
The primacy of the US dollar looks unsustainable - signor_bosco
http://www.economist.com/news/leaders/21669875-americas-economic-supremacy-fades-primacy-dollar-looks-unsustainable-dominant-and
======
todayiamme
I get more than a little bit worried when I look at the American political
circus. The soft power the US once held has now been eroded by the steady
stream of WTFs coming out of the country. I think that what most Americans
don't realise is that when people threaten to shut down the American
government over women's healthcare - the craziness shakes up the risk calculus
of the world and people start searching for alternatives. This is bad for
America and it's bad for the world.

For the longest time, we've been under a hegemony that was originally far more
stable than the world before it. This has helped to bring an unprecedented era
of prosperity. The American empire is perhaps the first empire in history
where people want to be under its banner as opposed to out in the cold.† But
current antics threaten that very tenuous stability that was fought over for
so many centuries. It is not without any faults, but out of all the
alternatives out there - this is the most peaceful one.

Yes, there are arguments that broadening the base of support will help not
hinder stability.ß The fact remains that this is the best system we have found
so far and it does actually work. We might even someday have something far
more stable than this, but the transition to that is not going to be easy. In
fact, I think that on the existential risks meter of the world - stabilising
American hegemony should be a priority. It is vital that this system is
maintained until a better one emerges to take its place.

People might disagree, but it really is a tragedy that countries and groups
now want to overthrow the American hegemony largely due to political missteps
at home and a steady disconnect between what it means to be hegemon and the
day-to-day of American politics. They've forgotten that their alliances were
built upon shaky ground and need upkeep to maintain. And that even the firmest
of empires do fall.

†
[http://www.middlebury.edu/media/view/214721/original/OdomPap...](http://www.middlebury.edu/media/view/214721/original/OdomPaper.pdf)
ß
[http://www.economist.com/blogs/democracyinamerica/2012/02/wo...](http://www.economist.com/blogs/democracyinamerica/2012/02/world-
order)

~~~
hueving
The risk you talk about does not seem to exist in the real markets. If the US
were viewed as unstable like you suggest, it would be priced into US bonds,
which are trading near all time highs. If there is a risk in there, it's
nearly negligible.

~~~
eru
US bonds are priced in USD. If the USD is expected to collapse (if at all) if
and only if the US bonds collapse, what would you see in the prices?

~~~
zkhalique
At least US bonds being priced in USD does reflect the risk and demand
associated with them.

What I wonder is, how is inflation being calculated in terms of the CPI, which
is essentially prices _in dollars_? After all, what exactly is being measured
by this? If dollars the very currency which is being printed, how does
measuring prices account for how much M0 money there is?

~~~
forgetsusername
> _After all, what exactly is being measured by this?_

Purchasing power of Americans.

> _how does measuring prices account for how much M0 money there is?_

Why does it need to? On its own, the amount of M0 is irrelevant. We care about
how the effects of supply manifest in prices.

------
dkbrk
Is it so important to have a single reserve currency? Couldn't these problems
be largely offset with better diversification and less friction in currency
trading.

For example, lets say some banks got together and defined a meta-currency
called Euro-Dollars, which is a mixture of 55% Euros and 45% USD. I could take
out a loan in Euro-Dollars from a bank. I could buy and sell goods
internationally in Euro-Dollars. I could hold my personal savings in Euro-
Dollars. I could buy on Ebay, Amazon and Alibaba with Euro-Dollars because the
sellers know that it's a good idea to diversify their currency holdings, they
can buy other goods and services with Euro-Dollars and currency trading is
relatively frictionless.

Or, perhaps, we could go further and create a currency that's a mix of the top
10 most traded in some suitable ratio. Rather like an index fund, wouldn't
this insulate from the relative fluctuations of the individual economies and
help facilitate international trade?

