The fate of the world's currencies in the wake of the demise of the dollar. - page 89
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Why does greenback continue to be the favourite? - yes there are the most obvious reasons: nothing serious has happened to it since the 19th century (and there have been several defaults in Europe), treasuries remain the highest standard of risklessness (there has never been a case of default), the ACP of the former British colonies is pretty clear and predictable to market participants, and most importantly why the greenback is in demand is the consistently high interest in the states for investors (IPOs), well, if it is the No. 1 market on the planet, then of course there is automatic demand for the appropriate currency, there is no conspiracy or ill intentions, it's just the usual economics...60% or more of the world's central bank reserves are in dead presidents for a reason...
About the yuan... yes, since 2016 it is also a reserve, but sorry, it is still about 2-3-4% of total trade turnover, it still needs to grow, the Celestial Empire has capital restrictions, and the policy is not the most attractive for outside investors... until capital restrictions are lifted, there will be no appreciable increase in the renminbi's share... so in terms of diversification, it is of course good if there is more scope for choice...
just a couple more words about government debt...
If you look at the ratio of debt to GDP, it's not that bad, right? There are countries with much higher ratios, like Japan... there is an expression "they do it because they can" - this is the case, why are they so indebted? - because it doesn't stop them from living
...and at the very least they will pay it off in 5-10 years (if need be)...
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Nothing serious has happened to it since the 19th century (and there have been several defaults in Europe),
You are misinformed - the default of 1862, the default of 1934, plus the technical ones though they are not exactly defaults but they do not add to investor confidence.
The DKP of the former British colonies is pretty clear and predictable for market participants,
I'm afraid mainstream market participants have more and more questions about their DCPs.
and the most important reason why the greenback is in demand is the consistently high interest in US markets for investors (IPOs),
The current account deficit does not support this thesis, they are eating up more than they have time to sell property.
60% or more of the world's central bank reserves are in dead presidents for a reason...
I agree, it's still lying around for now, but that could change quickly.
About the yuan... yes, as of 2016 it has become a reserve as well,
It has not become a reserve, it was included in the IMF basket in 16, it is just a representative function, its exchange rate is taken into account when calculating the IMF depositary receipts rate. For the time being it is not even a freely convertible currency, the PRC authorities actively resist that. However, when the PRC economy exceeds the state economy in absolute terms, the costs for using another country's currency will become too high and they will be forced to let the renminbi float freely.
A few more words about government debt...
But if you look at the ratio of debt to GDP, it's not so scary, right? There are countries that have a much higher ratio, say Japan... there is an expression "they do it because they can" - this is the case, why are they so indebted? - because it doesn't stop them from livingThat's what I wrote in my post.
"The main idea is to boost the economy while the cost of debt servicing is low. And it is small because of the dollar's reserve currency status. In general, the idea makes sense - who would give me three quid at 1% per annum! But what happens if the cost of servicing the debt goes up dramatically? "
But if the cost of borrowing starts to rise rapidly, then what do we do?
And at the very least, in 5-10 years, they'll just pay it off (if they need to)
That's a masterpiece! How? With what, a magic wand? Of course if at 30 trl, investors will refuse to buy debt with 7% coupons, we can offer them 10%, then 20%, then 30%. And then, when the debt increases to, say, 300 trillion dollars, they would default. But it makes more sense to decide on it when it is still in some decent size.
Frankly, I do not understand the painful reaction to my posts. I have foolishly decided to give my vision. This is my personal understanding of geo-economic evolution, I am not imposing it on anyone. It may well be that I am wrong in my view, but so far I have not found a convincing argument.
As for the dollar, I'm totally indifferent to it, I have no sympathy or antipathy. It's just a tool with which you can earn, if it grows I buy it, if it falls I sell it. If it rises, I buy it, if it falls, I sell it. That is all. For example according to my estimations till the middle of next year dollar will be getting markedly stronger, somewhere around 1.06-1.08 level for euro, naturally, I will buy it happily the whole time. Then, when it starts to fall, I will just as gladly sell it. The main thing is not to stand still.
If the question arises "what could be a substitute for the dollar as the world's main reserve currency?", since local currencies have to be counted in something for import/export transactions, then why not create some kind of value benchmark expressed in a portfolio of precious metals, oil, gas, and man-hours to create a unit of food? Then all the negative consequences of having an OMRV in the world economy are eliminated.
If you replace the dollar with the yuan, what will change? - In my opinion, nothing, except that the preconditions for humanity to turn into the Chinese will only increase (forgive me, Chinese, if anything).
Replace it with... how do you get people to pay in Yuan?
Replace it... but how do you get people to pay in Yuan?
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You are misinformed - the default of 1862, the default of 1934, plus the technical ones, while not exactly defaults, do not add to investor confidence.
There have been episodes of great thrashing and panic, even from the 18th century, so I agree, I have generalised too much, I accept your point,
But they managed to get out of all of them with minimal damage, for example the Demand Notes suspended exchange, but they refinanced everything with the subsequent issues,
and by the end of the war (which was a civil war) they managed to get out without defaulting, which is pretty good,
they say Demand Notes still exist somewhere and are considered quite legitimate...
if we're talking about hardcore hell, then the confederate dollar of the southern states is an example,
that was a real bummer, the devaluation was almost total, inflation was 4,000%...
But what does that have to do with modern times?
do investors really see the risk of dollars being discounted like they were in the 1860s? - that's ridiculous...
US sovereign debt is of first class quality now - which cannot be said for example about Europe where another Greece/Italy/ might get caught...
