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Creating a parallel financial system will take decades if it's even feasible at all. The entire global economy relies on the US/UK/EU based financial system and
by esics6A 5y ago
Creating a parallel financial system will take decades if it's even feasible at all. The entire global economy relies on the US/UK/EU based financial system and has evolved around it for over 75 years. It's not something that can be simply torn out and have a drop in replacement like a software system.
Any alternative system would likely be based in China and that would mean that currencies would be backed by China's debt. China would need to take on debt levels that would leave China in an impossible situation. It would mean crushing levels of taxation that would drain China's wealth to the benefit of nations like Russia. There would be a major imbalance in payments. Russia and other nations would make net gains and China would have net losses. Even seizing assets in these nations China would need to sell the assets internationally using the same US/UK/EU system that provides the liquidity and access to markets.
It would require China to become even more reliant on business with Western nations to fund this system making the whole thing illogical and circular in structure. If the Western nations pulled out of Chinese manufacturing it would mean the US/UK/EU could collapse the whole parallel system over time and make it insolvent.
- jl6 5y agoCan you explain why “owning” the financial system is such a burden? US/UK/EU do not seem to suffer for it.
- mooreds 5y agoThis may be a useful link: https://carnegieendowment.org/chinafinancialmarkets/56856 https://carnegieendowment.org/chinafinancialmarkets/56856 tl;dr: If you want to "own" the financial system, you need to be willing to be an importer of last resort, follow the rule of law, have deep financial markets, a freely exchangable currency, and freely tradeable debt. You also have to be willing to accept either rising debt or unemployment. These can cause pain to countries who have them. Here's a quote from the piece: "The one thing both sides agreed on, however, was that the US enjoyed an advantage because of the reserve currency status of the US dollar, with some people even assuming that the US was somehow repressing the ability of Europe, China and Japan to gain the advantage for themselves. No matter how many times the US engaged in policies that tried to shift the benefits to those countries, or these countries engaged in policies that prevented them from receiving the benefits, it was somehow clear to both sides that reserve currency status is a wonderful thing that everyone wants but only the US is allowed to have." (Emphasis mine.)
- spiralx 5y agoThe status of the USD has also been called the "exorbitant privilege" in part because times of crisis lead to a strong USD and hurts US companies - even when the crisis is entirely unrelated to the US. US policy for well over a decade now has been to encourage other reserve currencies to reduce this exposure. https://www.brookings.edu/blog/ben-bernanke/2016/01/07/the-dollars-international-role-an-exorbitant-privilege-2/ https://www.brookings.edu/blog/ben-bernanke/2016/01/07/the-d...
- kelseyfrog 5y agoTesting my (US-centric) understanding here. But I'll argue that the US does suffer for global dollar dominance in that there is necessarily a US trade deficit whose primary results are the exporting of US manufacturing overseas and the creation of the productivity-wage gap that started in the 1970s.
- deleted 5y ago[deleted]
- spiralx 5y agoBeing the main reserve currency (global reserves are ~60% USD, ~30% Euro and 9% GBP/JPY/CAD) also means local financial crises lead to dollar buying which then affects the price of USD and thus US imports and exports. This is in part why the US has had a policy of discouraging the USD's status as the sole reserve currency - global reserves used to be 80% or more USD.
- kelseyfrog 5y agoInteresting! Would it be fair to say that on one hand the US is incentivized to have the US dollar maintain its role as the main reserve currency because it enables access to lower lending rates, but on the other hand too much dollar dominance exposes the US to greater risk?
- spiralx 5y agoNo, the US gets low rates because of the stability and strength of its economy i.e. both reserve currency use and low interest rates are effects, not causes. https://www.brookings.edu/blog/ben-bernanke/2016/01/07/the-dollars-international-role-an-exorbitant-privilege-2/ https://www.brookings.edu/blog/ben-bernanke/2016/01/07/the-d...
- Ambolia 5y agoIt looks like China has a working alternative since 2015 [1], not sure regarding your other questions if it's in their interests to expand it or not. [1] https://www.scmp.com/economy/china-economy/article/3168684/what-chinas-swift-equivalent-and-could-it-help-beijing-reduce https://www.scmp.com/economy/china-economy/article/3168684/w...
- jopsen 5y agoBut when China trades with Russia, they often trade in Euro or Dollar.. Would you trust the yen? Or the ruble?
- waffleiron 5y agoThe yen is Japanese, I assume you are thinking renminbi/yuan.
- jopsen 5y agoAh, sorry yes!
- from 5y agoThe IMF trusts the yuan enough to hold reserves of it (https://en.wikipedia.org/wiki/Special_drawing_rights https://en.wikipedia.org/wiki/Special_drawing_rights).
- deleted 5y ago[deleted]
- anjel 5y agoI wouldn't equate IMF currency holdings with some sort of endorsement as to how that currency is managed. https://www.reuters.com/article/venezuela-imf-reserves-idUSL1N0ZP0WH20150709 https://www.reuters.com/article/venezuela-imf-reserves-idUSL...
- 5y ago
- FpUser 5y agoI think this is FUD. The world has lived without reserved currency controlled by a single country before and it will do it again.
- chemeng 5y agoHas it? It’s pretty much been a gold-backed currency making gold the defacto reserve currency. Curious whether the USD has been the only fiat reserve currency.
- FpUser 5y agoYes it has. Gold was not controlled by a single country.
- spiralx 5y agoGlobal currency reserves are currently ~60% USD, ~30% EUR and 9% GBP/JPY/CAD, USD use as a reserve currency has been trending down for decades now. As for previous reserves I would guess before the Euro the German Deutschmark and French Franc would both have been used for reserves instead.
- lostcolony 5y agoAt a time with far less globalization. The world will live, sure, but it would definitely be a major change if the movement of goods around the world also necessitated arbitrage due to currency fluctuations in whatever local currency was being used to negotiate its passage at each stage.