Tuesday, July 8, 2014
Should The US Dollar Remain The International Reserve Currency. Yes. It Is Not Just About Value Because Exchange Rates Take Care Of That. It Is About Relative Political Stability.
The US Dollar as the International Reserve Currency . Reading the Financial Press About the US Dollar's Decline and Fall is Mostly Nonsense in Print. Even If You Can Define the Word Economy You Can't Eat It Lex Loeb Contributor Network . It takes a financial crisis to cause people to start taking about the US dollar's role in international finance. Much of what is being said about the US Dollar and it's shortcomings is pure nonsense. Yes it is a debased paper currency. Most major international paper currency is also subject to being debased. The mystery of how inflation works has been determined long ago and it comes down to government mints printing more paper money and putting it into circulation then actual financial transactions require be printed. What governments do is print money and buy stuff with it. When the US need diesel fuel from Kuwait to fuel tanks in Iraq it writes a check to the Kuwaiti Oil company selling the oil. To cash the check the Kuwaiti oil company takes the check to a local bank and says cash this please. The bank says "that is a lot of money . we can get it for you tomorrow because we don't have a half billion dollars here. You do realize we charge a commission to change the dollars in our local currency or do you want us dollars? The guy trying to cash the check says OK that he will come back the next day to get the cash in US dollars. The bank then has to go to a different bank and order the delivery of the US dollars for the next day. The bank that the dollars comes from then needs to order more US dollars. They call an other bank has to call the us government to get the bills delivered to Kuwait. When the order comes in to the government to send the cash they check their inventory and yes they have lots of freshly printed 100 dollar bills and they put those on a plane to go pay for the diesel fuel. The Kuwaitis get the paper and the US military gets the diesel fuel. That is the whole transaction. When the currency is sent to Kuwait no one is necessarily if the Government printed those hundred bills because someone paid their taxes or because they just printed them to buy stuff the government wants to buy even if it does not have any tax money around to base the printing run on. When governments print money for stuff they want to buy without having collected any tax money that leads to inflation. It is not just a theory. There is absolute proof. Theories otherwise do persist. One theory is that inflation can be caused by oil prices going up or because OPEC , as a cartel, causes inflation or similarly labor unions generally have caused inflation. The statical evidence does not support these claims at all. Charts of the recent rise of the price of Oil where it topped $140 per barrel actually show more conclusively that the price of oil really was just cat aching up with the rate of inflation as it compounded over the years since the price broke in the 1980s. Adjusted for inflation the price of oil at $140 per barrel may not have exceeded its price back during the OPEC oil embargo. What had looked like inflation caused by OPEC was really the devaluation and decline of the US Dollar. The Gold Chart over the same period with gold rising almost to $1000 an once , similarly was just gold trying to keep pace with inflation and not quite exceeding it as it is also a production commodity which means it has common uses in common markets. where the relative scarcity is more able to determine the actual price than inflation necessarily. The fact that there can deflation because of improving production of commodities during periods of inflation also shows rather conclusively that Government printing presses are the whole absolute cause of the phenomenon. Going back to reserve currencies, in the illustration with Kuwait, Before the Market crash of 2008, the big media extravaganza in fear mongering was talking about the strange hybrid animal called a Sovereign money trust. There has been a tendency with the US Dollar being the worlds main reserve currency for foreign nations and particularly those with top heavy command and control economies and others with extremely frugal citizens, to sell the citizens of the United States of America Lots of their goods and services and to save their US dollars and not spend them. Japan and Western Europe were two of the first places to end up holding huge US dollar reserves. Instead of spending the US dollars the countries would rather hold the dollars and receive interest payments from the US treasury primarily instead of spending them back in the USA and getting goods and services from America in return. It is sort of a mystery why they do this considering that the US dollar is and has always been subject to devaluation due to inflation. The real long term interest rate of holding this US money paper has often been very low or negative when compounding of inflation is considered. The threat of devaluation is the biggest risk. The only way most Americans feel the effect of devaluation is when they see the domestic price of imports or goods trading on international markets go up the way we saw oil go up in price/ It was hard to determine internally what part of the price rise was due to inflation and what part was due to economic scarcity in world markets but there had to be some combination of the two involved. The question then becomes why foreign governments, in particular want to maintain huge lingering US dollar reserves when they know the currency is a slippery down hill asset. One reason maybe they feel they are not subject to US domestic taxes giving them a competitive advantage in ownership but that does not adjust for inflationary devaluation over the long term. An