes, but now is really the time.’ But why not after the Cold War, when a multipolar world was widely predicted? Or after Iraq, or the Arab Spring, or the financial crisis? If COVID really is the trigger, I’d argue that people have had a good taste of China-style authoritarian restrictions on freedom and movement over the last year, and I’d say they didn’t like it very much. It’s got to the point where in the absence of any new and compelling evidence, such claims have to be treated with a little scepticism.
- dkjaudyeqooe 6y agoAs is typical, there is an element of truth to it, but people love to make sensational claims because it gets people to read. It would be completely natural for there to be a transition to more balance between the major trading bloc currencies, namely USD, EUR and RMB, but it won't be as severe or cataclysmic as claimed, mainly because that doesn't serve anyone's interest (who is holding USD and can bring it about) and because the markets will smooth the way. The most likely outcome is that everyone will be better off and The US will lose some soft power, which is a process that has already been underway.
- twelve40 6y agoHe mentions this right here: "So, what is wrong with three world currencies – the euro, the renminbi, and the dollar – sharing the spotlight? ... US government borrowing rates would almost certainly be affected" USG owes $28 trillion, borrowing at an increasing volume. If switching to 3 reserve currencies happens as you say, rates will go up. How exactly do you service $28 trillion and beyond debt with higher rates? So no, it won't be as joyous for everyone as you suggest.
- dcolkitt 6y agoWhy would rates go higher? The Eurozone has lower rates than the US. Heck, Australia and New Zealand (not exactly global reserve currencies) have the same rates as the US. The only way that the dollars international status would meaningfully affect USG’s ability to borrow is if it was relegated to emerging markets status. All developed market currencies can borrow at sub-2% rates. That doesn’t require you to have reserve currency status.
- jokethrowaway 6y agoThis will make for the best conspiracy theories ever, if it happens Closing the economy because of fear of a virus first found next to a Chinese lab, triggering a shift in currency dominance to China?
- hjfigkfkrkr 6y agoPeople should google some (night) videos from Chinese cities like Shanghai or Wuhan. You might be shocked by how they look like. I think few in the West realize how fast China is moving.
- graeme 6y agoLike this? https://www.youtube.com/watch?v=Ff29nDLBzaA https://www.youtube.com/watch?v=Ff29nDLBzaA Looks like insomnia. China does move impressively fast, but what does this show? Everyone needs to sleep.
- hjfigkfkrkr 6y agoI was thinking more about drone video, you can see the scale better: https://youtu.be/4nrdHYL5eq8 https://youtu.be/4nrdHYL5eq8
- NicoJuicy 6y agoFancy lights
- davidy123 6y agoThis reminds me of the neon sign craze of the 50s. After the novelty wears off, it's garish. That neon was torn down in most places, thanks largely to better ideas around mixed use development where constant bright lights are a problem. People need places to feel part of society, and it's fun to visit, but living in a mall/amusement park/sports bar/Tron has negative health impacts with all the over stimulation. By now, high density, ecologically sensitive, mixed use cities that have a focus on overall quality of life, rather than dazzling, are more impressive. Chinese development can pull ahead there with a focus on transportation systems.
- graeme 6y agoThe scale is certainly impressive! I’ve seem much better use of lights in Europe though. But your point may have been largely about scale in which case I agree. They’ve moved very fast n
- jillesvangurp 6y agoThere are a few other factors not discussed in the article: 1) in terms of economic growth, China is expected to surpass the US as the biggest economy by the end of this decade. Some of these predictions have been moved forward by economists factoring in e.g. Covid and the policies of recent administrations (i.e. they had that effect apparently). So, the closer that get, the less evident it gets that we should trade using dollars. After all once that happens most trade effectively is not in dollars anymore. 2) Demographics this century are going to be interesting. China is the largest nation right now. But its population is actually shrinking and projected to dip below 1 billion by the end of this century where other countries (e.g. India and Nigeria) might end up becoming larger. The US looks like it would shrink except it is able to keep up through immigration. The same is happening in the EU. So relatively speaking, China will become smaller in the next decades even as the world population continues to grow. 3) In the past hundred years, oil has been the major driver for our economies and we've historically traded in it using dollars. However, with clean energy coming up and China not having a lot of domestic oil production as well as a massive clean energy industry, this is not likely to continue to be the case. Large parts of our transport sector are transitioning to EVs right now. So, the less important oil becomes, the less important the dollar becomes. This will also transform economies very dependent on oil right now (like the middle east). IMHO, it's not a given that the US loses its dominance. But it does need to adapt to prevent that from happening. A pan North American/European/South American block would still be an enormous portion of land and the world population. And it's culturally very homogeneous. I've not been to either but I think I'd feel a lot less of an alien in e.g. most of South America than in most of Asia where language and culture are much more different (not better or worse, just different) than what I grew up in. Unite those economies, and you have a block of countries that is mostly already maintaining friendly relations, shares a lot of values, and doing a brisk trade with each other and the rest of the world. Australia, Micronesia, and much of Africa also fit in that picture quite easily. The world is a big place. But isolationism as practiced currently is not putting us (Europeans and North Americans)on a positive path. It didn't work out that great a century ago either. The US needs to look at its past to see what worked and didn't work last century. Winning WW II and landing on the moon was not an accident. That was the US transforming itself from the failing colonial economy it used to be to a world power in about forty years and changing isolationist policy to a policy of being the world's leading economy. That had its own problems of course (and several wars) but it wasn't all that bad. If the US declines into irrelevance, it will be its own fault.
