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Goldman warns on inflation threat to dollar as reserve currency (bloomberg.com)
92 points by 0DHm2CxO7Lb3 17 days ago | hide | past | favorite | 133 comments



There's no risk of the USD not remaining the world reserve currency as long as oil is being purchased.

The US spends more than 144 countries combined[1] on their military. The US protects the middle-east oil supply, the middle-east agrees to only sell oil in US dollars. Therefore, demand of USD remains consistent and strong.

Ask Iran and Venezuela how it's working out for them trying to skirt that arrangement.

[1] - https://www.nationalpriorities.org/blog/2019/07/18/us-spends...


+1 I'd also like to note the, not obvious fact, that the "wealthy" have no other meaningful choice but to put their money in dollars. No other country, or group of countries, even comes close to providing the liquidity, safety, and flexibility of the US dollar. The US has never halted trading, has continuously paid its debts, and has shown zero meaningful (congressional shenanigans aside) intention of stopping.

That's not to say one day, another country won't have the burden of being the world's reserve currency, but for at least the next 20-30 years it's very likely going to be the US.


It's also tied to a single, very large country. This gives USD a significant boost over EUR in many ways.


Wealthy people have other people who manage their money. Only part of that money is in U.S. dollars/bonds at any given time, because it is less risky to have money in various different assets such as land, buildings, stocks.


Yes, wealthy people do pay others to manage their funds... I'm failing to see how that's a revelation here.

The people who manage that money, assuming they are responsible, or remotely-qualified, have only one option; which, is going to be investing primarily in securities/assets backed by US dollars. Land, buildings, and stock are all assets because you can get money back for them. That money is only good if its spendable and can be extracted from the asset... which is my point.

/shrug I'm just a bit lost at what you're trying to say...


> The people who manage that money, assuming they are responsible, or remotely-qualified, have only one option; which, is going to be investing primarily in securities/assets backed by US dollars.

That may be a strategy of single person with a little money trying to not lose it long term. But it would be foolish for the really big investors. They don't do that. Wealthy people diversify in different asset classes, not just in US stocks/bonds.

Real world assets such as gold, stocks, art, land, buildings, private companies etc. are not in general "backed by US dollars". They can have value largely decoupled from the value of US dollar or its status as top world currency. Which is why those clever managers invest also in those assets.


People rarely hold that much in cash, it goes into assets like buildings. And those assets tend to be diversified around the world - cash will probably be held in banks offshore with good tax rules.


To further that point, the current global trade regime is essentially US-style capitalism writ large. Individual countries don't play that way -- state owned CCP corps in China, for example -- but the US is the bulkwark of the system.

If the US dollar totally fails it means the global economic system is in upheaval, and if that happens I'd rather have reserves of water, salt, seeds, and ammo...


The key isn't oil purchases, it's what the middle East do with the dollars. They give them back to the US, buying government bonds and other US domestic securities. Only that process has stopped on its own because prices are so low, most countries in the region are spending more than they make.

I don't think the usd is going anywhere as the world reserve currency, but oil trade currency isn't the reason.

This is an interesting time because the US does NOT have the support of excess oil revenue to keep it in demand.


And what are all the oil barons doing with their USD?

If I buy US dollars so I can go buy oil, and then the oil producers go and exchange those dollars in to other currencies, then the whole process is neutral for the greenback.


Nixon cut a deal with King Faisal of Saudi Arabia in the 70s (after the oil embargo). The US would protect the Al-Saud kleptocracy, and in exchange the Saudis would invest their money in America.


Apropos of Saudi, one of the big BTC spikes was correlated to be when MBS took over and started cracking down on rivals and dissidents. Whole lotta folks turned to BTC to get cash out of the country and then GTFO.

Similar trends with Xi's anti-corruption campaign in China.


They buy US treasuries and/or foreign exports. USD is helpful because 1. most of the world will accept USD directly or 2. conversion into another currency is extremely cheap and simple, even at large values, due to the unwavering worldwide demand for USD.


Prior to this year, shutting down the world economy for months was an anathema. Even saving the planet stuff could not achieve that. Leverage points and priorities.

Prior to this year, the US society devolving into a third-world developing one was unthinkable.

When I ask my kid to do something he doesn't want, he pouts and jokingly says "Never ever".

What this pandemic has taught me is to never say never ever.

The US become isolationist, losing it's military supremacy in the next decade ? The rest of the world going it's own way and not caring enough about what the US thinks ? A world war with US against the RoW ?


Quick way to think about it:

If you believe that Russia or China's currencies will be a safe place to hold your wealth for 10+ years, then it will be a threat. Safe means "keep its value & is accessible".

If you do not believe that they will be safe, then there is no threat to the dollar.

The rationale is that people generally want to have their wealth in a safe place (currency, not necessarily a physical location).

Right now (and for the foreseeable future) there is no currency that can compete with the Dollar. However, Gold could displace it if people lose confidence in the Dollar's value (ability to safely store wealth).


> However, Gold could displace it if people lose confidence in the Dollar's value (ability to safely store wealth).

Bitcoin is spiking like mad right now. I trust gold more, but if you're willing to tolerate the BTC risk, it maybe more lucrative.

