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eskercurve, what happens when the US loses status as the reserve currency and we can't keep printing money to cover loan payments or even interest? Isn't it a house of cards that is eventually going to come crashing down?
Technically speaking, that can't happen. We can just print the money to cover the payments, but that would be bad and probably lead to rampant inflation.
Further, losing the reserve currency status doesn't mean anything really. It just means that our loans would get a little more expensive, and once some initial shock wore off and we got better with our finances, whomever is the next reserve currency would have a strong currency, we would get more manufacturing and raw materials exports, and heck even maybe a trade surplus.
What goes around, comes around.
Remember, macro economics is NOT A ZERO-SUM GAME!!! Repeat after me, "macro is NOT a zero sum game." If it was, we would all still be vassals of the British Empire.
Good. Now, think about what that means for a second. Hundreds of millions have been lifted out of poverty in the past 20 years. The US now has 310 million living, breathing souls inside its borders and territories. Those people need food, shelter, cars, houses, stuff they don't need, etc.
We are the third largest nation in terms of population in the world. We have the most stable government in the world with a robust system of checks and balances among the arms of government. We have a workforce that is among the most productive in the world. We also have one of the most innovative workforces in the world.
Just like how China and India are a "mass market of 2.4 billion potential consumers that cannot be ignored," the USA (and EU, and Canada ...etc) are markets that cannot be ignored, and we just happen to have the best shot moving forward.
I went on a multipage rave once about the merits of the US economy comparatively speaking, and I still stand by it.
I would ask whomever says the US dollar will lose its reserve currency "What will replace it?"
The Euro? HAH! Talk about a demographic and financial nightmare. Way too diverse to work within the current framework. If they ever get around to allowing any central agency to truly govern the finances of sovereign states with teeth (which will never happen, everyone is too proud to allow it), then come back to me.
The Renminbi? HAH! Demographic nightmare, pollution will ravage that country for over a century, and barring a social revolution, will never become the consumer engine the US is.
The Rupee? HAH! Talk about a diversity nightmare. However, they probably stand the greatest chance to eventually displacing the USD, but they have a long road ahead.
The Ruble? HAH! They just can't seem to get around having the state bail them out with oil money and telling them what to do. And as history has shown us, central governments aren't good at finance (one of the rare situations in which I praise our economy).
The rest of the world is either a laughingstock banana republic / despotism / theocratic gobbledygook or just starting down the path of industrialization and liberalization.
So in short, NO, nobody will come close to rivaling us in the near future, and am not worried whatsoever. Even if it does happen, our population demands convenience, is innovative enough to continue delivering, and even has the raw resources and engineering know-how to export if we do end up having to be smarter about our finances. In fact I WISH it would happen! That would surely kick us in teh RIGHT DIRECTION and far from causing a CRASH, would actually lead to QUICKER RECOVERY!
When the British Pound lost its status as the world's reserve currency, four crucial developments were afoot:
1. A second potential reserve currency, the US dollar, was waiting in the wings.
2. Britain was eviscerated by the stress of fighting two world wars, the disintegration of its empire and its prestige.
3. Though Britain fought valiantly and emerged victorious, it did so not as sole-power or even as leader of a coalition, but as a partner - and in WW2, as junior partner.
4. The world was convulsed to the point that the very essence of the relationship between Man and the State was reevaluated from first principles.
Now let's ask which four of these things apply to the US today:
1. Is there a potential alternative reserve currency? The only viable alternatives are the Euro and the Yen. Both are in trouble, and both are backed by economies in far worse shape than that of the US.
2. America was wounded by the War on Terror, but the level of economic and demographic pain was miniscule compared to what Britain suffered in WW1 and WW2.
3. Rightly or wrongly, America fought its wars either alone or as the unquestioned hegemon of coalitions.
4. The world is indeed rethinking the merits of globalization, the welfare state vs. capitalism, privacy vs. security and so forth - but has accepted the basic idea of private property backed by democratic consensus.
