8 ms·

I'm not an economist so someone please correct me / expand on this; I'm guessing this is kind of a "It's not a problem until it's a crisis" situation? So far o

by duttish 9mo ago

I'm not an economist so someone please correct me / expand on this; I'm guessing this is kind of a "It's not a problem until it's a crisis" situation? So far other central banks haven't begun selling treasuries, they've just stopped buying them. But once one starts selling it could become self reinforcing? What could replace it? There doesn't seem to be any new hegemonic power on the same level. Could we enter a world where all central banks hold a mix of currencies and nobody benefits from being the reserve?

seanmcdirmid 9mo ago
US Treasuries have terms, if you aren’t refreshing your treasury buys, it is the same as selling them. US treasuries and by extension USD was useful because it could soak up billions of dollars of savings (debt for America) without taking a huge inflation hit (treasury rates were often less than inflation, so you still take some hit). As for where that money is going now? Other currencies and saving instruments probably..
- deleted 9mo ago
  [deleted]
somenameforme 9mo ago
This is more of a go out with a whimper rather than a bang type thing. Being the world reserve currency (as well as the largest consumer market in the world) previously enabled the US to do things like relatively easily export inflation in spite of relatively reckless monetary policy. Now that inflation is sticking around far more persistently, even long term bonds have gone from 1-2% to 4%+, and so on. Stagflation is a conceivable longer term outcome. The replacement will probably be a multinational currency with strictly controlled quantity tied to some sort of physical asset(s). Basically Bretton Woods 2.0, except with the learned experience of not just granting a single country immense power and having them pinky swear not to default on their obligations and then abuse that granted power. China's probably betting that that asset will be gold.
- HPsquared 9mo ago
  With highly liquid capital markets, why wouldn't the dynamics be more like a bank run?
  - selectodude 9mo ago
    Because dumping all of your US treasuries is a political statement. You can only sell to a willing buyer and announcing that you’re going to do that is tantamount to lighting wealth on fire. Treasuries are assets so there’s no counterparty that will “run out”.
- GenerocUsername 9mo ago
  Imagine how red 100 years of economists faces will be when the world ends up back on a gold backed currency. Probably only takes 2 years before they start inventing abstractions on top of it and this kicking off the eventually next economic disaster.
  - vkou 9mo ago
    There were, of course, no economic disasters back when the world operated on gold-backed currencies. The goldbugs won't be red in the face, though, because they are never wrong and are constitutionally incapable of feeling any shame.
    - cjbgkagh 9mo ago
      I’m pretty sure no-one has argued that a gold standard would prevent economic disasters. That sounds like a straw man. My understanding is that there would be more of them but the individual and cumulative impact would be far less. You can still have fractional reserve banking with the gold standard so the gold standard alone is not sufficient to prevent that.
      - throw0101c 9mo ago
        > I’m pretty sure no-one has argued that a gold standard would prevent economic disasters. That sounds like a straw man. My understanding is that there would be more of them but the individual and cumulative impact would be far less. Contrary to popular opinion, the historical record shows that gold does not actually bring price stability; see "Why the Gold Standard Is the World's Worst Economic Idea, in 2 Charts": * http://archive.is/https://www.theatlantic.com/business/archive/2012/08/why-the-gold-standard-is-the-worlds-worst-economic-idea-in-2-charts/261552/ http://archive.is/https://www.theatlantic.com/business/archi... Most of the claimed benefits of gold-backed currencies are myths: * https://archive.is/https://www.vox.com/2014/7/16/5900297/case-against-gold-standard https://archive.is/https://www.vox.com/2014/7/16/5900297/cas... Before what we call "The Great Depression" (of the 1930s), that label was applied to another years-long economic malaise, which was in part caused by using gold-backed currency (as was the 1930s Great Depression): * https://en.wikipedia.org/wiki/Long_Depression https://en.wikipedia.org/wiki/Long_Depression You'll find that US economic downturns became less frequent as the US went off the gold standard, and the Fed gained more and more independence: * https://en.wikipedia.org/wiki/File:GDP_growth_1923-2009.jpg https://en.wikipedia.org/wiki/File:GDP_growth_1923-2009.jpg * https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States https://en.wikipedia.org/wiki/List_of_recessions_in_the_Unit...
scythe 9mo ago