And I'm staying this as a notable BTC skeptic.


Big wealth is not in general hold in a currency, for reasons of inflation and currently, for reasons of negative interest rates. Currency is used to settle transactions. Any wealth that could move geopolitics/global economics is kept in different, more dependable form.


This doesn’t make sense to me. The reason interest rates are negative is that the demand for USD is so high that you have to pay for the privilege of storing your wealth in USD.


Any source for such a wild claim?

Interest rates are so low because people controlling the FED decided the rates to be low. They did so, as the story goes, to stimulate the economy growth, to make banks more likely to lend and companies more likely to borrow money and use the money they have to buy things, hire people, increase production. Of course, the reality is more complicated and lot of that newly created money just pumps the stock market with little benefit to economy.

One indeed has to pay banks for storing money, whether in USD or EUR, that's why big wealth managers don't keep big wealth as money but invest in diverse assets. Storing some USD is no privilege, it is a necessary liability. USD is needed for transactions, not for storing wealth.


It seems easy to imagine a world where oil is not being aggressively purchased in the way that it was until this year, and also easy to imagine one where US military spending is curtailed by a combination of flagging support for US empire as well as the harsh reality of american fiscal policy. Not that either of these are a guarantee, but current oil consumption is incompatible with human civilization in its current form, so...


>The US protects the middle-east oil supply

Now that the US is basically self-sufficient in petroleum and seems to have entered an isolationist mood, I wouldn't count on its risking the loss of one of its aircraft carriers to re-open Gulf shipping lanes if Iran or some other actor decides to close them.


You got downvoted, but that's basically the view that Peter Zeihan takes in his book "Accidental Superpower".

It's reasonable to assume that if the US becomes insular enough, and self-sufficient enough in energy, that such a thing could become true. Not a popular thought, but definitely a possibility.


What do you think of China and Rusia in talks to trade oil in other currencies? How significant is their share of the market?


Russia's oil reserves are a drop in the bucket compared to middle east, and more expensive to extract. Saudi Arabia could simply ramp up production to drive prices down globally and make it not worth the effort. Also, US has leverage over China bc they buy all China's cheap crap.

The headaches and downsides aren't worth it, and any "talks" are likely just game-theory pokes at the US.


"Perception is reality", and it's super true in investing. It's in Russia's and China's (and India's, and others) to weaken the dollar and the US' role in global hegemony.

To that end you keep stoking the fire, keep raising the question.


China and Russia are both known to manipulate their currencies much more than the USA.

USD's most credible rival as a global currency is the Euro, because no individual government is able to devalue it.


USD also has bond yield and access to the largest economy in the world built into it. It's more difficult to spend your Euros.


> "China and Russia are both known to manipulate their currencies much more than the USA."

What do they do to "manipulate their currency"? Does quantitative easing qualify?


"How easy is it to buy and sell other currencies in China compared to the United States?" is a good start to answering this question.


Someday, it will be true. But, it's telling that they don't even pretend that there is another currency poised to take the dollar's position; they posit gold returning as the world reserve currency.

Regardless of my opinion on whether or not such an event would be good (I don't particularly have one), I don't think it's likely.


Why should there be only one? I get financial advisor emails every week that pretty much always tell me to diversify where I put my money. If I were an independent nation that needed reserve currency, I wouldn't want to bet it all on the US, China, or Europe. They've all got their own risks ahead. And there's no clear winner for the next decade or two to get on the good side of.


> Why should there be only one?

Network effects.

Every marginal dollar spender, dollar acceptor, dollar lender, dollar borrower, dollar investor and dollar investment makes the dollar more attractive to use for all. That makes it more attractive to intermediate, which results in more services around U.S. dollars which keeps the flywheel going. As financial and trading and distribution relationships become more complicated, these advantages grow.


I agree with this, but, I’ve become very comfortable with TransferWise, which is kinda like Libra without the blockchain bullshit. I can move between currencies effortlessly and inexpensively (and I don’t want an index currency that trades a basket of currencies beneath it, an unnecessary abstraction in my opinion). I provide charity to a friend down on their luck in CAD. I buy SaaS services in USD and EUR. I pay an Australian mortgage for a vacation home and investment property in Tasmania in AUD. From an iOS app!

As FinTech velocity accelerates, the value of network effects will diminish. It’ll all be IP between fintech providers (mostly like SWIFT, but not quite).


All of those transactions are settled in USD. Just because it's happening behind the scenes doesn't mean it's not happening at all.


But it can be settled in any currency trivially. All you want in a currency is acceptance and value stability, and the infrastructure to support rapid changes in currency polices.

Disclosure: I work in financial services and am familiar with this infrastructure.


> All you want in a currency is acceptance and value stability

And ready lenders and collateral and repos et cetera. Or maybe you don't, but a good fraction of the individuals you transact with, or with whom they transact, do.

The fundamental advantage of the U.S. dollar is in our consumption. That litters the world with dollars searching for a home, and seeds the cross-border financial infrastructure whose pervasiveness makes transacting in dollars so much more convenient for so many more people than in any other currency.


