Thread

US Treasuries Have Become Unappetizing for Foreign Central Banks and Governments

152 points · 132 comments · iamnothere

Arubis · 1789753289 · focus · HN ↗
Dedollarizing the world economy has more net losers than the US (though that's the obvious one).
It's not without its benefits -- over the last couple decade, the US has found ways to weaponize access to USD, so if you're not a fan of having a country other than your own able to effectively regulate or sanction you and your business, there's some niceties here.
Being able to trade and invest in a stable, highly liquid, easily converted, low risk currency was a net win for most of the world for about half a century. There isn't an obvious replacement, so we'll just see more friction.
1. nostrademons · 1789753559 · focus · HN ↗
  It's kind of a prelude to a Thucydides Trap.
  The problem with replacing the world reserve currency with something else is that nobody can agree on what that something else should be. Expect to see a lot of jockeying for power as people realize the U.S. isn't the world hegemon anymore. Jockeying, on a state level, usually means war.
  1. tehjoker · 1789753933 · focus · HN ↗
    Only China has the GDP to replace USA. So while the answer isn't written in stone, it looks like it'll be China, or since China favors UN governance, maybe we'll move to an old discarded idea (because it didn't serve American interests) like an international currency system that Keynes favored.
    <a href="https://en.wikipedia.org/wiki/Bancor" rel="nofollow">https://en.wikipedia.org/wiki/Bancor
    Recall that America is currently attacking Iran without provocation and is aiding a genocide.
    rdm_blackhole · 1789754525 · focus · HN ↗
    It will not be China as it doesn't have a floating currency. That is one of the prerequisites for becoming a reserve currency, that and removing capital controls.
    Finally there has to be a certain willingness from other countries to accept this new currency and I just don't see the EU countries conducting all their international trade in yuan anytime soon.
    Finally replacing the USD is just one part. The second part is how to stop the next currency from being weaponized just like the USD is/was. Without the answer to that question, then switching to a new reserve currency is just replacing one problem with another.
    nostrademons · 1789755469 · focus · HN ↗
    Bitcoin as the new Bancor.
    A stable, simple cryptocurrency is ideal for this. Not only is it not controlled by any nation state, it's not controlled by anyone. It's just there, a tradable asset that has mathematically-defined rules for how many will ever be created. Also gets around the Triffin Dilemma by not being used as a national currency, or for general consumer purchases.
    The international settlement use-case also gets around two of the traditional weaknesses of Bitcoin. The fact that it's deflationary is not concerning when used as a unit of international settlement, because national currencies can be made to be inflationary to spur consumer activity, and then just float relative to Bitcoin. And its low TPS limits also don't matter much when it's only used for general international settlement between large financial entities, rather than as a payment coin for ordinary consumer purchases.
    watwut · 1789756895 · focus · HN ↗
    Bitcoin is used for two things - speculation and crime. It is highlynvolatile Not a good reserve currency.
    Arubis · 1789754528 · focus · HN ↗
    China probably has the fiscal firepower to replace Eurodollars, but while their financial system remains split between "internally used currency" and "currency for everyone else" and while external investment is treated with deep suspicion and harsh rules, it would be limited to liquidity and exchange purposes. Nobody wants to hold a currency like the yuan over an appreciable period of time. That might be enough; that confers a lot of power and influence to the currency issuer. But definitely different ground than US Treasuries cover.
    Historically this is also where we'd insert something into the conversation about who gets to hold the moral high ground, but as you've noted, that's something the current US administration has abandoned entirely.
    stickfigure · 1789756169 · focus · HN ↗
    China is actively broadcasting its plans to start the next Russia/Ukraine conflict. There is no moral high ground there.
    tehjoker · 1789882558 · focus · HN ↗
    What business does America have in Taiwan? It makes no sense.
    stickfigure · 1789912982 · focus · HN ↗
    Same business it has in Ukraine today, or Czechoslovakia in 1938, or Poland in 1939.
    internet-390 · 1789754822 · focus · HN ↗
    No, China's economy is not setup to be a reserve currency. To be a reserve currency other countries need to have a stockpile of it to trade with 3rd party countries.
    The only way for other countries to have the RMB is either China has to start issues massive amounts of bonds (doubt they'll be okay with foreign government owning their debts) or they stop being an export driven economy (this is because all the money goes back to China, and RMB is unable to actually leave the country if you're in a trade deficit with China) . Neither of which seems likely.
    carefree-bob · 1789754985 · focus · HN ↗
    You are confusing being the world's biggest net exporter with being the world's biggest net importer.
    But they are the opposites of each other.
    So it's fair to say that China is the exact opposite of what it would take issue a reserve currency.