On another note, this would help insulate individuals from currency
fluctuations in a global economy. I happen to be in Australia and my personal
accounts are in AUD. Since 2011 AUD has dropped about 40% relative to USD. If
I now want to buy something from a company in the US, I am 40% poorer. If my
money had been split into a mix of major currencies, I would be in much the
same position whether I now wanted to buy domestic or international goods.
Some banks offer multi-currency accounts for personal use, but it's far from
the norm. Wouldn't it make more sense if my bank automatically diversified my
currency holdings to insulate me from international fluctuations?

~~~
mamon
The system you described would be beneficial for all but USA :)

The last two people that wanted to challenge US dollar dominance in the world
financial markets were Saddam Hussein (wanted to trade oil for Euros instead
of USD) and Muammar Kadafi (wanted to trade oil for gold). We all know how
that ended for both of them - their countries were invaded in under 6 months
after they announced their plans.

Now, the only country powerful enough to force switch from USD to currency
basket is China, and their recent initiatives, like creating AIIB bank, or
devaluating juan are aimed at exactly that.

~~~
cheriot
I've not been able to figure out the benefits. Stability by increasing the
stakeholders in the value of the dollar? It gives people more reason to buy
dollars => raises the value of dollars => and makes US exports less
competitive => makes the US poorer.

~~~
nopinsight
Effects of strong dollar and its global reserve status:

\--> Americans can buy stuff / take international vacations more cheaply -->
Better lifestyle

\--> American corporations can use their stocks valued in dollars to takeover
foreign companies/assets and expand more cheaply.

\--> Power to punish enemies with financial sanctions/manipulations.

\--> QE over and over again with near perfect impunity. Ability to rescue
itself from certain kinds of financial crises.

~~~
cheriot
#1 Very nice from the Zanzibar beach I'm sitting on, but I doubt it's a big
motivator!

#2 Sounds like something significant. Do you know of a way to quantify it?

#3 As far as I know, the threat is to shut financial institutions out of the
US market. I don't think the US government has much control over a dollar once
it's leaves the country.

#4 The Chinese have a similar ability to print massive amounts of money
without inflation. I wonder if it's a property of sufficiently large
economies. The article also mentions a downside that the Fed has had to print
money to keep foreign institutions afloat.

------
mahranch
> Despite talk of the yuan’s rise, the primacy of the greenback is
> unchallenged.

And it _is_ just that, talk. People forget, as the Yuan rises, _so does the
dollar_. The real question is, how much ground is the Yuan gaining on the
dollar? And the answer? None. If anything, it's taken a couple steps back.

You see all these articles over the last few years about how the Yuan is
starting to do well but for some reason, people think that the U.S dollar just
stands still the entire time and is letting it catch up. It doesn't work like
that. If the yuan was to ever replace the dollar, it would be several decades,
likely much more, before it's even remotely close to replacing the dollar as
the world's currency. If it happens, it almost certainly won't happen in your
lifetime unless some asteroid drops of the sky, destroying most of the U.S.

Even in that unlikely event, they would still have to do something about their
rampant corruption before countries start pegging their currency to the Yuan.
They rank 127th on the global corruption index. No country is going to
willingly sign up for that, a country that tightly controls it's own currency
and where politics, business and corruption are all one in the same. It's just
not happening.

Like it or not, the U.S dollar is simply the lesser of all the evils. And it's
not even close, we're talking orders of magnitude. It also has a fortitude
that is unrivaled by anything before in world history.

~~~
rrggrr
"do something about their rampant corruption before countries start pegging
their currency to the Yuan."

Exactly. Reserve currency is as much about trust, political stability and
transparency as it is transaction frequency and liquidity. China is a
wonderful country, great people and an admirable success story. It also has
the wrong political system and current value structure to rise to reserve
currency status anytime soon.

------
digi_owl
What may be interesting in all this is that China is talking up the Keynesian
Bankor.

[https://en.wikipedia.org/wiki/Bancor](https://en.wikipedia.org/wiki/Bancor)

Meaning a currency not tied to any one nation, existing specifically for trade
between nations.

And i'm not sure i follow the line about "rule of law" regarding China.

~~~
prewett
"Rule of law" means that the law is above the government; the government is
constrained by the law. This means that there is a common understanding about
what the government can and cannot do. China has "rule by law"; that is, the
government is above the law. But if the law is arbitrary, how can anyone trust
you?

Rule OF law means that, at some level, I protect your interests (because I am
forced to by the law). Rule BY law means I do whatever I want. You can't fully
trust someone who is only committed to their own interests. Trust happens when
I know that you will look out for my interests. Deep trust happens when I know
you will look out for my interests even if it costs you.