Then you should almost certainly aware of the fact that the spreads on USD currency pairs are extremely low. Low enough where it ends up being cheaper to go Currency A -> USD -> Currency B than it is to go Currency A -> Currency B. If all you want is acceptance and value stability, it doesn't get a whole lot more stable than that.


You’re missing my point (which is probably my fault). It’s not about the financial mechanisms of currency exchange, it’s about the financial infrastructure. How does a crypto exchange support a new coin at genesis? They just add it to the platform. We’re arguing about the window dressing (currency spreads), and I’m talking about the technical implementation and fundamentals of supporting global treasury management.

Edit: @JumpCrisscross I am familiar with how TransferWise works under the hood. The underlying settlement system is the legacy slowly being replaced.


> We’re arguing about the window dressing (currency spreads)

TransferWise is the window dressing. It is bolted onto an international credit and settlement system which is built on dollar settlement rails. The fact that it's turned every other currency into, in effect, a feature, underscores the point.


>The underlying settlement system is the legacy slowly being replaced.

The underlying settlement system is basic supply and demand. I'm not entirely sure how they (you?) plan to create some system where every currency pair is in perfect harmony. It simply doesn't work that way.


(1) Not everyone has a financial advisor. Also, mass emails may not constitute financial advice. Living in various countries of Latin America, my uncles and aunts have always had in mind the USD as a unit of account and an alternative savings medium. Not all of these people were intellectually sophisticated or "good with money" necessarily. They'd either struggle with baskets of currency or bear an additional cognitive/stress load that would make them worse off.

2) At a more formal setting where cashflow projections are made and international investors placated (and so on), having forecasts be conditional on both USD and euro is already commonplace, particularly if there's lots of intercontinental logistics implicitly baked in costs and revenues. Adding another currency to these types of calculations (also backed by econometric models, commodity price forecasts etc) would not add 50% complexity, it would pretty much double it. I can't imagine being responsible for a cashflow in four or five currencies at a scale in which exchange rate volatility matters.

This isn't to say there wouldn't be benefits, but surely there'd be costs.


Because none of the alternatives are large enough. If you are a central bank, and you need to deposit $100bn...you realise that you can't walk into your local branch of Chase and ask if they will take a cheque.

If you give it to a bank, you are now an equity investor (as Middle East central banks found out in the 80s). If you invest in a non-USD currency, you are exposed to that currency in size and you probably can't sell (as Commonwealth central banks found out in the 60/70s).

USTs are the only market where you can trade tens of billions easily. That is it. There are no alternatives. China and Russia have both tried to exit, and all they have managed to do is buy a few billion of gold. The ECB is trying to create an alternative but EU financial markets are microscopic because their banking system is so large/insolvent.

There are also economic reasons, the US is the largest economy in the world, almost all trade is priced in USD so exporters/importers will earn/sell in USD which will usually be key to other areas of central bank policy.

But yes, the main issue is quite fundamental: no other currency is large enough.


Why is there a monopoly in anything? It's convenient and tends to happen naturally via small scale local optimizations.


“Goldman warns the next big crash is around the corner”

“Gold warns about the end of QE in terms of effectiveness”

“Goldman warns about the rise of China”

It goes on and on. It’s all marketing, they have to say something.

The dollar has no risk, the demand for dollars is massive.


The dollar has no risk, the demand for dollars is massive.

As is the supply of dollars. To say it has no risk is absurd; the dollar is created out of thin air by trading its future value.

https://fred.stlouisfed.org/series/M2


Yes it is. But the Fed is not stupid. This whole dollar losing its status fear is similar to “the next big depression, worse than 1929” or “the next big earthquake to knock California into the ocean”.

It’s just human nature to fear these events.

The us economy is rock solid and is basically the only economy innovating at all. This doesn’t mean that wages aren’t stagnant or that wealth inequality isn’t a problem.


The Fed is run by human beings, whom have biases and flaws.

The US economy is strong, however its fiscal discipline is not. Federal debt to GDP ratio is at an all time high, and will only go higher. Abstract this graph out at current trends:

https://fred.stlouisfed.org/series/GFDEGDQ188S

Public debt growth is outpacing GDP growth, so its only a matter of time.

Do we anticipate that politicians will suddenly become conservative and start paying down debt? Unlikely. The pressure to keep the economy going and win elections is too strong. The power to create money (or artifically low interest rates) is a heroin addiction, impossible to wean your economy off of.

If you had to lock your wealth in over the next 10-25 years, you're not buying US government bonds. You're hiding out in gold, housing, and stocks. The dollar is not an asset you want to be part of.


> The us economy is rock solid and is basically the only economy innovating at all.

It is powerful, but not apparently healthy and experienced quite some scary events in recent years so "rock solid" is a very weird characterization. The U.S. capitalist system is inherently instable, it undergoes periodic crashes and extraction schemes that make people lose their property or get collectively more indebted. This makes people angry and willing to consider radical changes - see violence and rising popularity of socialism in U.S. It is hard to predict when it happens, but the outlook is not good. For economic/political stability, E.U. looks much better.


I've noticed this too. I wonder how much is ass covering? It would look really bad if Goldman never brought this up to their clients and it did happen.