- clomond 6y agoMaybe I’ve been spending too much time on FT, the Economist, and Bloomberg but is it just me or is this pretty low quality for an economics write up in a major paper? These two things can be simultaneous true: - The USD and it’s position in the world has never been as fragile as it is now - The Renminbi / Digital Chinese Yuan has no viable path to supplanting the USD as things stand today. Until there are no more capital controls on the mainland, a free floating exchange rate (that is not controlled by the central govt.), and a trust that the central government won’t step in and devalue (or possibly weaponize in some way) the RMB, I would put my money that it will never become THE reserve currency of the world, digital or not. Digital RMB news has generally felt like lots of hype machine and PR. While it would be beneficial to the CCP, Chinese economy and Chinese businesses - I still would bet it would be mostly relegated to the utility as a medium of exchange, not as a store of value (why do $$ mainlanders want to immediately turn their RMB to pretty much anything else that’s offshore?). Unless I am missing something major and obvious here..
- nickthemagicman 6y agoCan't the US government do the same thing? Step in and devalue their currency or weaponize it? What makes the US different? Because it's trustworthy?
- Armisael16 6y agoYes, in at least this aspect. Obviously there is nothing the US couldn’t do to the dollar. Any law or policy can be passed or changed; the constitution can be amended.
- viraptor 6y agoThere's been a response to the US credit position already. It's not impossible but it does get spotted when things go wrong. https://en.wikipedia.org/wiki/United_States_federal_government_credit-rating_downgrades https://en.wikipedia.org/wiki/United_States_federal_governme... The US is "different" here, because they have to be proven wrong after many years in this position. Any other country/currency instead needs to be proven better than USD and trustworthy in a long run.
- hackeraccount 6y agoAs soon as China or potentially the EU says "I don't care if we run a trade deficit." the dollar's hegemony will go away. Or alternatively it'll go away when people in the US decide they'd be happier with Yuan or Euros in their pocket then stuff in their house. I have no clue when either of those situations will arise though.
- throwaway210222 6y agoYou also have to able to buy a lot of big ticket stuff in the new reserve currency [if it is to be]. Which is why Airbus is such a big deal — and COMAC on the horizon.
- jmull 6y agoThis is by Kenneth Rogoff, who, it seems, isn't above fudging the numbers in research to make his point. Not that that means he's wrong, but his credibility as an expert isn't good.
- ianai 6y agoSource for that statement?
- mark_l_watson 6y ago(Chess grandmaster) Kenneth Rogoff makes a good case for fighting back and trying to protect our way of life here in the US. Just my opinion, but I think that the days are long gone when it is a good strategy for us to weaponize the US dollar and act as empire. I would like to see us concentrate on culture, safe (no GMO enabled weed killers, other GMO Is OK) food production, improve our schools so that American kids are as excited to learn as the kids my wife and I saw in Africa, and rebuild strong alliances based on treating other countries fairly. We have had a free ride since the end of WW II, and I think we should appreciate that while playing the game on the board that is in front of us, with a clear eyed view of reality. I think that Rogoff’s view of reality is accurate.
- sys_64738 6y agoThe real issues for China and the Yuan is its aging and shrinking population. Plenty of other countries will rise as it falls. https://www.nytimes.com/interactive/2019/01/17/world/asia/china-population-crisis.html https://www.nytimes.com/interactive/2019/01/17/world/asia/ch...