The British pound was displaced by the US dollar. Currently, the US dollar just doesn't have a proper rival. The euro, yuan and rupee are considered politically suspect (each for its own unique reasons); the pound and yen have too small a base. Without further transformation of the global financial system, the only alternative is for banks to hold a basket of currencies, and in such a basket the dollar would likely still play a significant, if reduced, role. This is a slow process because it means changing the nature of currency reserves from a single safe haven to a "nest". What this means for USG spending power is not immediately clear.
- quicklime 9mo ago
  Who considers them politically suspect? I’m guessing the people who live in the countries that use them don’t, and on the contrary would increasingly be seeing the USD as politically suspect.
  - AnimalMuppet 9mo ago
    The people who live in the countries that use them aren't relevant, because we are talking about them as reserve currencies. What matters is whether other countries see them as politically suspect.
- foxrider 9mo ago
  Ok, let's see - yuan isn't a freely traded currency, it's heavily regulated by China. From that alone it can not be used a reserve currency by anyone - unless they want to hand over all control over their assets to CCP. The rupee is better, but there's not a lot of trust in Indian institutions globally, so black swan events are more likely. I can see it becoming a better proposition as India further matures and taps into its population more. No, euro - that's a solid contender. Not only it's already used in a lot of countries, and therefore backed by more than one economy, the EU institutions are legit to a fault - they continuously refuse to seize Russian assets, because there's no solid legal grounds for it, despite all political will towards doing so. That alone makes it far removed from being politically suspect in my book, unless there's some blatant case against the euro that I'm missing.
tmn 9mo ago
There’s nothing fundamentally stopping all currencies from floating against gold and gold being the base asset
- littlestymaar 9mo ago
  Gold is a terrible unit of international money because the supply isn't flexible enough to accommodate any growth in international trade. Contrary to popular belief, during history gold has always had limited role in the monetary system, because it was too scarce to really be useful (in most of human history, Silver, not gold was the cornerstone of trade, and trade itself was a tiny part of economic activity in an era where most of it was subsistence farming). It's only when banking and paper money replaced silver that gold took a bigger role in the monetary system. The gold standard is in fact an invention of the late 19th century and it didn't last long before it disappeared progressively (the first world war being the beginning of the end). Unfortunately for us, it just happened to be the period when a bunch of influential economists grew up (particularly Ludwig Von Mises), and like every human being they assumed that the system they grew up with was special and what came after was decadent, an idea that has unfortunately since then become widespread in the general population. Most people wrongly assume that the key property for a commodity to become the basis of a monetary system is scarcity, but in reality scarcity is a drawback. Money must be abundant enough (too abundant is bad, but too scarce is even worse).
- daedrdev 9mo ago
  If your economy grows by 100 percent, and the supply of gold grows by 10 percent, its a massive problem
  - MisterMower 9mo ago
    Why is that a problem?
    - immibis 9mo ago
      Look at Bitcoin to see an example. It's a gambling game that is relatively useless to do transactions with.
827a 9mo ago
In some ways, this effect can have a positive impact on US citizens; demand for the US dollar requires supply to satisfy the demand. Where does that supply come from? Oftentimes: Printing. The US generally does not make a habit of telling US dollar buyers "no, we don't have any US dollars to sell you", so less demand on the dollar for reserve holdings can have a deflationary impact on its value. This can be combined with lowering interest rates, which creates more domestic demand for dollars, to help balance out the inflationary impacts from that. Many economists take the stance that being the world's reserve currency is something of a two-edged sword; a curse that does come with geopolitical advantages, but bundles those advantages with significantly more difficult global financial responsibilities.
- rangestransform 9mo ago
  It’s either printing or increasing taxation for constant benefits. We all know what happens when the government tries to increase taxes at all, now try doing it for zero increased benefits. This is a populace that’s had candy for dinner since WW2, and forcing them to eat their vegetables will result in a never before seen level of civil unrest from people of all political inclinations.