Or the other way around... Goldman warns loudly, yet the same Goldman readily bets on the opposite.


I understand the fears of inflation because of the additional money printing the fed has been up to, but what I think everyone is missing is that this time around, everyone around the world is also printing money. As long as eventually the economy gets up and running, the relative demand and value of dollar should stabilize.


I'm less concerned about inflation between currencies and more concerned about the "hyperinflation" of financial assets due to ZIRP, low debt yields, and extreme multiple expansion for equity.

In particular, I'm curious about the domestic political consequences: if financial assets are inflated to the point where you can only tap a 1% yield in retirement (versus the 3-4% today), what does the typical middle/upper middle class family do? What happens to newcomers in the FIRE movement? High housing costs can be escaped by moving to a LCOL area, but if/when the idea of a privately-funded retirement floats out of reach, how does the overall electorate respond?


No pensions, no (worthwhile) 401k's. We all become indentured servants renting for the rest of our lives.


> ...if/when the idea of a privately-funded retirement floats out of reach, how does the overall electorate respond?

In a way this has already started to happen in lower socio-economic strata: they decouple as best they can. This is why you see such a large correlation between the "unbanked" and those strata.

Currently, most individuals in those strata lack the education and information to learn how to decouple in more areas of their lives. The information part is slowly being addressed by the proliferation of the Net, and it is even slower now with social networks (which retard the growth of structured and systematic information sharing). The education part is even slower to change, but it is changing. It is now socially acceptable to openly discuss the value of college/university education, where that used to be unthinkable just a decade ago. That opens the door to alternatives.

The rational response is decoupling from norms in real estate, insurance (especially healthcare in the US), finance, and education, and establishing alternatives with like-minded people who determined they're simply too poor to participate in the "accepted" norms (the notion that those "mainstream" norms have priced themselves out of their markets is still heresy).

In a Japan-evocative ZIRP environment, being a millionaire per individual in a family is no longer sufficient, "lean" FIRE/normal-retirement plans would need to re-calibrate to deca-millionaire. If equities start yielding 1%, the SWR would drop to around 0.5%, and $10M USD would yield only about $50K per year, a huge chunk of which goes to those "mainstream" norms. At these kind of numbers, we're talking about people with both education and information, and they'll start to make and share decisions, and iterate solutions, in a different manner than previously-affected strata.

Hard to say what the iterative ramifications are of people switching to alternatives. A sharp bifurcation just like envisioned in dystopian cyberpunk scifi is arguably imaginable, with megacorps and an underground, and a financial no-man's-land in-between. So is a demographic implosion-based hyper-depression: children are simply flat-out impossible to afford at some point for the majority, and they respond appropriately; vast segments of our modern economic civilization utterly dependent upon an implicit constant population growth run into a sudden reversal. More positive outcomes are also possible. Co-ops, on-site recycling, permaculture, local currency, DIY medicine, automation, land trusts, etc., blended into what works for each group's idiosyncrasies, and decoupling from the mainstream mores and indebtedness expectations to yield a good enough solution for them. They're poor in mainstream capital, but readily acknowledge they'll statistically never acquire massive amounts of it anyways, and enrich themselves in other forms of capital through other means of exchange, and have accepted the trade-off.


Also, the money is not printed in a vacuum. We are in the midst of a terrible economic crisis. If the downturn becomes much worse we will need to contend with deflation rather than inflation above and beyond the 2% target. These are basic principles of an elastic money supply.


Value of dollar may remain fairly stable relative to other currencies but not necessarily to assets and commodities.


The fear right now is for deflation rather. The fed printing money will just weaken the dollar relative to other currencies as you point out. Which might end up being convenient for the US economy, but it comes at the risk of the world going away from the Dollar as a reserve currency as Goldman warns.


This isn’t really a criticism, and I get that the article’s purpose was to focus on gold price as a signal for potential debasement…BUT…it seems like a miss to not even allude to or link out to commentary on the tremendous political power being the reserve currency affords the US, and the long term incentive for others to provide an alternative.


More information on this topic can be found on the Wikipedia article for Exorbitant privilege. [0]

[0] https://en.wikipedia.org/wiki/Exorbitant_privilege


The dollar has been weakening precipitously, with the dollar index declining nearly 10% over the past few months.

I’m curious to hear tomorrow how the Fed intends to address this.


That's not much perspective. It's down 10% but part of the reason why is that it was up quite a bit earlier this year. There was a dollar shortage and the fed opened swap lines to alleviate. It's not that weak, and would need quite a bit of weakening to get to where it was in 2018, further weakening to get to where it was in 2013, not to mention 2011.


Versus what? USD has been in a steady decline vs. CHF over the past year. USD is in fact at a five-year low vs. CHF. It's also at a 2-year low versus the Euro.


Was looking at DXY. The dollar currency index which looks at a basket of currencies, but weighs heavily towards the euro. Still hasn't dropped even to early 2018 levels against the Euro.


>The dollar has been weakening precipitously, with the dollar index declining nearly 10% over the past few months.

... which is still up 6% from its 5-year low (January 2018), up 24% from its 10-year low (April 2014), and down 6% yoy.