I'm afraid mainstream market participants are getting more and more questions about their DCP.
There are always questions, but the monetary authorities of other countries have many more...
The current account deficit does not support this thesis, they spend more than they have time to sell property.
They have a consistently negative trade balance too, so what? how does that cancel out the attractiveness of the market to investors?
I agree, they are still lying around, but things can change quickly.
How quickly? for what reasons? what needs to happen? what are the reasons to think so in the first place?
It did not become a reserve, in 16 it was included in the IMF basket, it is just a representative function, its exchange rate is taken into account when calculating the IMF depositary receipts rate.
Well ok, it's an argument about terms, it's considered symbolic value, although its weight in the basket already exceeds the yen and the pound...
It's not even a freely convertible currency yet, the PRC authorities are actively resisting this. But when the PRC economy exceeds the state economy in absolute terms, the cost of using another country's currency, will become too unacceptable and they will be forced to let the yuan float freely.
As far as I remember in PPP terms, China seemed to have already surpassed the U.S. recently (it depends on the methodology)
Now the Chinese growth rate has slowed down, so the leap is questionable,
But in any case, why should this surplus automatically generate unacceptable costs?
In theory, as any export-oriented country it would be beneficial for them to have a declining national currency...
but judging by the brutal intervention of 2017 they don't want it so far...
overnights bombed up to 100% in a moment... the offshore yuan is breaking away from the domestic yuan...
what kind of investor would like that kind of swing?
That's what I was talking about in my post
"The main idea is to boost the economy while the cost of debt servicing is low. And it's small because of the dollar's status as a reserve currency. In general, the idea makes sense - who would give me a trillion quid at 1% per annum! But what happens if the cost of servicing the debt goes up dramatically? "
But if the cost of borrowing starts to rise rapidly, then what do we do?
Why should it suddenly rise quickly?
That's brilliant! How? By what, a magic wand?
The size of the debt is now just one size of GDP, and there's not much of a problem with smooth refinancing now...
but if it turned out they couldn't issue new bonds, then they would have to pay right out of the current GDP,
but even if such a fantasy scenario is imagined, even so it is not a super-impossible burden...
Of course if at 30 trl, investors will refuse to buy debt with a 7% coupon, they could offer them 10%, then 20%, then 30%. And then, when the debt increases to, say, 300 trillion dollars, they would default. But it is wiser to decide to default when it is still in some decent size.
Why should investors give up?
During the 2008-2009 crisis (it was worse than now) investors were more enthusiastic about buying them as a way to protect capital,
and by the way the rates are much lower now, where are these crazy numbers about 20% and 30%? even 30 year olds do not quote higher than 4%, look at Bloomberg...
in a word - you are writing about things that don't exist....
Honestly, I don't really understand the painful reaction to my posts. I foolishly decided to set out my vision. This is my personal understanding of geo-economic evolution, I do not impose it on anyone.
Not at all, I am not imposing anything, I just think that your opinion is fantastic, so I stated it in an unobtrusive and ironic way ))))).
It may well be that I am mistaken in my view, but so far I haven't found any convincing arguments.
And so far no convincing argument has been found as to why the dollar should suddenly become a pariah,
and treasuries, which are the standard for risk-free returns for investors, should suddenly become irrelevant...
they're the basis of almost all risk-portfolio models, and then, lo and behold! - now everything has changed - and why should it?
well, if someone sells off treasuries - there will be other buyers...
and the most important thing is that it will hit such sellers in the first place:
they'll sell treasuries and then what? they'll need somewhere to put it - and there's nothing as safe as treasuries on the planet yet )))))
As for the dollar, I'm totally indifferent to it, I have no sympathy or antipathy. It's just an instrument to earn, if it rises I buy it, if it falls I sell it. If it rises, I buy it, if it falls, I sell it. That is all. For example according to my estimations till the middle of next year dollar will be getting markedly stronger, somewhere around 1.06-1.08 level for euro, naturally, I will buy it happily the whole time. Then, when it starts to fall, I will just as gladly sell it. The main thing is not to stand still.
Yes, volatility is everything for a trader, but the principal has to be stored somewhere, right?
I would not bet on the yuan - who knows what they have in mind?
I would not bet on currencies of exotic countries, such as the rouble, for obvious reasons,
The currency is strengthening, but now there are reasons for it to strengthen, so the ruble instruments may be kept until there is no new aggravation,
but for the long term it is better to have a portfolio denominated in more predictable currencies...
Purely theoretically - any empire can collapse - for example, Rome seemed unshakable, but fell...
but such processes are very slow, stretching over decades or even centuries,
maybe the states will run out of battery one day too, but for the foreseeable future there is no reason to think so...
so, too, few people make settlements in dollars. and there are a lot of people in china, if anything...
It is a matter of economic expediency and it happens that way. It is a consequence of the relevant reality, if one does it in dollars.
It is a matter of economic expediency that it happens that way. Calculations in dollars, if one does them, are only a consequence of the relevant reality.
verily
the market decides
I've been hearing about the end of the dollar for more than 10 years... and the further it goes the more they shout - and the dollar gets stronger)))
And it's not going to end yet)))
You are focusing your comments on the current state of the world economy, I am interested in how it will change in the near future, and this interest is purely mercantile. In the next 10-15 years, two US economies will form in Southeast Asia with a population of 40% of the world's population. Such a massive quantitative change, in my view, will inevitably lead to a massive qualitative restructuring of the geo-economy.
Frankly, I see no point in arguing further - I have neither the desire nor the time. You will stick to your opinion; I will stick to mine. The future will show who was right.