- nutjob2 9mo ago
  The Fed most commonly uses Open Market Operations to modify the money supply, with "money printing" or Quantitative Easing used in more emergency situations. But more broadly your comment doesn't really represent reality, whatever happens in the markets and economy the Fed manages inflation (or deflation) and it's much more complicated than a single relationship like you describe. More interesting is trade, where the US consumes so much and pays out so many dollars for goods that places like China which run huge surpluses have few choices other than lend it back to the US.
  - 827a 9mo ago
    Sure; and I'm referring directly to those "emergency situations", which aren't much of an "emergency" as most people would understand the word given that they've engaged in QE for ~7 of the past twenty years.
KaiserPro 9mo ago
Its only really a crisis for people who are dependent on the US for protection. The whole compact is that you use the dollar, and the US will look after you (ie House of Saud, Europe, taiwan, south korea, etc) But that isn't really certain anymore. You need to make tributes to the suntan king, and he is most capricious and likley to tariff the fuck out of you. So alternative destination for your goods is a necessity Also the markets are not convinced that the fed is in good hands. The whole point of the fed is that they are far enough away from the meddling in Washington so that you can rely on the dollar. The fed is being steadily erroded, with the new chair being selected soon. The problem is that present administration is hell bent on loyalty over competence. Printing dollars to get out of domestic budgetary problems was never a thing (excluding QE, but thats different, nominally) was never an option in the US. but that doesn't seem so far fetched now.
- lumost 9mo ago
  The printing of dollars by the Fed comes with a secondary effect - the dollars are not evenly distributed amongst the population. They are printed via market action, and the ones who are closest to the market action are free to capture as large of a share as markets allow. Over time, it's natural that actors will optimize the above system to capture as many dollars from the printer as they can.
- expedition32 9mo ago
  Putting trade tariffs on countries like Vietnam should have gotten Trump deposed. He is literally the Manchurian candidate.
AnimalMuppet 9mo ago
If they stop buying treasuries, that's still a big problem, because the US continues to run a deficit, and therefore continues to need to sell treasuries.
Ekaros 9mo ago
Not buying is same as selling with debt. On long enough time horizon. If the debt is not rolled over anymore eventually you run out of lenders.
throw0101c 9mo ago
> What could replace it? It doesn't necessarily have to be one thing. We've had multi-currency regimes in the past (before one generally took over). See How global currencies work past, present, and future by Barry Eichengreen, Arnaud Mehl, and Livia Chitu: * https://press.princeton.edu/books/hardcover/9780691177007/how-global-currencies-work https://press.princeton.edu/books/hardcover/9780691177007/ho...
pandaman 9mo ago
Treasuries are not some kind of artifacts that can be stored indefinitely, they are bonds with maturity dates. As they mature they turn into cash automatically and that cash used to come from selling new treasuries. As the demand dwindles the US has to sell its bonds cheaper thus borrowing at higher interest and that interest will have to be paid by selling even more treasuries at even higher interest so it's already a feedback loop.
- JumpCrisscross 9mo ago
  > As the demand dwindles the US has to sell its bonds cheaper To be clear, we see no indication of this. (The Fed reduced its balance sheet in the last 3 years on the order of the GDP of Spain or Brazil [1][2].) [1] https://www.federalreserve.gov/monetarypolicy/policy-normalization.htm https://www.federalreserve.gov/monetarypolicy/policy-normali... [2] https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal) https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nomi...
  - pandaman 9mo ago
    Not sure what your links are supposed to prove but here is the link[1] to the actual yield on the 10 year bond, higher yield means the bond is sold at higher discount i.e. cheaper. 1. https://fred.stlouisfed.org/series/DGS10/ https://fred.stlouisfed.org/series/DGS10/
    - JumpCrisscross 9mo ago
      > higher yield means the bond is sold at higher discount i.e. cheaper Yes. The Fed set a policy of higher rates. It did that by selling bonds and driving the price up. Then it set a policy of reducing rates, and was able to do that by just selling fewer bonds. Not buying them. That implies strong demand for these assets. (You can’t use price as a proxy for demand in Treasuries since it’s an explicitly manipulated price by its issuer.)
      - BobbyJo 9mo ago