>I’m curious to hear tomorrow how the Fed intends to address this.

What is there for the Fed to address? A weaker dollar, in and of itself, benefits US exports and reduces the trade deficit.


The difference between this moment and 2018 or 2014 is that we are in the middle of a bona fide crisis, and we went into it with rates already near rock bottom.

That leaves few options if dollar continues to weaken and inflation becomes concerning.


If inflation becomes concerning, rates near rock bottom is not a problem. You deal with inflation by raising rates, not by lowering them.


Yes, of course, I understand that. But in the middle of a recession that becomes Sophie's choice: do you raise rates to curb inflation while killing the chance of a recovery?


Ah, I see your point.

Still, this isn't the stagflation of the 1970s. While there may be underlying problems, the main issue is that Covid shut down parts of the economy, which also meant shutting down parts of employment. The trick really isn't to avoid inflation. The trick is to make it back to approximately normal without killing too many businesses and bankrupting too many families (while also not killing too many people). If inflation happens as a result, but we get back to a healthy economy, then we can worry about inflation. For the next one or two years, I don't think that inflation is the issue to focus on.


That is the big question and I think the answer remains to be seen. Is Covid an acute crisis where we quickly bounce back to "normal," or is it the catalyst for a broader deleveraging that may have been due for several years and with many of the layoffs being "sticky"


The US is making lots of steps typical of falling empires. This includes blind belief in the strength of its currency. Even big investors are starting to get worried about the sustainability of what the Fed is doing.


I believe you are referring to Rome? In the west, they debased their currency in order to pay for wars, which wreaked havoc on the economy and Supply chain. I’m not aware of it being a factor in Alexander’s empire, the Russians in 1918, Napoleon, the Japanese after wwii, or the decline of the British empire. Most came from exhaustion or defeat from to war. Debasing the currency is not something that only falling empires do. Look at Venezuela or Zimbabwe


Japanese did it. Their model for economic growth was late 19th century Germany, which was largely based on financial repression.

The British did it. The UK had a huge stock of foreign assets at the start of the 20th century. They had to be sold to pay for war, and that crushed the currency (they also had to do a huge amount of financial repression). The exchange rate in the mid-20s was $5, $2.50 after WW2, and is now closer to $1.

The Russians didn't have an Empire. The extent of their ambition was interfering repeatedly in the Balkans/Turkey for no reason, and (briefly) in Europe with the Prussian/Austrian war (and then having to dial back once Prussia gained in strength/Germany appeared/etc.)

The point about "debasing currency" is, however, nonsense and based on a misunderstanding of almost everything at play here. Perhaps most important: the US isn't an empire, having a large army doesn't mean you are an empire (if that were true, North Korea would be a world power), the role of the US is and has always been collaborative (this hasn't changed with Trump either, observing that Europe pays almost nothing into NATO seems quite fair).


> the US isn't an empire, having a large army doesn't mean you are an empire

An empire is a political unit that controls vast parts of the world and dictate their policies through military and economic means. This fits well on how the US operates. Unlike any other country, the US has military deployed practically in all continents and major oceans. The only difference between the US empire and the British empire is that the US likes to propagandize about the apparent freedom of their vassal states. In many part of the world, elections are only uphold if the elected support US policies (mainly through economic coercion), and when this doesn't happen the country is a target of coups, "regime change", or enters the "black list" of sanctions. For this reason, the US has several foreign spying and "regime changing" institutions, including the most famous CIA and NSA. All of this supported by mainstream US media, which has international reach and influence media in other countries. This is obvious with what happens at Venezuela, Iran, and Russia. More recently, China is entering the black list because it is increasingly seen as a threat to the US political hegemony.


> The Russians didn't have an Empire.

Russia was the metropole of an empire not only under the czars but through the entire Soviet period.

> the US isn't an empire, having a large army doesn't mean you are an empire

The metropole dictating to peripheries does, whether the latter are formally independent or openly dependent territories does, and the US is a metropole which has many (and has had previously had more) of both kinds of peripheries.


I think Congress and the Administration are more to blame for fiscal problems.


Look: the stock market is in a massive, unprecedented bubble and has been for years. But, every time asset prices try to fall, the fed jumps in and does whatever it takes to keep that from happening. So asset prices no longer have any relation to reality. Where does that end? It’s just the gamblers paradox writ large: the perfect gambling strategy is that every time you lose, you double down. You have to win eventually, right? Wrong, because in reality your cash supply is limited and you will at some point go bankrupt. This is the same. They are doubling down, doubling down, doubling down.. there’s only one way that ends. If asset prices cannot fall, then the whole economy eventually implodes under its own weight and we lose the reserve currency status. Any seismic event feels impossible right up till the moment that it happens. None of us thought that nationwide stay home orders were possible until one morning, it happened. A big enough crisis makes the impossible suddenly inevitable. All the things people are saying are reasons it can’t happen- oil prices in dollars, no better alternative- at some point they just won’t matter.

