Quote: (12-24-2013 12:34 AM)paninaro Wrote:
For 1 and 2 -- if the USD will fail to remain the world reserve currency in the next 10 years, what will replace it? It has to be a currency with a) a large market (supply) b) backed by a relatively stable and transparent government with good monetary policy
The a) requirement eliminates just about all currencies except the Euro and RMB. Then, b) eliminates RMB for sure, and probably the Euro. The ECB and EU, partly due to their complicated structures which hinder decision-making, haven't proven very good at responding to problems in a rapid manner.
For 3 -- the US's ability to borrow at low interest rates is primarily driven by investors willing to loan money to the US (in the forms of T-bills) at that rate. A decent amount of that money is coming from foreign governments and investors. So, if they're willing to give the US a loan of money at such a low rate, why should the US not accept it? (The reason they do it, IMO, is that there are no other "risk-free" options for holding large sums of money.. i.e. the US is the best of the worst when it comes to safe investments).
Moving on to the overall apocalypse I think you allude to. What happened in 2008? From a numbers standpoint, that was pretty bad. Markets down, home values down, unemployment up. But it still wasn't Mad Max style armageddon. We didn't have wide-scale riots in streets; a collapse of order, etc. People for the most part went about their usual routine, though with a lighter wallet and a smaller bank account.
But let's just pretend the USD fails entirely. So what? The US produces a surplus of food and has abundant resources notably fresh water and energy. The next day, the Mint can just start printing some new currency, and all domestic transactions will take place using that. We can just ignore world trade (which is the only place where a currency's value is compared anyway) and still at least get by.
The reason I don't think the USD will fail is that would imply some other world currency will take its place as the global currency, and I don't see any good candidates. On top of that, so many countries and businesses are tied to the USD, whether it be due to trade or just holdings, that there's so much to be lost if that were to happen.. I don't think they would let it reach that point.
Thank you for the thoughtful comments. There is near universal agreement that the new reserve currency will be a basket of currencies that will include the USD, the RMB, the Euro (if it still exists), perhaps the GBP, and a few BRIC currencies. The purpose is to act as a hedge against using only a single devalued currency from a nation with a huge debt.
BTW: Nothing need go wrong in the U.S. need for the financial system to fail. The 2008 financial crisis began in the U.S. and quickly went worldwide. In fact, next time it is much more likely to begin in Europe or Japan and then spread to the rest of the world, but the result will be the same.
I fervently disagree that "low interest rates are primarily driven by investors willing to loan money to the US (in the forms of T-bills) at that rate." The Fed has made $85 billion per month in bond purchases (recently cut to $75 billion) because no other buyers are willing to make those bond purchases.
In essence, the U.S. government is selling debt to itself to artificially suppress interest rates. The USG would need to offer much higher market interest rates to entice real buyers back into the U.S. bond market. Instead, the USG simply sells debt to itself to skew the market.
Here is an excerpt from an article that I just read today, explaining some of these points:
Quote:Quote:
Moreover, the Fed has the ability to increase its liabilities at will. Mr. Bernanke can conjure additional Federal Reserve notes out of thin air and pump them into the system.
And at this point, thanks to a long-standing policy of wanton money printing, the Fed has more liabilities than ever before in its history. By an enormous margin.
This precarious balance sheet is dangerous, because if the Fed goes bust, everyone loses.
Is it even possible for a central bank to go bust? Definitely. Zimbabwe and Tajikistan are infamous examples.
And most recently it happened in Iceland. The banking system there collapsed from being so highly leveraged, and Iceland's central bank suffered tremendous losses.
The end result was insolvency, and the central bank's liabilities, i.e. the Icelandic kronor, went into freefall, losing 60% against the dollar and euro in a matter of days.
So yes, it does happen. And the consequences are devastating.
But how likely is it that the Fed could go bust?
In its most recently published balance sheet, the Fed listed assets valued at $3.5 trillion.
Most of this is US Treasuries and 'agency' debt securities. You probably remember those-- the toxic mortgage debt that blew up a few years ago like Fannie Mae and Freddie Mac. Not exactly low risk.
Meanwhile, the Fed has become one of the biggest creditors of the United States government... which has managed to accumulate more debt than any government in the history of the world.
Of course, the only way the US government can pay interest to the Fed is by going into even more debt (which the Fed then has to buy).
Every time this happens, the Fed's already razor-thin capital gets smaller and smaller, and the Fed's balance sheet becomes riskier and riskier.
In fact, the Fed's capital ratio (1.53%) is lower than Lehman Brothers when they went bankrupt in 2008.
But what happens if the Fed becomes insolvent?
In the case of Iceland, the government bailed out its central bank.
Iceland's government went from being essentially debt free to having debts in excess of 100% of the country's GDP, just to bail out the bank.
But the US, Japan, and Europe are already too indebted to bail out their central banks. An insolvent government cannot bail out an insolvent central bank.
The IMF is not an option either. The US, EU, Japan, etc. make up roughly half of the IMF capital quota-- these are the countries who fund the IMF, not the other way around.
There really is no backstop for the Fed. The buck, so to speak, stops here. And with a capital ratio of just 1.53%, the Fed's balance sheet is already in precarious financial condition.
Given that the Fed's assets are so closely tied to the finances of the US government, the outlook should concern independent, thinking people.
If they go bust, the value of Federal Reserve notes (i.e. 'dollars') is going to plummet... along with the paper wealth of anyone holding them.
http://www.sovereignman.com/finance/thin...ain-12453/