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The reserve currency isn't where power lies. It's convenient (at most) for people in the USA to have the dollar as the de facto reserve currency. It's also co
by gumby 4y ago
The reserve currency isn't where power lies.
It's convenient (at most) for people in the USA to have the dollar as the de facto reserve currency. It's also convenient for people outside the US to have a dominant reserve currency -- having a small number larger than 1 would be OK, but not especially convenient and in the end would still converge back to the largest one, which would be the incumbent.
The convenience for the US is simply that if you do any foreign transactions you can easily see their value. Also, domestically, if you borrow you have a lot of predictability in interest rates. That's basically it.
If you are, say, Australian and use aussie dollars the same is basically true! If you're a very small country, or your economy is a basket case and there is no real lending in your currency then the reserve currency doesn't help you much -- you have to borrow in some foreign currency so currency fluctuations hurt can hurt (or help) you, and you have no control over it.
The USD is a good choice because foreign exchange is a small part of the size of the total amount of money, and the amount doesn't fluctuate a lot. It might feel like it does when you live in the states, but really it's like swimming in the ocean: there's some surface chop, but the big waves have such long wavelength you don't even notice them.
The real power is in control of the banking forex interchanges -- you can see them being used against Russia and Norks, for example. In reality the US doesn't really have a lot of control over them except by persuading other important economies to go along. It's like a very weak form of nuclear weapons: their value comes from not using them. And for forex -- well let's just say the US control over that is negligible, specifically because it's the reserve currency. So not much of a weapon at all.
It's pretty easy to not use the dollar as an exchange currency -- think of hawala, with perhaps, say, its own private set of AED/PKR exchange rates (notice the plural!). Or china and iran selling oil without the dollar. These work for small sums, but at the end of the day people work out the exchange rates...by comparing vs dollars, the same way a translation between Maltese and Estonian probably goes through English or French. This is why having more than one will regress back to the incumbent barring a major, and very slow (decades/centuries scale), problem.
- rcme 4y agoThere is a huge benefit to being the reserve currency: you can issue way more debt than you would otherwise be able to. That’s a massive advantage. Unfortunately, in the US, we use that advantage to cut taxes for the rich rather than invest back into our society.
- gumby 4y agoThat's not a property of being a reserve currency; if anything it's the opposite.. The US doesn't even have the highest ratio of debt to GDP. For example, Japan has 200%, borrowed in JPY. The US can afford to have a lot of debt because it has enormous, highly liquid markets without currency controls, so people want to do transactions with it. So does Japan, which is why it works out for them. To the degree that reserve status drives debt at all: the US has to issue some debt anyway because that's how foreign countries hold dollar reserves for foreign exchange. But the US is able to issue more than is needed for that (for the reasons above) so this is irrelevant. But it's not a case that being a reserve currency allows you to issue more debt than others can.
- rcme 4y agoThe U.S. is 12th in countries ranked by debt-to-GDP. Only Venezuela, Japan, Sudan, Greece, Lebanon, Cabo Verde, Italy, Libya, Portugal, Singapore, and Bahrain. Not exactly the 11 healthiest economies I’ve ever seen. Being the reserve currency allows the US to borrow at much cheaper rates than would otherwise be possible, which allows it to take on more debt without affecting economic growth. The debt to GDP ratio doesn’t matter.
- gumby 4y agoSo what -- you are just asserting this has something to do with its role as a reserve currency. Again, how does it help? > Being the reserve currency allows the US to borrow at much cheaper rates than would otherwise be possible 26 countries borrow for less than the US, and from your list those 26 include Japan (the cheapest!), Singapore and Portugal. The US is indeed in the top 1/3, but that hardly supports your claim. In the end it's simply no big deal either way. Ego-stroking for some, infuriating to others, but at the end of the day just a snooze.
- rcme 4y ago> 26 countries borrow for less than the US This is so misleading. The U.S. is intentionally raising the rate at which it borrows to slow down its own economy. Also, the rate at which you borrow is only half the equation. You also need to consider the amount being borrowed.