Trump and the rest of the political establishment consider that a stock market crash can not be allowed to happen while they are in office. So they are 100% willing to just keep kicking the can harder and harder just to hold things together until November. It’s a cycle of short term thinking. If the smaller crises are not allowed to happen, then the big crisis that wipes out the whole economy eventually willl.


Can anyone game out what would happen if the dollar dropped dramatically? My understanding is that would be a very good thing for American exports, which would become cheaper and increase sales. And it would be bad for Americans traveling/spending abroad, as their purchasing power would decline.

What else would happen, and what would the interactions between these effects be? It seems like the boon for American exports would mediate the effect of the drop in the dollar.


It's not really even that much of a problem, long term, and it might help out certain sectors of the U.S. economy, given that we produce a fair amount of our own raw materials so that we don't suffer as much from a weaker currency in buying raw inputs. It would make our exports more price competitive.

HOWEVER, the effects of a rapid, uncontrolled fall would be quite disruptive, and a lot of people who had their savings in $$ would now have no savings, and that could be very bad, especially since most of those with their savings in currency would be small time investors, retirees, etc. who cannot afford an advisor to help them diversify.

It should be mentioned that many nations have, at various times in the past, intentionally devalued their own currencies. We have at various times in the past accused Japan, China, Germany, etc. of intentionally preventing their currency from appreciating. But, major swings in short periods of time can be painful.


I can only recommend listening to or watching some of Peter Schiff's talks. That's exactly the scenario he has been talking about for years.

If that scenario would play out (I think it's very unlikely right now, but probably inevitable long-term), the US would have a big issue as it's not exporting a lot, but importing basically everything. Hence, cost of living would go up (inflation) and standard of living would most likely decrease substantially.

One effect that would accelerate this is rising interest rates (to conquer inflation) meaning a significant drop in asset prices (since you now have to borrow at a higher rate).


The interactions are the problem. So, yes, American exports have and advantage if the dollar drops, but conversely, American importers suffer. Most American products these days have a large percentage of imported parts.

Given that currently nobody can travel abroad, we don’t have to worry about travelers.

The real rub is debt and interest rates. When the dollar plummets, who wants to own dollar denominated debt? That in turn will cause interest rates to rise which will damage an already faltering economy.

It ain’t simple arithmetic.


Gold goes up when interest rates go down. The interest rate on gold is always negative - there is cost to storing it. But usually you can find someone who will pay interest on dollars. So there is a cost to holding gold over dollars, the lost interest plus the storage cost. Right now that number is close to zero. It may become negative, that is, cheaper to store gold than hold dollars. That's why gold is going up.


On the other hand, gold has historically kept up with inflation. So it's also going up when interest rates are high. Just look at its performance in the 2000s before 2008.

Also there have been periods where it has been going down even though interest rates were low (e.g. after 2011).

I would much rather argue that the value of gold is loosely correlated with money supply over the long run.

The current short term surge in gold prices seems to be driven by fear and lack of other secure investment opportunities.


The dollar index is 50% or more Euro and there’s been a big shift there, probably driven by the fact that the EU appears to be making progress towards a fiscal union - in the mean time supporting (hopefully) a rescue package that transfers funding from the wealthier to less wealthy states. (Something we don’t think about much but happens in the US as normal course, think CA taxes going to AL.)

Combine that with the absolutely incompetent response to the pandemic and economic situation, whereas Europe has handled it well and managed to keep everyone on payrolls the US went down the massive unemployment and potential evictions route and is now squabbling over what’s the least amount of money we can give all these people. Even Wall St knows we need to give these people more money, the extra unemployment benefits have been keeping retail sales up, and keeping evictions down.

In the longer term the USD not being a reserve currency is probably good for everyone including the US.


I don't agree at all that the EU has handled the pandemic well. See https://ourworldindata.org/coronavirus-data-explorer?zoomToS... for a comparison of the US, EU, and East Asia (a region that could reasonably be characterized as handling the pandemic well) by linear per capita confirmed COVID-19 deaths.


Talking about economic response to the pandemic here.


Agreed. US dollar being propped up has undermined manufacturing sector by making exports artificially expensive, and imports artificially cheap.


Where I live, undergrads have to present their capstone graduation paper to a committee, much like PhD students do. I've had a handful opportunities to ask, after a presentation about this very subject: why is this bad?

I never got good answers. Maybe the PhDs did, but PhD committees draw from their own discipline.


It’s not bad in the short-term. You trade stamped paper for complex goods and services. The problem is when people don’t want to make that trade anymore. One side is left with the ability to print stamped paper, the other has the means of production for goods and services desired. The U.S. “allowed” many domestic industries and supply chains to leave/fail/etc. because it was “better” to print paper.


But does this indicate we need to fix the "undermined" part of the manufacturing sector rather than ceding the power of having the reserve currency to another power?



Maybe I'm naive, but given the level of unemployment and the decrease in consumer demand across a wide array of markets and fields, don't we see an increased risk of deflation without printing more money?


Consumer price inflation depends on four main factors: The velocity of money (how much it moves around), the amount of money available, supply, and demand. With the latter two being a potential result of the former two (amongst other external factors that have an influence on supply and demand).

So yes, if people don't move (less velocity) and if less money is available (lost job), then that will be deflationary. This effectively yields lower demand. At the same time, if less supply is available, that's inflationary.

