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The dollar is highly valuable largely from the promise of its central banks to repay debts - for which the US has a strong reputation of upholding. Now that the

The dollar is highly valuable largely from the promise of its central banks to repay debts - for which the US has a strong reputation of upholding. Now that the Fed is playing games with people's expectations of their plans for interest rates (to scare the market and lower demand without raising rates in proportion), they are also poised to devalue the repayment of their loans while indicating that they will not devalue those repayments. So in combination with inflation that will not slow down as much as it needs to, the trust which made the U.S. dollar the global reserve currency in the first place is also eroding. Inspired by the final statement from the article: > "Inflation that is stable and modestly above 2% might be tolerable for the real economy, but there is no guarantee the Fed’s stance today can deliver even that. And breaking promises has consequences. It hurts long-term bondholders, including foreign central banks and governments which own $4trn-worth of Treasury bonds. (A decade of 4% inflation instead of 2% would cut the purchasing power of money repaid at the end of that period by 18%.) It might add an inflation risk premium to America’s cost of borrowing. And if even America broke its inflation promises in tough times, investors might worry that other central banks—many of which are looking over their shoulders at indebted governments—would do the same. In the 1980s the recessions brought about by Paul Volcker’s Fed laid the foundations for inflation-targeting regimes worldwide. Every month inflation runs too hot, part of that hard-won credibility ebbs away."

deltarholamda 4y ago
I've read a lot of opinions from credible people who take opposite positions on every conceivable issue in regards to the economy. The state of the dollar as the reserve currency for the world is just one of many examples. At a certain point it starts to feel like nobody really knows for sure, and they're largely just guessing. It's a weird feeling to understand that there's little that can be done, because so many of the issues we're dealing with were locked in carbonite many decades ago, e.g. Social Security unfunded liabilities. It's like a game of musical chairs, only there is only one chair left, but 27 people are still circling around it, and every few seconds another person shows up to play.
- phkahler 4y ago
  >> Social Security unfunded liabilities. Social Security isn't unfunded. The main issue there is that it invests the money in US treasury bonds. As those bonds mature they reinvest in new bonds. That's all find and dandy, but it creates a system where SS is constantly "buying" bonds and the treasury is constantly "paying" SS. This has historically looked like a flow of money from SS into the treasury. As the boomers retire, the net flow will have to reverse, meaning the treasury will have to pay back a bunch of money that it borrowed from the Social Security administration. That's fine, they have several trillion dollars invested. The big issue is that congress has made a habit of spending other peoples money and sees a huge hole in their budget because of this situation. Social Security is not an "entitlement" it's more like a contract and congress keeps wanting to default on their end of the deal. The amount a person gets from SS is not much more than their lifetime contributions - the average rate of return for an individual is very low, but that's not what the "problem" is.
puranjay 4y ago
Wont the reserves seizure they pulled off with Russia also contribute to this trust deficit?
- deleted 4y ago
  [deleted]
PKop 4y ago
I'd add freezing of Russian reserves worth hundreds of billions of dollars to the incremental loss of faith in the $.
splistud 4y ago

deltarholamda 4y ago

I've read a lot of opinions from credible people who take opposite positions on every conceivable issue in regards to the economy. The state of the dollar as the reserve currency for the world is just one of many examples. At a certain point it starts to feel like nobody really knows for sure, and they're largely just guessing. It's a weird feeling to understand that there's little that can be done, because so many of the issues we're dealing with were locked in carbonite many decades ago, e.g. Social Security unfunded liabilities. It's like a game of musical chairs, only there is only one chair left, but 27 people are still circling around it, and every few seconds another person shows up to play.

phkahler 4y ago
>> Social Security unfunded liabilities. Social Security isn't unfunded. The main issue there is that it invests the money in US treasury bonds. As those bonds mature they reinvest in new bonds. That's all find and dandy, but it creates a system where SS is constantly "buying" bonds and the treasury is constantly "paying" SS. This has historically looked like a flow of money from SS into the treasury. As the boomers retire, the net flow will have to reverse, meaning the treasury will have to pay back a bunch of money that it borrowed from the Social Security administration. That's fine, they have several trillion dollars invested. The big issue is that congress has made a habit of spending other peoples money and sees a huge hole in their budget because of this situation. Social Security is not an "entitlement" it's more like a contract and congress keeps wanting to default on their end of the deal. The amount a person gets from SS is not much more than their lifetime contributions - the average rate of return for an individual is very low, but that's not what the "problem" is.

puranjay 4y ago

Wont the reserves seizure they pulled off with Russia also contribute to this trust deficit?

deleted 4y ago
[deleted]

PKop 4y ago

I'd add freezing of Russian reserves worth hundreds of billions of dollars to the incremental loss of faith in the $.

splistud 4y ago