    Let China spend a few decades running net trade deficits, let it open its capital market so the CNY fully floats, and allow unfettered foreign capital inflows and outflows for a few decades.
    Then we can have a discussion about how it can be a dominant reserve currency.
    wahern · 1789760427 · focus · HN ↗
    The US was a net exporter for most of the time it was a de jure and de facto reserve currency, up until the dollar was floated (i.e. end of gold convertibility). IOW, it was arguably the reserve currency status that drove the trade deficits, not the other way around. The effect was muted by the artificial constraint of gold convertibility, but the pressures from that restraint manifested in other problems, culminating in a currency crisis and Nixon's decision to end convertibility. That unleashed the deflationary pressures caused by reserved status, accelerating the shift to goods imports.
    [deleted] · 1789764151 · focus · HN ↗
    [deleted]
    carefree-bob · 1789768285 · focus · HN ↗
    > The US was a net exporter for most of the time it was a de jure and de facto reserve currency, up until the dollar was floated (i.e. end of gold convertibility).
    No, the US ran a goods surplus but a current account deficit.
    If we look at US history, we can divide it into a few periods:
    revolution to civil war: US is a net debtor, running goods deficits and borrowing from europe.
    1870 - Great Depression/start of WW2: US is running goods surpluses (of about 1% of GDP) but continues to heavily borrow from Europe.
    Post WW2 - Bretton woods. US is suddenly the world's biggest creditor, and it's good surplus rapidly declines to a deficit, forcing the US off the gold standard.
    That middle period puzzled a lot of economists, because the balance of payments identity says that the current account plus capital account must sum to zero, so if the capital account is positive (continues to borrow from Europe) then the current account must be negative. But here we have reports of the US running a goods surplus! Well, the problem is that even though there was a goods surplus, the current account was negative. The US owed so much money in dividend and interest payments that the money earned from the goods surplus wasn't enough and the US kept getting deeper in debt to Europe throughout this period, which meant that Europe was a net accumulator of US liabilities even though the US ran a goods surplus.
    And it was the fact that Europe kept accumulating US liabilities that allowed the these liabilities to be traded as an effective reserve currency. If the US was not getting its liabilities into the hands of the europeans, then there is no way US liabilities could possibly be used to settle international trade. This should be a no brainer.
    Now a lot of crazy stuff happened during the stock market crash and capital flight during WW1 and WW2 that turned the table on the Europe, so the US ended up in a situation where, very suddenly -- as in, over the course of just a few days -- it became a net creditor to Europe, but that necessitated the Marshall plan, where the US needed to flood Europe with dollar claims -- which were gifts, not investments -- in order to prevent the European economies from grinding to a halt in the immediate aftermath of WW2, and then the US goods trade deteriorated so that we had to go off the gold standard. Thus the period from the end of WW2 to the end of Bretton woods should be viewed as an anomalous disequilibrium period of adjustment, and if you look at US current account data, you see a fairly rapid decline because the US goods surplus during the WW2 period was artificially inflated by counting munitions and war material as exports, but these exports were "paid" for by loans that were forgiven, and this, together with the Marshall plan, is what screws with traditional readings of the balance of payments identity in that WW2-end of Bretton woods period.
    Bottom line, if you want to run trade surpluses and be a reserve currency, you need to be giving away more claims than are necessary to buy your goods, because at the end of the day, the rest of the world has to be a net accumulator of claims on you in order for those claims to be a reserve currency.
    nostrademons · 1789770027 · focus · HN ↗
    Huh, interesting. During the ZIRP period (~2016-2017), I remember suggesting somewhat tongue-in-cheek here that the rational response to negative interest rates is to borrow as much money as possible, use it to raise an army, and then go conquer the people who loaned you the money. It sounds like that is actually what the U.S. did, except with a dose of diplomacy that got them to exhaust themselves fighting each other first.
    It's kind of the historical embodiment of "Owe the bank $100, and you have a problem. Owe the bankers $100T, and they have a problem."
    wahern · 1789777161 · focus · HN ↗
    According to this the US nominally ran a current account surplus until the 1970s: <a href="https://www.bea.gov/sites/default/files/2024-03/trans423-annual-current-account-balance.pdf" rel="nofollow">https://www.bea.gov/sites/default/files/2024-03/trans423-ann...