by duttish 9mo ago

seanmcdirmid 9mo ago

US Treasuries have terms, if you aren’t refreshing your treasury buys, it is the same as selling them. US treasuries and by extension USD was useful because it could soak up billions of dollars of savings (debt for America) without taking a huge inflation hit (treasury rates were often less than inflation, so you still take some hit). As for where that money is going now? Other currencies and saving instruments probably..

deleted 9mo ago
[deleted]

somenameforme 9mo ago

This is more of a go out with a whimper rather than a bang type thing. Being the world reserve currency (as well as the largest consumer market in the world) previously enabled the US to do things like relatively easily export inflation in spite of relatively reckless monetary policy. Now that inflation is sticking around far more persistently, even long term bonds have gone from 1-2% to 4%+, and so on. Stagflation is a conceivable longer term outcome. The replacement will probably be a multinational currency with strictly controlled quantity tied to some sort of physical asset(s). Basically Bretton Woods 2.0, except with the learned experience of not just granting a single country immense power and having them pinky swear not to default on their obligations and then abuse that granted power. China's probably betting that that asset will be gold.

HPsquared 9mo ago
With highly liquid capital markets, why wouldn't the dynamics be more like a bank run?
- selectodude 9mo ago
  Because dumping all of your US treasuries is a political statement. You can only sell to a willing buyer and announcing that you’re going to do that is tantamount to lighting wealth on fire. Treasuries are assets so there’s no counterparty that will “run out”.
GenerocUsername 9mo ago
Imagine how red 100 years of economists faces will be when the world ends up back on a gold backed currency. Probably only takes 2 years before they start inventing abstractions on top of it and this kicking off the eventually next economic disaster.
- vkou 9mo ago
  There were, of course, no economic disasters back when the world operated on gold-backed currencies. The goldbugs won't be red in the face, though, because they are never wrong and are constitutionally incapable of feeling any shame.
  - cjbgkagh 9mo ago
    I’m pretty sure no-one has argued that a gold standard would prevent economic disasters. That sounds like a straw man. My understanding is that there would be more of them but the individual and cumulative impact would be far less. You can still have fractional reserve banking with the gold standard so the gold standard alone is not sufficient to prevent that.
    - throw0101c 9mo ago
      > I’m pretty sure no-one has argued that a gold standard would prevent economic disasters. That sounds like a straw man. My understanding is that there would be more of them but the individual and cumulative impact would be far less. Contrary to popular opinion, the historical record shows that gold does not actually bring price stability; see "Why the Gold Standard Is the World's Worst Economic Idea, in 2 Charts": * http://archive.is/https://www.theatlantic.com/business/archive/2012/08/why-the-gold-standard-is-the-worlds-worst-economic-idea-in-2-charts/261552/ http://archive.is/https://www.theatlantic.com/business/archi... Most of the claimed benefits of gold-backed currencies are myths: * https://archive.is/https://www.vox.com/2014/7/16/5900297/case-against-gold-standard https://archive.is/https://www.vox.com/2014/7/16/5900297/cas... Before what we call "The Great Depression" (of the 1930s), that label was applied to another years-long economic malaise, which was in part caused by using gold-backed currency (as was the 1930s Great Depression): * https://en.wikipedia.org/wiki/Long_Depression https://en.wikipedia.org/wiki/Long_Depression You'll find that US economic downturns became less frequent as the US went off the gold standard, and the Fed gained more and more independence: * https://en.wikipedia.org/wiki/File:GDP_growth_1923-2009.jpg https://en.wikipedia.org/wiki/File:GDP_growth_1923-2009.jpg * https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States https://en.wikipedia.org/wiki/List_of_recessions_in_the_Unit...