So I would rank the similarities as:
1. Not at all.
2. Not really.
3. Not at all.
4. Maybe, but only slightly.
Modern America has some very serious problems - maybe even existential problems. But the rest of the world, with the exception of tiny countries such as Switzerland or Singapore, has even more profound problems. Will American hegemony continue to recede? Yes. Will a credible alternative emerge? Not for many, many decades.
-South America has grown by leaps and bounds in the last 20 years. Brazil? Argentina? Chile?
-China may have a lot of pollution, social problems, etc. but their finances are extremely strong. Something like $3 trillion in foreign reserves? What do they think about Bernanke, don't they laugh at our Central Bank?
The renmimbi could conceivably be the worlds reserve currency in a few decades.
The renminbi to the dollar now, is probably analogous to US dollar vs the pound in 1908 or 1910.
-The use of the dollar among oil producing countries (saudi arabia, iran) is probably closer to an end than a beginning. We're probably in the 6th or 7th inning of the US dollar hegemony.
We've certainly got the government bloat for a sinking dollar. I.e. US military overextended. Huge growth in the federal government, federal spending.
I think we were extremely, extremely lucky after WWII. The Germans and Japanese took decades to catch up to us. Losing our reserve currency would be like losing a comfortable chair in a movie theater. The feeling underneath next time would be a lot bumpier, something you're not use to.
There are many reasons why people shouldn't worry about what the most widely-held reserve currency is. It's a mistake to think, though, that the world issues trade solely in dollars. It is not - roughly 25% of world trade is denominated in Euros.
First, a primer on why being the world's dominant reserve currency is beneficial:
- Lower transaction costs for the host country, reducing trade costs
- Bonds issued in the reserve currency are usually low rates thanks to the perceived robustness of the economy
There are a couple drawbacks:
- Low bond rates tend to inflate asset bubbles in the host country and also tend to spur deficit spending
- The currency is more free to be liquid and less regulated, which can be bad for small firms
Also, another thing to recognize is that the world economic traders don't want instability in the finance system. So they won't displace the USD as the preferred reserve currency rapidly. Over time they may switch to other monies, but I find it difficult to find a suitable substitute at this point in time or the near future for the following reasons:
1) The yuan is still (mostly) pegged to the USD; at least it's not traded freely
2) The EU will likely continue status quo ... they don't have the demographics to sustain long term growth in their economies
3) Other economies are still tiny compared to the US, and aren't as stable
Personally, I'd be glad to see the USD be displaced over time by other currencies as it wouldn't mean the US is doomed but rather the rest of the world is stabilizing and becoming more wealthy.
Remember economics isn't necessarily a zero-sum game. It's not like there's 10 units of "stuff" to trade and dem dirty Chinese and Indians are stealing the share. On the contrary, hundreds of millions over the past two decades have been brought out of poverty, and if you had invested in international stocks, you would have made a handsome profit.
So, the moral of the story is don't fear the big bad wolf of other currencies becoming more stable, more richer, etc. If anything it will force us to be more competitive, more responsible fiscally, and will only benefit investors in the long run so long as you keep a portion of your portfolio in international stocks.
It also doesn't mean the US economy is in dire straits. Nope ... just means the rest of the world is catching up. Bound to happen, if you ask me, but doesn't mean we'll crash and burn.
I like your "glass half full" perspective, one positive rating for you.
Technically speaking, that can't happen. We can just print the money to cover the payments, but that would be bad and probably lead to rampant inflation.
Further, losing the reserve currency status doesn't mean anything really. It just means that our loans would get a little more expensive, and once some initial shock wore off and we got better with our finances, whomever is the next reserve currency would have a strong currency, we would get more manufacturing and raw materials exports, and heck even maybe a trade surplus.
What goes around, comes around.
