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What interests me is long-term, which nation/currency is optimal as reserve currency?(assuming no political/military factors) Like theoretically, assume all co

by lmpdev 1y ago

What interests me is long-term, which nation/currency is optimal as reserve currency?(assuming no political/military factors) Like theoretically, assume all countries can’t collapse. Should the reserve currency be primarily the countries with the most people? (think China/India/Indonesia/Nigeria) Most natural resources? (think Australia, China or Russia) Historical power? (UK) Linguistic network? (France) Can we even derive a normative answer? Do non-national currencies differ to national ones? I’m not the biggest fan of economists, but I feel like research does need to be done here…

impossiblefork 1y ago
Personally I believe that the days of the reserve currencies are close to over, and that they will go away with the going away of the oil trade. The present situation is one where if one wants oil, which everybody does and has nothing to trade directly with the oil countries, must export something to someone else who either exports or sells something to the oil countries, or who in turn exports or sells something to someone who exports or sells something to the oil countries. I believe that once this ends trade itself will become less important. Today it's mandatory to get oil, but once we don't need oil, the export of goods to acquire dollars to buy oil becomes optional. Consequently I see the future as one in which people will manufacture what they themselves need or want, instead of what sells abroad.
- hshdhdhj4444 1y ago
  Most countries can’t produce what they need. And even when they can, comparative advantages are still a thing. That being said, I do agree that with a reduction in the need for oil, the importance and use of a reserve currencies will reduce even if they don’t go away fully.
  - impossiblefork 1y ago
    Yes, but if you're not manufacturing a bunch of stuff for export, then you can also dedicate the resources used for that to build what you actually want.
- spangry 1y ago
  Won’t the reserve currency simply switch to being “backed” by some other fundamental productive input? And by switch I mean the world’s most militarily powerful country will ensure that countries producing this fundamental input denominate their exports of it in their currency, if they don’t want to risk being “liberated”. Personally, my money is on semi-conductors. It’s currently sitting at #4 in total international trade value, behind automobiles (which are increasingly reliant on semi-conductor inputs), refined oil, and crude oil. Certainly casts a new light on contention over Taiwan.
  - impossiblefork 1y ago
    I don't think that can be done. A whole lot of countries, even some quite small ones, so it won't be possible to directly bully them all. Secondly, these technologies usually have stages developed by different people. Microchips are a chain: different components from Europe, Japan and the US are put together into actually usable factories in Taiwan, South Korea, the US etc. The whole chain is needed. Obviously the US recently succeded in some bullying against Taiwan, but I think it was mostly about demand, threats of tariffs, that kind of thing, and I think that kind of threat again matters only because exports are necessary because of the oil trade. It'll be harder to bully with tariffs when trade matters less. I also think bullying countries capable of doing useful semiconductor work is less possible, and I also think countries like China will catch up, so that much will be commoditized. I see thing as being like the end of the bronze age. With iron there's nothing to control, so there's no path to power, with decentralization and independence as the result.
0xDEAFBEAD 1y ago
Given that minting the reserve currency grants a nation economic privileges (in terms of being able to lend at a lower interest rate and having foreigners want to sell you things so as to get your currency), perhaps one could argue for a populous developing economy like India.
- neilwilson 1y ago
  That would be putting the cart before the horse. Foreigners sell you things in exchange for your currency, because they want to hold the currency. Once a currency is usable for payment in taxes, it can be analysed like any other commodity. There are no 'reserve currencies'. Anybody holding a financial asset in a denomination outside its home physical zone area is a 'reserve'. They are operationally no different from hoarding diamonds or gold bars.
  - spangry 1y ago
    There’s one crucial difference - countries can’t print new diamonds or gold bars at will. Whenever the US prints more dollars, it transfers value from hoarders of US dollars to themselves - they’re levying a stealth tax via global oil price inflation. Other countries do not have this ability - if they print more of their own currency it just leads to domestic inflation. The US can effectively tax the world as long as they use their military power to ensure oil producing countries denominate their oil exports in US dollars. The reserve currency system is a stealth tribute system.
vasco 1y ago
All the things you mention could be used to decide make no sense at all because you discounted "political and military factors", which are almost all that matters in choosing a reserve currency. It's like asking which is the best CPU when you discount speed, price and energy consumption.
- satyrun 1y ago
  It is really even more than that because of the depth of the US bond market. Nation states need to be able to make huge transactions without any one else holding the currency feeling it. That is what makes the reserve currency the reserve currency. That can't be done without a massively liquid bond market and no one else is even close to the US. Then the network of military bases and military power is just another layer on top of the US bond market. Then on top of that the top competitor has capital controls.
- lmpdev 1y ago
  I disagree There is signal under the noise of political and military factors Political and military factors right now are the primary concerns But in peace time, or with a long enough view (centuries and millennia) the question of what makes a good reserve currency is a question worth addressing
  - vasco 1y ago
    In peace time politics and military are exactly as important as during war, because the threat of war never goes away. This has been true as long as we've had currency, which is inextricably linked to military power. You need the power of the state behind the currency for it to have any value and for people to use it as currency, as well as to prevent forgery.
flessner 1y ago
Interesting question, here are my few cents. Exports are more "expensive" for countries with reserve currency status. This is a problem for countries that export many primary and "low-tech" secondary sector products. Countries that export many "high-tech" secondary sector products can usually still thrive. This leaves us with the usual suspects: US, China, Germany (-> EU) and Japan.
throw0101a 1y ago
> What interests me is long-term, which nation/currency is optimal as reserve currency? Perhaps none, as Keynes suggested at the actual Bretton Woods conference: * https://en.wikipedia.org/wiki/Bancor https://en.wikipedia.org/wiki/Bancor