Now, good luck at predicting how supply and demand will behave, especially if you add more money to the game.

For example, it could happen that if the crisis ends faster than anticipated, too much money has been injected into the economy and demand picks up much faster than projected. This would be highly inflationary, especially if you add a drop in supply simultaneously (more money chasing less goods).

On the other hand, it may happen that regardless of how much money you add, people are just not going to spend it, because they can't (low velocity). Then you might end up with deflation anyway, conclude that you should add even more money, and eventually end up in the scenario described above.

Too make it even more complex, you might end up with inflation in one class of goods and deflation in another at the same time. Looking at a broader picture by including not only consumer goods, you might for example inflate an already existing asset bubble (housing) even more, while simultaneously suffering from deflation in another area.

It's really really hard to judge what will happen. We're in the midst of a big experiment.


Just nit picking:

> and if less money is available (lost job)

that's less velocity. The employer keeps that money, and if it's because of less sales then it's because someone else kept their money. Right now velocity is dropping. The number of dollars stays the same in a lost job scenario.


True, but I am looking at it in a simplified way by only talking about one individual here instead of looking at the whole economy's money supply. Makes reasoning about consumer price inflation easier for me, as an employer would usually not use the money for their own grocery shopping anyway.

It's less money available to the individual who has lost their job in this example. That may of course be caused by less velocity. Or it may be caused by a business closing down defaulting on their loans which actually shrinks overall money supply in the economy.

The resulting effect on prices is likely going to be the same anyway (in the short run).

It remains to be seen whether lower velocity will keep being the only deflationary driver over the long run. If businesses default en masse, then I think we will see real money supply deflation.


Last week the currency panic was about deflation. As a simple software developer, I just feel lost


Inflation happens when you have a supply side shock. Deflation happens when you have a demand side shock. COVID-19 caused both. We could get lucky and have the two balance out, but it's more likely one shock is bigger than the other. But nobody's going to know for sure until well after it's over.


As others have stated, no one really knows what is going to happen. But I also think that arguing about inflation vs deflation greatly oversimplifies reality. For example, the Fed's monetary stimulus is likely creating inflationary pressure on assets (stocks, bonds, real estate, etc...). And the pandemic has resulted in a drop in demand for a number of goods and services (travel, clothes, gas/oil, etc..) while also increasing demand or disrupting the supply of a number of other goods and services (food, medical supplies, fitness equipment, etc...).

I don't think the aggregate statistics are going to really tell the full story. We will likely see significant inflation in some sectors, while at the same time seeing significant deflation in others.


That's because it's really hard to predict right now what will happen, even for most experts.

Both inflation and deflation are equally probable outcomes, if you look at it from a broad perspective and with limited data. If demand goes down, that's deflationary. If supply goes down, that's inflationary. Money printing is always inflationary, but so far, the US has been able to "print" without the money actually ending up causing inflation in consumer prices. It's also unclear whether this is going to change after the COVID crisis is over.

Where we already see massive inflation is in the stock market and in asset prices. So a "currency panic about deflation" is also a really narrow way to look at it.

Sorry if I managed to confuse you even more.


It looks like the FED figured out how to conquer deflation and showed that it would do whatever it takes to defeat it. The amount of money printing earlier was a demonstration. In a sense they are fighting the last war. 2008 was all about deflation.

Inflation could help in some ways because the economy is over leveraged and inflation is a transfer from lenders to borrowers. I recently refinanced my mortgage and would really not want to be on the other side of that transaction.

On the other hand the government is spending money without even a thought of how to pay for anything, deficits are huge and the only reason it all works is because interest rates are low. Higher rates due to inflation could stop this.

Historically governments tend to choose inflation over deflation.

Interest rates rising due to inflation could stop the government from spending without constraint, but then again government is 35% of GDP(in the US), so perhaps consumer choice making a greater impact on an economy might be ok.


Interest rates cannot rise significantly anymore or the debt will become uncontrollable.

On the other hand, I'd say it's very likely that a continued low interest rate environment will drive the societal divide even further and won't be politically sustainable in the long run.

Exciting times we live in.


Indeed. With the recent course of US gov./FED decisions, debt seems pretty much already uncontrollable, it just keeps soaring and current powers at helm won't touch that problem with a ten foot pole.

However, it seems to me that as long as US gov. is maintaining world dominance of US dollar and the US population is kept disorganized to prevent a major coherent political action, this can probably go on indefinitely.

I would like to know what has to happen for the US gov. to change its fiscal behaviour. Maybe the internal turmoil like we see these months is what eventually breaks the camel's neck. What do you think will happen then? Maybe we will see some extraordinary government actions reforming debt/currency or work/incorporation laws to start over? Or maybe the situation will be managed by spraying little money to the poor people to keep up? I can imagine with some helicopter money the current mess can go on for next 100 years...


It can go on for a really long time unfortunately. Impossible to predict timing. And I don't think the social unrest will change the US's fiscal behavior unless it's really getting messy (civil war messy).