If China's rulers think it will keep the Party in power, they won't hesitate
to devalue their currency, or set an arbitrary exchange rate, or limit the
amount of money foreigners can exchange, or any numbers of other things that
could cause problems for a company holding a large amount of RMB. Imagine you
sold $100 million of goods in RMB, and you have $95 million in expenses in
USD. Great, convert RMB -> USD, collect $5 million in profit! But one day, you
wake up to discover that the currency is worth 10% less than yesterday, or now
there is a rule that you can only take $500 out of the country per day. In the
first case you now have a $5 million loss, in the second case you have a cash
flow problem. Not the kind of thing I look for in a reserve currency.

~~~
venomsnake
Is the US any better? There are so many vague, complicated, broad and
contradictory laws that the government can do anything it has decided and find
justification for it SOMEWHERE.

Edit: Talking strictly about constraints put on the government.

~~~
crucifiction
It is not static, hence why it is linked to being a level of trust. While this
can happen in the US, its rare to happen at the federal level without some
sort of check/balance. On the other side, arbitrary application of law is the
routine system of governing at all levels in China. One type you can mostly
trust, especially if history tells you how the pattern plays out. The other
side there cannot be any trust.

------
politician
TLDR: ...except that there are no alternatives... (last paragraph).

~~~
emn13
I think that's a pretty misleading TLDR (as it suggests nothing will change
which isn't at all what the article claims); The title is a better summary of
the message.

~~~
blumkvist
The article doesn't claim anything.

~~~
emn13
Sure it does; it claims the dollar's primacy is unsustainable.

------
adventured
This has been suggested for decades, that the dollar would lose its global
reserve currency status in the near future.

The Japanese Yen would rise to be the dominant currency, with Japan eventually
becoming the top economy. Then it was the Euro that would inevitably conquer
the dollar in importance. Then it was the Yuan that would of course conquer
the dollar, with China becoming the dominant global economy - that prediction
is also going to fall flat.

The dollar primacy is stronger today than it has been in 10 to 15 years and
it's gathering strength - pulling trillions in capital away from the rest of
the world, and crushing emerging markets in the process - even before the Fed
has raised interest rates. So long as the US avoids going on any more massive
spending binges that blow out the budget (2000-2010), and avoids starting any
new trillion dollar wars, the dollar will continue to gain in dominance rather
than lose it over the coming decade.

~~~
ZenoArrow
If the position of the US dollar as the world's main reserve currency is so
secure, why did John Kerry feel the need to talk up the financial importance
of the recent deal with Iran (who had started to sell their oil in Euros
before the deal)?

[https://m.youtube.com/watch?v=PCAFnCo6nyM](https://m.youtube.com/watch?v=PCAFnCo6nyM)

~~~
forgetsusername
> _why did John Kerry feel the need to talk up the financial importance of the
> recent deal with Iran_

Because politics?

Again, what is the alternative to the dollar? It's completely reasonable that
the global community diversifies away from the USD. But any specific basket
they come up with is going to be heavily titled towards the strongest currency
of the biggest economy on the planet. Otherwise, it's useless.

~~~
ZenoArrow
> "Because politics?"

There's a bit more to it than just that, protecting the dollar is also part of
it.

If you want to understand where I'm coming from better, would recommend
watching the History of Oil (it's entertaining as well as informative):

[http://youtu.be/GIpm_8v80hw](http://youtu.be/GIpm_8v80hw)

------
conchy
Strange that the emergence of non-State digital cryptocurrencies was not even
mentioned in this article. Is it that radical to envision that perhaps one day
the successor to the U.S. dollar might not be fiat currency backed by any
single state?

~~~
forgetsusername
> _on-State digital cryptocurrencies was not even mentioned in this article._

I'm probably in the minority on these boards, so call me crazy: I _want_ my
currency backed by the economic and military might of the state.

To me, "money" is a means of performing transactions and acquiring _real_
assets. I don't need a hunk of metal or a fancy digital wallet that is
"unreproducible" to do that. Being able to print money is a _feature_ of the
system, not a detriment. The current system works well enough for me, for now.