scythe 9mo ago

The British pound was displaced by the US dollar. Currently, the US dollar just doesn't have a proper rival. The euro, yuan and rupee are considered politically suspect (each for its own unique reasons); the pound and yen have too small a base. Without further transformation of the global financial system, the only alternative is for banks to hold a basket of currencies, and in such a basket the dollar would likely still play a significant, if reduced, role. This is a slow process because it means changing the nature of currency reserves from a single safe haven to a "nest". What this means for USG spending power is not immediately clear.

quicklime 9mo ago
Who considers them politically suspect? I’m guessing the people who live in the countries that use them don’t, and on the contrary would increasingly be seeing the USD as politically suspect.
- AnimalMuppet 9mo ago
  The people who live in the countries that use them aren't relevant, because we are talking about them as reserve currencies. What matters is whether other countries see them as politically suspect.
foxrider 9mo ago
Ok, let's see - yuan isn't a freely traded currency, it's heavily regulated by China. From that alone it can not be used a reserve currency by anyone - unless they want to hand over all control over their assets to CCP. The rupee is better, but there's not a lot of trust in Indian institutions globally, so black swan events are more likely. I can see it becoming a better proposition as India further matures and taps into its population more. No, euro - that's a solid contender. Not only it's already used in a lot of countries, and therefore backed by more than one economy, the EU institutions are legit to a fault - they continuously refuse to seize Russian assets, because there's no solid legal grounds for it, despite all political will towards doing so. That alone makes it far removed from being politically suspect in my book, unless there's some blatant case against the euro that I'm missing.

tmn 9mo ago

There’s nothing fundamentally stopping all currencies from floating against gold and gold being the base asset

littlestymaar 9mo ago
Gold is a terrible unit of international money because the supply isn't flexible enough to accommodate any growth in international trade. Contrary to popular belief, during history gold has always had limited role in the monetary system, because it was too scarce to really be useful (in most of human history, Silver, not gold was the cornerstone of trade, and trade itself was a tiny part of economic activity in an era where most of it was subsistence farming). It's only when banking and paper money replaced silver that gold took a bigger role in the monetary system. The gold standard is in fact an invention of the late 19th century and it didn't last long before it disappeared progressively (the first world war being the beginning of the end). Unfortunately for us, it just happened to be the period when a bunch of influential economists grew up (particularly Ludwig Von Mises), and like every human being they assumed that the system they grew up with was special and what came after was decadent, an idea that has unfortunately since then become widespread in the general population. Most people wrongly assume that the key property for a commodity to become the basis of a monetary system is scarcity, but in reality scarcity is a drawback. Money must be abundant enough (too abundant is bad, but too scarce is even worse).
daedrdev 9mo ago
If your economy grows by 100 percent, and the supply of gold grows by 10 percent, its a massive problem
- MisterMower 9mo ago
  Why is that a problem?
  - immibis 9mo ago
    Look at Bitcoin to see an example. It's a gambling game that is relatively useless to do transactions with.

827a 9mo ago

In some ways, this effect can have a positive impact on US citizens; demand for the US dollar requires supply to satisfy the demand. Where does that supply come from? Oftentimes: Printing. The US generally does not make a habit of telling US dollar buyers "no, we don't have any US dollars to sell you", so less demand on the dollar for reserve holdings can have a deflationary impact on its value. This can be combined with lowering interest rates, which creates more domestic demand for dollars, to help balance out the inflationary impacts from that. Many economists take the stance that being the world's reserve currency is something of a two-edged sword; a curse that does come with geopolitical advantages, but bundles those advantages with significantly more difficult global financial responsibilities.

rangestransform 9mo ago
It’s either printing or increasing taxation for constant benefits. We all know what happens when the government tries to increase taxes at all, now try doing it for zero increased benefits. This is a populace that’s had candy for dinner since WW2, and forcing them to eat their vegetables will result in a never before seen level of civil unrest from people of all political inclinations.
nutjob2 9mo ago
The Fed most commonly uses Open Market Operations to modify the money supply, with "money printing" or Quantitative Easing used in more emergency situations. But more broadly your comment doesn't really represent reality, whatever happens in the markets and economy the Fed manages inflation (or deflation) and it's much more complicated than a single relationship like you describe. More interesting is trade, where the US consumes so much and pays out so many dollars for goods that places like China which run huge surpluses have few choices other than lend it back to the US.
- 827a 9mo ago
  Sure; and I'm referring directly to those "emergency situations", which aren't much of an "emergency" as most people would understand the word given that they've engaged in QE for ~7 of the past twenty years.