Remember, macro economics is NOT A ZERO-SUM GAME!!! Repeat after me, "macro is NOT a zero sum game." If it was, we would all still be vassals of the British Empire.
Good. Now, think about what that means for a second. Hundreds of millions have been lifted out of poverty in the past 20 years. The US now has 310 million living, breathing souls inside its borders and territories. Those people need food, shelter, cars, houses, stuff they don't need, etc.
We are the third largest nation in terms of population in the world. We have the most stable government in the world with a robust system of checks and balances among the arms of government. We have a workforce that is among the most productive in the world. We also have one of the most innovative workforces in the world.
Just like how China and India are a "mass market of 2.4 billion potential consumers that cannot be ignored," the USA (and EU, and Canada ...etc) are markets that cannot be ignored, and we just happen to have the best shot moving forward.
I went on a multipage rave once about the merits of the US economy comparatively speaking, and I still stand by it.
I would ask whomever says the US dollar will lose its reserve currency "What will replace it?"
The Euro? HAH! Talk about a demographic and financial nightmare. Way too diverse to work within the current framework. If they ever get around to allowing any central agency to truly govern the finances of sovereign states with teeth (which will never happen, everyone is too proud to allow it), then come back to me.
The Renminbi? HAH! Demographic nightmare, pollution will ravage that country for over a century, and barring a social revolution, will never become the consumer engine the US is.
The Rupee? HAH! Talk about a diversity nightmare. However, they probably stand the greatest chance to eventually displacing the USD, but they have a long road ahead.
The Ruble? HAH! They just can't seem to get around having the state bail them out with oil money and telling them what to do. And as history has shown us, central governments aren't good at finance (one of the rare situations in which I praise our economy).
The rest of the world is either a laughingstock banana republic / despotism / theocratic gobbledygook or just starting down the path of industrialization and liberalization.
So in short, NO, nobody will come close to rivaling us in the near future, and am not worried whatsoever. Even if it does happen, our population demands convenience, is innovative enough to continue delivering, and even has the raw resources and engineering know-how to export if we do end up having to be smarter about our finances. In fact I WISH it would happen! That would surely kick us in teh RIGHT DIRECTION and far from causing a CRASH, would actually lead to QUICKER RECOVERY!
all good points to be sure, but oil countries could start asking for payment in gold for their oil. I dont think the USA could last very long by buying oil on gold.
Some are saying that when that happens (and they are saying it's not if, but when), things are going to be much worse than they were in 2008. I guess that wouldn't be bad if you were in for the long term, but what about if you were within 10-15 years of retirement?
Also, there is the talk of the government taking over 401Ks, and I take that with a grain of salt - but stranger things have happened.
I'm not ready to cash out 401k and buy gold, or hoard cash in the walls of my house (not that American dollars would be worth much anyway if we were no longer the reserve currency), but I am concerned about the economic future of the United States and how it is going to affect American citizens and their investments.
As I suspect as long as the Euro stays strong (which is the worlds second reserve currency) our duo of being the reserve currency will last pretty long. Although China and Asia in general is booming, they still aren't considered a safe haven for investing, China has even allowed most countries to buy any of its bonds so how would they even become a reserve currency if they don't want anyone to trade their currency or bonds?
If China freely-floated its currency, then perhaps the US Dollar would receive some serious competition, much like the Japanese Yen is competition. The Yen isn't really an alternative reserve currency, but at least it's significant enough to matter.
But China is pegging its currency to the US Dollar. Essentially, the US Dollar is the national currency of both the first and second-largest economies in the world.
China and Australia are bypassing the USD and will convert their currencies directly.
Fortescue to Boost Yuan Trade After China, Australia Reach Currency Deal - WSJ.com
China introduced a yuan-Australian dollar exchange rate to its onshore currency market in November 2011, but until now trading of the pair has been done indirectly through the U.S. dollar. The new deal struck between the two nations ends the need for companies and currency traders to first convert their Australian dollars or yuan into U.S. dollars.
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