~~~
jerbear
> I want my currency backed by the economic and military might of the state

You realize that this means you're actively supporting murder, surveillance,
and debt slavery built on the backs of the unborn, right? Sure it's easier to
just go with the status quo currency flow, but that doesn't make it the most
ethical or moral choice.

~~~
eli_gottlieb
>murder, surveillance, and debt slavery built on the backs of the unborn

None of these things are unique to fiat currency, as distinct from capitalism
as a whole.

~~~
Zigurd
That's true. But it is also true that, in the specific case of the US dollar,
it's backed by US hegemony. That hegemony is brittle, and supported by an
outsize military that was misused in a way that almost broke the nation in
combination with a derivatives crash that could easily have caused a global
depression. The US's ability to get away with ZIRP, QE(n), etc. rests on "You
and what army?" and on a hegemony where vassal states have no decision-making
autonomy and submit themselves to US surveillance.

We're only partway out of that crisis, and it could come roaring back. Chest-
thumping about "Where else ya gonna go?" is unproductive.

I don't see US hegemony as good or evil, except if you call brittleness that
could lead to a very deep unprecedented crisis "evil."

------
zkhalique
Well, it's regular mean reversion. China's treasuries and others will
eventually grow as reserve instruments. Also, the primacy of high US salaries
/ income relative to the rest of the world also looks unsustainable.

~~~
techdragon
What high salaries? The entire country is built on a house of cards where the
bottom layer stands in various degrees of minimum wage poverty that in some
cases make being a European feudal serf in the Middle Ages look like an
improvement.

------
digitalengineer
Also known as The Triffin Dilemma:
[https://en.m.wikipedia.org/wiki/Triffin_dilemma](https://en.m.wikipedia.org/wiki/Triffin_dilemma)

------
pessimizer
Good. Maybe capitalism will be allowed to work, the dollar will weaken, and
the US will stop running half trillion dollar trade deficits every year. Trade
deficit = public debt + private debt.

[http://www.frbsf.org/education/publications/doctor-
econ/2007...](http://www.frbsf.org/education/publications/doctor-
econ/2007/june/trade-deficit-exchange-rate)

The strong dollar and the unregulated medical sector are virtually the only
problems with the US economy.

The high US dollar is sustainable as long as the American public are willing
to collectively take on a half-trillion dollars worth of debt every year.

------
beedogs
Good. Hopefully that means the primacy of the US is equally unsustainable.

~~~
adventured
Not likely, the US is on the rise again after suffering a decade plus of
weakness.

The strong dollar is powering the US economy ahead while most of the world is
struggling to stay above water. Americans gained roughly 20-25% in purchasing
power against the rest of the world in just the last 18 months. US households
have paid down a vast amount of debt in five years, significantly improving
their debt to income ratio (while much of the world has done the opposite).
Full-time job openings are at 15 year highs. The US share of all global wealth
remains above 45%. The US median income remains among the highest of any
nation, with no indication of erosion inbound. US economic competitiveness is
among the highest, and total US manufacturing output is the highest it has
ever been. Economically the US has been persistently getting better the last
three to four years. The US is also about to enter a significant wage increase
cycle that will see the standard of living move upward for the first time
since the late 1990s.

By comparison, China is a disaster; Japan is stuck in the same hole it has
been in for 25 years with 'deflation' (debt) continuing to eat away at their
economy; Europe hasn't seen net GDP expansion since roughly 2007, with the
Eurozone having twice the unemployment rate of the US, and with the Eurozone
QE program failing to boost growth meaningfully.

Further, US neighbors Canada and Mexico both have done tremendously well over
the last decade and will continue to, which will act as a multiplier for the
US economy.

~~~
jazzyk
>...on the rise again

The only thing on the rise in the US seem to be:

\- all sorts of debts (check out the student loan debt, in particular, it has
exceeded the credit-card debt and has currently a 17% deadbeat rate)

\- the number of people not in labor force (95 million, the highest in 30
years).

The fact that the US is (for now) in better shape than Greece or Brazil does
not mean it is doing great. And the direction things are going in is down, not
up.

~~~
happyscrappy
Finance is hard. But not that hard.

