The Never-ending Dollar Decline

The Dollar bottom is forecast to be a long way away according to most forecasters.

The most accurate dollar forecasters predict the world’s reserve currency will continue sliding even when the Federal Reserve begins to raise interest rates, which policy makers say is an “extended period” away.

Standard Chartered Plc, Aletti Gestielle SGR, HSBC Holdings Plc and Scotia Capital Inc. say the dollar will depreciate as much as 6.4 percent versus the euro. About $12 trillion of fiscal and monetary stimulus, the world’s lowest borrowing costs and a record $4 trillion of government bond sales between 2009 and 2010 will weigh on the currency, they said. So will the nation’s 10.2 percent unemployment rate and signs that the economic recovery may falter, they said.

and look at this statistic:

The Dollar Index has fallen 16 percent since March 5, a steeper drop than in any eight calendar months in 23 years.

Meanwhile, oil is way up also in part to a falling dollar.

Imagine what would happen if the U.S. dollar is no longer a reserve currency.

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reserve currency - why care?

“Imagine what would happen if the U.S. dollar is no longer a reserve currency”.

What would happen? I have no idea. Why would that be so terrible? This is not a rhetorical question. I really don’t know.
China’s currency is not a reserve currency and they seem to be doing OK. All the economies in the world except the US have currencies that are not reserve and many of them are doing fine.

So what’s up with the reserve thing?

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awful

debt would cost way more to service, the U.S. for oil, commodities a host of international purchases, esp. raw materials, commodities would pay much more, due to needing to exchange to a new reserve currency, we could not obtain as much in loans, set prices....

Suddenly all of the other nations holding dollars...as a reserve currency might flood the market with them, for they no longer need them for international finance...

I've written on this many times but there are huge financial advantages to being a reserve currency.

It would possibly spiral the U.S. straight into the 3rd world economically.

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reserve currency theory has holes

You have also often written that China has an unfair currency advantage and it is having a very bad impact on our economy. So it seems that while being a reserve currency economy brings some advantages, it’s no panacea.

So again, reasoning a priori, if many countries have efficient economies without being reserve currency economies, then why couldn’t the US be an efficient economy after losing reserve currency status?

Also, a priori, if having reserve currency status provides economic advantage, why are we in the mess we are in today? And, China seemingly is doing relative well. Again, these are not rhetorical questions. They point to what appears to a real contradiction in the theory of relative advantage of reserve currency status.

There may be, as you suggest, short-term pain associated with the transition out of reserve currency status, but I am talking long term and theory.

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I don't think so

The problem with China is Chinese currency, not U.S. currency. They peg, that means they do not let it change, to the dollar, all for the purposes of having an unfair trade advantage.

Think of Argentina, Thailand, S. Korea and think about a currency collapse and then the U.S. not being a reserve currency.

We'd be in a much worse mess today.

I suggest reading about reserve currency and what kind of global advantages it gives.

I have no idea why you would be against it...

after all, China is trying to get the U.S. dollar removed as the world's currency at which point we're in huge trouble.

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reserve currency and economic growth

I did not say I was against reserve currency status.

I said that it is not obvious that if the US lost reserve status that it would, in the long run, necessarily constitute any profound negative economic consequences. It is a fact that we see countries like China, India, Brazil, etc. that are vigorously growing without having a reserve currency status.

You say that there is a problem with China ‘pegging’ its currency and having negative consequences for the US. So there you have it. Evidence that whatever advantage reserve status has can be circumvented by an economy without reserve status, and that reserve status is not a necessary condition for a robust growing economy.

Also, the US economy is virtually on Federal gov’t life supports – it’s falling apart. So again more evidence that reserves status is neither a necessary nor sufficient condition for a growing economy.

So again, the question is:

Why would it not be possible the US to be a vigorous growing economy if it lost its reserve currency status – in the long run?

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because the U.S. is not an emerging economy

with investors pouring in funds due to their cheap labor, lower PPP like Brazil. We only have one way to go, down.

How much is long? 10 years, 20 years, 100 years?

But your question is a good one, maybe I'll write up a post on it with some detailed analysis. I don't know the answer to that at the moment, but a good post would be "scenarios if the U.S. lost reserve currency status".

I'd say with the debt levels as they are it would be extremely bad at the moment. All borrowing costs would dramatically increase and we're already paying enormous interest on the U.S. debt.

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