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.
    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.
    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."

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