    Which is what you'd expect if you're exporting more than importing. Perhaps you meant by some other accounting, which is what I was alluding to regarding the distortion caused by gold convertibility. Ceteris paribus, the trade & account balance will zero out over time in the absence of some kind of regulatory or similar distortion. China doesn't need to be a net importer to become a reserve currency, but if they became one (deliberately or otherwise) and allowed their currency to float than in time their exports would tend to fall and they'd likely become a net importer, at least if they became the dominant reserve like the US. (If they didn't float, you'd get a mess like the US had.) The reserve status can drive the balance of trade toward net importing. Which is precisely why China doesn't really want to become a global reserve currency. They'd certainly like the soft power that would bring, but they don't want the domestic employment disruption the US suffers from. That doesn't stop them from wanting their cake and eating it, too; they can try, but nobody really believes they could, so nobody takes it seriously. Though it's not necessarily an all or nothing deal. I'm not sure the world needs a single reserve currency as dominant as the dollar. We have markets to arbitrage and balance currency valuations, including future expected valuations. A singular dominant reserve currency is helpful to reduce friction, but less so when you have huge, global currency and currency derivatives markets constantly trading.
    fragmede · 1789778787 · focus · HN ↗
    The Louvre Accord and the Plaza Accord before that, in the 80's, are of a different time and place.
  2. thijson · 1789755658 · focus · HN ↗
    I think that's becoming gold. That's why we're seeing the price action in it over the last few years. In a world with little trust, only gold is trusted. Even the Netherlands is repatriating a portion of their gold reserves from New York to London.
    upboundspiral · 1789756304 · focus · HN ↗
    Hopefully not. We've lived that movie already with currencies tied to gold. It significantly slowed down past WW1 reconstruction, and is in general makes it very hard to adjust the money supply to enable economic recovery.
    The ideal would be something like the International clearing currency proposed by Keynes durin Bretton Woods (he was overruled in favor of the dollar as reserve currency since America had all the power at the time).
    Here's an Op Ed from Greece's past finance minister in favor of this scheme: <a href="https://www.weforum.org/stories/economic-growth/yanis-varoufakis-imagining-a-new-keynesian-bretton-woods/" rel="nofollow">https://www.weforum.org/stories/economic-growth/yanis-varouf...
  3. jltsiren · 1789756143 · focus · HN ↗
    That "usually" was in a different world.
    Before the industrial revolution, there was almost no sustained economic growth and business was essentially a zero-sum game. Wars of conquest were high-risk business ventures that promised higher returns than actual business.
    Then the industrial revolution happened. Economic growth made business more lucrative, while wars got deeper into the negative-sum territory. Leaders were slow to understand that, which is why the 19th and 20th centuries saw a series of increasingly destructive wars that left almost everyone worse off.
    But there have been no wars between major powers in the last 80 years. Maybe people in power have realized that all-out wars are no longer productive. But there have been plenty of lesser wars: civil wars, proxy wars, and wars against much weaker states. As well as regional wars, where at least one of the parties is so dysfunctional that it does not benefit from positive-sum business.
    retrac · 1789756690 · focus · HN ↗
    > But there have been no wars between major powers in the last 80 years. Maybe people in power have realized that all-out wars are no longer productive.
    People talked like that before WW I. There hasn't been a major war in Europe since 1870 almost half a century and trade is such a large war would bankrupt all the major powers and so would never happen. The Great Illusion was published in 1909 and was positively received at the time:
    > In The Great Illusion, Angell's primary thesis was, in the words of historian James Joll, that "the economic cost of war was so great that no one could possibly hope to gain by starting a war the consequences of which would be so disastrous."[4][5] For that reason, a general European war was very unlikely to start, and if it did, it would not last long.[6] He argued that war was economically and socially irrational[7] and that war between industrial countries was futile because conquest did not pay.
    jltsiren · 1789757925 · focus · HN ↗
    There was a major war between Russian and Ottoman empires in 1877–1878. And if you look outside Europe, there was an even greater war between Russia and Japan in 1904–1905.
    jopsen · 1789758852 · focus · HN ↗
    These were small wars: <a href="https://en.wikipedia.org/wiki/Russo-Japanese_War" rel="nofollow">https://en.wikipedia.org/wiki/Russo-Japanese_War
    Smaller than the one in Ukraine today.
    jltsiren · 1789759264 · focus · HN ↗
    0.15% of world population was mobilized to fight in the Russo–Japanese war. That would correspond to ~12.5 million combatants today. Napoleon's invasion of Russia saw more casualties from combat, starvation, and disease, but it involved a smaller fraction of world population.
    nostrademons · 1789761912 · focus · HN ↗
    I assume you're going off the 1.365M + 1.2M combatant strength listed in the Wikipedia article?
    Those are figures for the total size of those national armies at the time. It'd be like saying the Iran war involved 3M people because the U.S. has about 2.1M in uniform and Iran has just under 1M counting reservists. Meanwhile there've been precisely zero boots on the ground in Iran, and the total number of military personnel directly affected is on the order of tens of thousands.
