US Treasuries Have Become Unappetizing for Foreign Central Banks and Governments
Thread
Unofficial Hacker News client; not affiliated with Y Combinator.
US Treasuries Have Become Unappetizing for Foreign Central Banks and Governments
Unofficial Hacker News client; not affiliated with Y Combinator.
Arubis · · focus · HN ↗
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.
nostrademons · · 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. 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.
tehjoker · · focus · HN ↗
<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 · · focus · HN ↗
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 · · focus · HN ↗
carefree-bob · · focus · HN ↗
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.
wahern · · focus · HN ↗
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 · · focus · HN ↗