Loading ...Denial & Deflection
Larry Summers is a pretty smart guy who likes to play both sides. Last year he correctly criticized the FED for it’s inflation is “transitory” nonsense and said they should have started tightening sooner than they did. This year he has switched over to supporting the FED in continuing to raise rates even when it is clear that they have over shot and that money supply is dropping, because as a former Treasury Secretary he knows that is the only thing keeping the dollar from collapsing. This weekend in his usual spot as guest commentator on Bloomberg’s Wall Street Week program he tried to deflect from the fact that the majority of the world are moving away from the US dollar at an accelerating pace. Instead of focusing on the facts, he chose to say that the dollar is still the world’s reserve currency because there is nothing else to replace it. While he was technically correct in that no one wants to hold reserves in Chinese yuan the way they did in US dollars and treasuries, he conveniently ignored the fact that more countries are both conducting trade in their own currencies and bypassing the dollar, as well as moving reserves out of the dollar and into gold. So while technically correct that the yuan(at least for now) isn’t going to replace the dollar as the global reserve currency, if it is backed by gold and made redeemable at some future point in time, it will do so. In the meantime the trend of more countries joining the BRIC’s and conducting trade without using the dollar, as well as moving more of their savings and reserves into gold, leaves the dollar with nowhere to go but lower as demand for it declines(especially as more energy deals are done without it) and supply of it continues to increase as the US budget deficits continue to grow.
After writing the above piece I had an additional thought about reserve currencies. In the past 6 or 7 hundred years there was a consistent shift in global economic powers who held the military/global reserve currency mantle. From Italy and Portugal, the Netherlands, Spain, Britain and the US they all had something in common that no longer exists today. (please correct me if I got this wrong) I believe that all of these regimes either used actual gold and silver as money or had their global reserve currency status supported by the fact that they backed their currencies with real physical money, gold and or silver. Therefore, while there may have been upheaval in terms of military victories and defeats and gold was often seized by the victors in wars, the currencies(at least for each reserve currency) was real money. Gold and or silver. This is the first time that the switch from a declinning power holding the reserve currency status, comes from just fiat. So it won’t take an actual military victory by China(or anyone else) to dethrone the US dollar as the reserve currency. The world is rapidly dedollarizing by switching out of dollars and into gold. That in itself will accomplish what in the past took military campaigns to do so.
“This is the first time that the switch from a declining power holding the reserve currency status, comes from just fiat.”
Mostly but not entirely correct. Britain officially ceased using the gold standard in 1931. And yet sterling was still the reigning reserve currency thereafter. The US dollar didn’t become the dominant reserve currency until 1944.
What we have now, is a reserve currency based not on assets but liabilities. Foreign central banks hold dollars as treasuries (IOUs) that are backed by the power to tax. But as Russia discovered, it wasn’t their $ if the US decided otherwise. That was, effectively, a partial default. Just like any political decision to apply Force Majeure would be in the metals markets. You’re stiffed. (~Stierf in Dutch)
Good points and thanks for that info, but even if Britain held technical claim to reserve currency status one could debate the US was already the economic and military power of the world in 1931 and beyond. Even with the depression going on in the thirties, the fact that the US dollar was still redeemable in gold until 1971 and arguably more in demand than sterling one can state the US dollar was the global reserve currency since at least WW1. My point is that there was a gold backed reserve currency at the time of transition (US dollar) and now there isn’t.