    The text of the article has the Russian far east strength at about 95,000 at the start of the war, with another 410,000 trained in over the course of the war. The best proxy for Japanese (and Russian) combat strength might be the Battle of Mukden [1], which had about 250K Japanese and 292K Russian troops. These numbers are smaller by a factor of about 5x.
    The present-day Russo-Ukrainian war is significantly larger. Estimated Russian deaths are 500K+, higher than the total number of Russian soldiers involved in the Russo-Japanese war.
    [1] <a href="https://en.wikipedia.org/wiki/Battle_of_Mukden" rel="nofollow">https://en.wikipedia.org/wiki/Battle_of_Mukden
    jltsiren · 1789764704 · focus · HN ↗
    If you continue reading the article, it mentions that Russia had mobilized almost a million soldiers in the Far East by the end of the war, and that mobilization largely happened after the Battle of Mukden. Without the naval defeat at the Battle of Tsushima, Russia would have had the upper hand at that point, and the war would likely have reached a different conclusion.
    Industrial armies were massive. By the standards of that era, current US military strength exceeds 60 million. But they mostly relied on reserves, which were slow to mobilize. Japan's quick decisive victories ended the Russo–Japanese war before it had a chance to escalate further, potentially reaching the scale of the Eastern Front in WW1. But even then, the Battle of Mukden was one of the largest land battles in history until that point
    nostrademons · 1789757654 · focus · HN ↗
    The biggest Thucydides Trap wars were WW1 and WW2, which happened specifically as Britain (the first major power to industrialize) lost its hegemony over industrialization and faced competition from Germany, Russia, Japan, the US, etc. Thirty years of some of the most brutal war the world has ever seen followed, which only ended with the U.S. re-establishing hegemony because it was the only one whose homeland hadn't been bombed into oblivion.
    You're right that there have been no great-power wars in the last 80 years. That's about the timescale at which major hegemonic realignments occur: WW1/WW2 from 1914-1945 (England -> US), Napoleonic Wars from 1803-1815 (England -> France -> England), Nine Years War + Glorious Revolution + War of Spanish Succession from 1688-1715 (France -> England), European Wars of Religion from 1618-1648 which created the nation-state system.
    But that just means that this is the first major hegemonic realignment after the development of nuclear weapons and drone swarms, which makes me fear for the survival of civilization a bit.
    jopsen · 1789758635 · focus · HN ↗
    Fall of the Soviet union was also a major hegemonic realignment.
    I don't know I have some hopes that maybe it'll play out more with economic tools.
    Oh, and I don't think western alliances and trade relationships necessarily need to collapse. But Trump certainly tries :(
    nostrademons · 1789760054 · focus · HN ↗
    To some extent yes, but the Soviet Union and Warsaw Pact was never really as threatening as western propaganda made it seem. In basically all metrics that matter - population, GDP, military spending, technological advancement, etc. - the eastern bloc was a distant second to NATO. That makes its collapse far less disruptive to the world order than when the former hegemon falls.
    jopsen · 1789758111 · focus · HN ↗
    In history 80 years is nothing.
    But since the industrial revolution 80 years is something.
    I hope it's a trend: but living in Europe right now, I do feel like our strongest ally are giving our enemies reason doubt the deterrence we've collectively built over the past 77 years.
    We had to deploy armed troops to Greenland to deter an ally from invasion.
    The deterrence to war we've spilled blood building for 77 years.
    Economics is part of why we haven't had wars, collective deterrence probably had something to do with it too. Without NATO who is to say how many smaller nations Russia/USSR would have invaded for the fun of it.
  4. mohamedkoubaa · 1789757369 · focus · HN ↗
    The question might be less about what replaced the world reserve currency and more about how the global economy might function or not function without a world reserve currency
  5. gumby · 1789758442 · focus · HN ↗
    > The problem with replacing the world reserve currency with something else is that nobody can agree on what that something else should be.
    It isn’t a decision made by some sort of vote, or done overnight. It’s an emergent phenomenon. Sterling had already lost the role de facto by the time Bretton Woods blessed the role of the dollar de jure.
    Whatever replaces the dollar will be messy because it won’t have the set of systems the dollar had at its peak (large, highly liquid markets; complete convertibility; bonds backed by huge government spending coupled with huge GDP).
    There is really only one alternative and it’s not a great one. It’s not China, as the government is afraid of letting go of control (thus no complete convertibility) and markets lack credibility which impairs liquidity.
    The only other opening is unfortunately the Euro. Large, liquid markets yes in aggregate but national markets (e.g. France, Germany) are not unified. They weren’t in the US when the dollar became the reserve currency either, but times have changed. The bond markets are likewise not unified, so risk is higher. But they do have complete liquidity, which is the most important of all after GDP size.
    So there will be chipping away at the dollar for years.

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