KaiserPro 9mo ago

Its only really a crisis for people who are dependent on the US for protection. The whole compact is that you use the dollar, and the US will look after you (ie House of Saud, Europe, taiwan, south korea, etc) But that isn't really certain anymore. You need to make tributes to the suntan king, and he is most capricious and likley to tariff the fuck out of you. So alternative destination for your goods is a necessity Also the markets are not convinced that the fed is in good hands. The whole point of the fed is that they are far enough away from the meddling in Washington so that you can rely on the dollar. The fed is being steadily erroded, with the new chair being selected soon. The problem is that present administration is hell bent on loyalty over competence. Printing dollars to get out of domestic budgetary problems was never a thing (excluding QE, but thats different, nominally) was never an option in the US. but that doesn't seem so far fetched now.

lumost 9mo ago
The printing of dollars by the Fed comes with a secondary effect - the dollars are not evenly distributed amongst the population. They are printed via market action, and the ones who are closest to the market action are free to capture as large of a share as markets allow. Over time, it's natural that actors will optimize the above system to capture as many dollars from the printer as they can.
expedition32 9mo ago
Putting trade tariffs on countries like Vietnam should have gotten Trump deposed. He is literally the Manchurian candidate.

AnimalMuppet 9mo ago

If they stop buying treasuries, that's still a big problem, because the US continues to run a deficit, and therefore continues to need to sell treasuries.

Ekaros 9mo ago

Not buying is same as selling with debt. On long enough time horizon. If the debt is not rolled over anymore eventually you run out of lenders.

throw0101c 9mo ago

> What could replace it? It doesn't necessarily have to be one thing. We've had multi-currency regimes in the past (before one generally took over). See How global currencies work past, present, and future by Barry Eichengreen, Arnaud Mehl, and Livia Chitu: * https://press.princeton.edu/books/hardcover/9780691177007/how-global-currencies-work https://press.princeton.edu/books/hardcover/9780691177007/ho...

pandaman 9mo ago

Treasuries are not some kind of artifacts that can be stored indefinitely, they are bonds with maturity dates. As they mature they turn into cash automatically and that cash used to come from selling new treasuries. As the demand dwindles the US has to sell its bonds cheaper thus borrowing at higher interest and that interest will have to be paid by selling even more treasuries at even higher interest so it's already a feedback loop.

JumpCrisscross 9mo ago
> As the demand dwindles the US has to sell its bonds cheaper To be clear, we see no indication of this. (The Fed reduced its balance sheet in the last 3 years on the order of the GDP of Spain or Brazil [1][2].) [1] https://www.federalreserve.gov/monetarypolicy/policy-normalization.htm https://www.federalreserve.gov/monetarypolicy/policy-normali... [2] https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal) https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nomi...
- pandaman 9mo ago
  Not sure what your links are supposed to prove but here is the link[1] to the actual yield on the 10 year bond, higher yield means the bond is sold at higher discount i.e. cheaper. 1. https://fred.stlouisfed.org/series/DGS10/ https://fred.stlouisfed.org/series/DGS10/
  - JumpCrisscross 9mo ago
    > higher yield means the bond is sold at higher discount i.e. cheaper Yes. The Fed set a policy of higher rates. It did that by selling bonds and driving the price up. Then it set a policy of reducing rates, and was able to do that by just selling fewer bonds. Not buying them. That implies strong demand for these assets. (You can’t use price as a proxy for demand in Treasuries since it’s an explicitly manipulated price by its issuer.)
    - BobbyJo 9mo ago