other reason is that foreign countries have been more prone to be protectionist than the USA because they still believe in mercantilism that says only countries with positive trade balances are successful. That too has been proved to be absolute bunk as huge trade deficits only mean foreigners have big US dollar credits to buy goods and services in the US but holding us dollars to earn interest instead just gives them the illusion of making money because US dollar devaluation has been predictably fairly constant over many many years. A country that really has no business having any US dollar savings reserves, and now in the trillions of us dollars, is China. China is not yet a fully developed nation more than two thirds of its people still live just slightly above the third world standard of living working for a few dollars a day . The Chinese government holds trillions of US dollars instead of spending them which is just a way to ultimately delay doing so as they are not as valuable as they seem. When the US was a developing country there were no major foreign reserve holdings in the US. Labor rates in the US have always been higher in the US than elsewhere in the world because of relative scarcity of laborers. China's recent high growth rates make one wonder why they are not buying goods and services with their US cash earning from the USA more immediately instead of creating funds to invest in US industries or to pour into national US dollar based sovereign funds. When the US was in a similar growth state, the US tended to re- invest most all of its "sovereign funds",back into the development and growth of our own country and not foreign countries. China's behavior creating these US dollar reserves and trying to use them to buy American firms tells some of us that maybe there is more long term economic vitality in the USA than there is in China. It has proved already and before the 2008 panic and crash to be that kind of colossal mistake for china. Foreigners hoarding us dollars instead of spending them have kept the US from having 100 full employment although those funds did build up some giant financial firms based mainly in Wall Street USA. The US dollar is still it and will remain it. China has too many currency controls to take the lead. The US has plenty of controls too which are not helping. The Euro is beginning to look like a bad joke. Things could change and put the US dollar permanently out of favor as the key currency if China suddenly became a true democracy with rule of law and stopped managing the Yuan and / or if Europe decided to become competitive and dropped its costly welfare obligations because those debt obligations are twice the dead weight as consumer debt in the US. We might even be impressed by President Obama and see the dollar rocket if instead of introducing a central economic control and command system that he introduces real market incentives for growth. Instead of an energy policy regime that offers tax credits for going though the motions the Obamaites could instead create competitive incentives such as tax waivers over production success. If it is possible for China to grow at a rate of 10-20 percent a year from a low starting point it is possible for a fully developed country to do the same from a high level starting point. The mathematics of high growth have no bearing to the starting point. The idea that high organic growth is not sustainable is not always supported by nature as some organisms can grow indefinitely without checks and balances so there is no reason human enterprise necessarily should have any limitations on growth. The question is then when are the limitations? Most of the time it is too much supply whether or not demand is in decline. Deflationary conditions are the result of excess production and yet at the same time there can be mass starvation. The point is that incentives for production are squeezed between supply and demand signals in the economy. No currency, not even pure gold is immune from circumstances of inflation and deflation. The Spanish rape of Latin America for gold resulted in a time of gold inflation not just in Spain but in the rest of Europe. Money supply and economic growth are not necessarily connected. A key world currency is going to be the one that it not overly connected to economic growth but to some perceived intrinsic value, convenience and familiarity. The fact that the US dollar still has any value at all after years of compound inflation is fascinating in a world of clone baseless printed currencies. A better idea for a new international currency might be a start up INTERNET company that makes a safe value version of the dollar available in a way that governments are unable and unwilling to provide. Gold backing could be attempted by assigning a gold basis for all currencies worldwide with a micro conversion fee. I would be tempted to try creating it. For every $100 bill collated a $100 gold bill would be issued but the problem of having to find and purchase enough gold to back it up. Could become an inadvertent ponzi scheme which is sort of what the US Treasury is running but it is not promising anything as certain in value for a dollar as any amount of gold. Clearly the only solution is to take the moon and subdivide it into acres and back dollars with those acres because the moon is always going to be ours. In order to lay claim to all those acres I would set my INTERNET money site transaction commissions to go toward starting a moon base colony there to give assurance to owners of the reissued dollars that their moon acres are accessible. That might actually lead to the best currency appreciation ever but it could end just like the south sea bubble which would at least be a fun historic remake. Just imagine the US treasury falling for my scheme to buy all US debt and convert it for lunar acre dollars! (they probably would) . Close