by lmpdev 1y ago

impossiblefork 1y ago

Personally I believe that the days of the reserve currencies are close to over, and that they will go away with the going away of the oil trade. The present situation is one where if one wants oil, which everybody does and has nothing to trade directly with the oil countries, must export something to someone else who either exports or sells something to the oil countries, or who in turn exports or sells something to someone who exports or sells something to the oil countries. I believe that once this ends trade itself will become less important. Today it's mandatory to get oil, but once we don't need oil, the export of goods to acquire dollars to buy oil becomes optional. Consequently I see the future as one in which people will manufacture what they themselves need or want, instead of what sells abroad.

hshdhdhj4444 1y ago
Most countries can’t produce what they need. And even when they can, comparative advantages are still a thing. That being said, I do agree that with a reduction in the need for oil, the importance and use of a reserve currencies will reduce even if they don’t go away fully.
- impossiblefork 1y ago
  Yes, but if you're not manufacturing a bunch of stuff for export, then you can also dedicate the resources used for that to build what you actually want.
spangry 1y ago
Won’t the reserve currency simply switch to being “backed” by some other fundamental productive input? And by switch I mean the world’s most militarily powerful country will ensure that countries producing this fundamental input denominate their exports of it in their currency, if they don’t want to risk being “liberated”. Personally, my money is on semi-conductors. It’s currently sitting at #4 in total international trade value, behind automobiles (which are increasingly reliant on semi-conductor inputs), refined oil, and crude oil. Certainly casts a new light on contention over Taiwan.
- impossiblefork 1y ago
  I don't think that can be done. A whole lot of countries, even some quite small ones, so it won't be possible to directly bully them all. Secondly, these technologies usually have stages developed by different people. Microchips are a chain: different components from Europe, Japan and the US are put together into actually usable factories in Taiwan, South Korea, the US etc. The whole chain is needed. Obviously the US recently succeded in some bullying against Taiwan, but I think it was mostly about demand, threats of tariffs, that kind of thing, and I think that kind of threat again matters only because exports are necessary because of the oil trade. It'll be harder to bully with tariffs when trade matters less. I also think bullying countries capable of doing useful semiconductor work is less possible, and I also think countries like China will catch up, so that much will be commoditized. I see thing as being like the end of the bronze age. With iron there's nothing to control, so there's no path to power, with decentralization and independence as the result.

0xDEAFBEAD 1y ago

Given that minting the reserve currency grants a nation economic privileges (in terms of being able to lend at a lower interest rate and having foreigners want to sell you things so as to get your currency), perhaps one could argue for a populous developing economy like India.

neilwilson 1y ago
That would be putting the cart before the horse. Foreigners sell you things in exchange for your currency, because they want to hold the currency. Once a currency is usable for payment in taxes, it can be analysed like any other commodity. There are no 'reserve currencies'. Anybody holding a financial asset in a denomination outside its home physical zone area is a 'reserve'. They are operationally no different from hoarding diamonds or gold bars.
- spangry 1y ago
  There’s one crucial difference - countries can’t print new diamonds or gold bars at will. Whenever the US prints more dollars, it transfers value from hoarders of US dollars to themselves - they’re levying a stealth tax via global oil price inflation. Other countries do not have this ability - if they print more of their own currency it just leads to domestic inflation. The US can effectively tax the world as long as they use their military power to ensure oil producing countries denominate their oil exports in US dollars. The reserve currency system is a stealth tribute system.

vasco 1y ago

All the things you mention could be used to decide make no sense at all because you discounted "political and military factors", which are almost all that matters in choosing a reserve currency. It's like asking which is the best CPU when you discount speed, price and energy consumption.

satyrun 1y ago
It is really even more than that because of the depth of the US bond market. Nation states need to be able to make huge transactions without any one else holding the currency feeling it. That is what makes the reserve currency the reserve currency. That can't be done without a massively liquid bond market and no one else is even close to the US. Then the network of military bases and military power is just another layer on top of the US bond market. Then on top of that the top competitor has capital controls.
lmpdev 1y ago
I disagree There is signal under the noise of political and military factors Political and military factors right now are the primary concerns But in peace time, or with a long enough view (centuries and millennia) the question of what makes a good reserve currency is a question worth addressing
- vasco 1y ago
  In peace time politics and military are exactly as important as during war, because the threat of war never goes away. This has been true as long as we've had currency, which is inextricably linked to military power. You need the power of the state behind the currency for it to have any value and for people to use it as currency, as well as to prevent forgery.

flessner 1y ago

Interesting question, here are my few cents. Exports are more "expensive" for countries with reserve currency status. This is a problem for countries that export many primary and "low-tech" secondary sector products. Countries that export many "high-tech" secondary sector products can usually still thrive. This leaves us with the usual suspects: US, China, Germany (-> EU) and Japan.

throw0101a 1y ago

> What interests me is long-term, which nation/currency is optimal as reserve currency? Perhaps none, as Keynes suggested at the actual Bretton Woods conference: * https://en.wikipedia.org/wiki/Bancor https://en.wikipedia.org/wiki/Bancor