When looking at history, debasing the currency has always produced inflation at a certain point, which then usually leads to the downfall of the predominant power structure. This then causes things to reset and start over eventually. It's highly likely it will be the same again.

Hypothetically, if China was to decide it wouldn't export anything to the US anymore tomorrow, we could see inflation pretty quickly. The same is true for the USD as the reserve currency. Hypothetically, if other nations were capable of organizing a viable alternative, that would be the end for the current fiscal behavior. Both are highly unlikely to occur anytime soon...

A major supply shock seems to be the biggest real risk in the short and medium term, as demand issues can easily be controlled with "Money printer go brrrr" again and again if you are in control of the planetary reserve currency, but supply issues cannot.


Deflation is a risk. Meaningful deflation is so terrible that it will not be allowed. Hence inflation is more likely in my view.


We're living in somewhat unprecedented times.


Assuming we could convince individuals and the public, is there any feasible scenario where Americans would resolve to work hard, live briskly, save and defer 'wanton' type behavior for 24-months? And simultaneously allow the government to spend less and perhaps a one-time 2 tax as a way to save the fiscal system of the US.

The only way it would work is if we could somehow dramatically the improve the lives of say 100 million people. (Ignoring all the common objections and fallacies.)


Paradox of thrift. If everyone saves, there's nothing to do hard work on, so currency inflates.

The approach only works if we can use our work to stockpile durable goods.


Investing in things that increase future productivity also works.


Not really. We can't even get people to wear masks. Also, spending less during a recession is a good way to deepen the recession.


That's partly bad accounting, where a $1 of useless entertainment or luxury is considered the same as $1 of food or medicine.


Could this also explain the latest BTC uptick?


Maybe as a straw that broke the camel's back. BTC and Ethereum have been poised to move upward for a while now due to market dynamics/cycle reasons. Markets have their own internal dynamics and do not have to be "news" driven.



Goldman realizes that soon there will be a Democrat in the White House, so now they and the rest of the right-wing is getting ready to be "fiscally conservative" again! Funny how that always happens just as liberals take power. A few weeks ago the problem was deflation, but Goldman can read polls as well as anyone and are changing their tune.

(This comment will soon be flagged because it's "too political", but oh well.)


Basic question: why is it bad for the US if the dollar stops being the reserve currency?


The US couldn't consume goods from other countries based on cheap debt anymore, but would have to increase their own exports to match up their deficit.

That's because if other countries aren't forced to purchase USD, there's a much smaller market for the US currency. This means the US's ability to print money without causing domestic inflation would be much more limited.

It would have to consume less and produce more.


How so? The yen isn't even close to USD as a reserve currency and yet their central bank has about a 95% asset balance to gdp ratio compared to the US that has about a 33% asset balance to gdp ratio [0, 1].

[0]: https://www.swfinstitute.org/fund-rankings/central-bank

[1]: https://graphics.reuters.com/GLOBAL-CENTRALBANKS/010041ZQ4B7...


Well, Japan actually has potent production assets and exports a lot?


For americans at least: "The world's need for dollars has allowed the United States government as well as Americans to borrow at lower costs, giving the United States an advantage in excess of $100 billion per year" [0].

[0]: https://en.wikipedia.org/wiki/Reserve_currency


Must be that time of the year.


Month


Called it. Decades of neoliberalism have rendered the United States government unable to take care of its own population and infrastructure, and this is the end result. Hope those tax cuts were worth it!

This explains why the stock market is up so much too. It’s not that they are expecting profits- they are pricing in inflation.


This administration is ruining American hedgemony. We are weaker and stupider as a nation.


Ha, this started after the French convinced us to join with Vietnam.

Historians point to that moment as when Americans gave up on the government.


If this is the case, it could be a blessing in disguise. After the world wars we were artificially powerful due to circumstance. A return to a more balanced politics empowers those that were underrepresented. Potentially, with a little wisdom, this facilitates a more balanced prosperity and greater overall well-being. I admit this is probably optimistic, if also possible.


and sicker and poorer


Decades of hard work and planning thrown out in less than a decade by complete and utter incompetence.


As evidenced by what? A pandemic that gripped the nation during one of our greatest economic booms ever?


Do you think NATO's position is stronger or weaker now than it was 4 years ago? The UN? US/EU relations? US/UK relations? US/China relations?

Is the Department of State better or worse off than it was 4 years ago? Is US soft power stronger or weaker than it was 4 years ago?

The answer to all of these is pretty obvious, damning, and moving in the same direction.


All of these types of power hinge upon our economy/military and the economy/military of other countries. This whole, "he has bad manners" have zero effect on relations. Whoever told you that is brainwashing you


> This whole, "he has bad manners" have zero effect on relations. Whoever told you that is brainwashing you

Complete strawman, since you don't have an actual leg to stand on in defending this administration. Never did I say (nor would I) that Trump's "bad manners" had any affect.


I don't see how Bezos and Zuckerberg and a few select individuals being immensely more wealthy and stocks being weirdly more inflated relates to "the economy".


Real wages for the lower classes and employment numbers for African Americans are/were basically the highest in 50 years. Zuck/Bezos wealth is an inherent outcome of technology...


You don’t deserve your username.




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