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Old 05-03-2012, 09:28 AM   #1
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World Reserve Currency

While the money supply of the U.S. has ramped up exponentially over the past 5 years, I see two reasons why inflation has not been that terrible.

1) The money velocity has been very low, which leads one to worry about what happens when it increases. I will leave this idea to other threads.

2) The U.S. dollar is still used as a de facto world reserve currency. Part of that new USD can be absorbed by other countries. After many years of dominance, I am starting to see cracks in the USD armor. Below I have posted a few articles on the subject. For those of us that get paid in USD, a change in the world reserve currency is a very BAD prospect!

http://www.businessinsider.com/the-m...-dollar-2012-4

http://www.nypost.com/p/news/opinion...Ua22QpSN7ttOIL

http://www.moneynews.com/StreetTalk/...MO_CODE=E67B-1
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Old 05-04-2012, 05:59 AM   #2
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Yeah, that's essentially what my total perspective vortex thread is all about - documenting the long, slow death of the dollar's reserve currency status.
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Old 05-04-2012, 08:42 AM   #3
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We have reserve currency status for just two reasons. One is the perceived stability that makes trade have less friction. The other is inertia (and don't discount that too much). Of course, we originally got this status by being the biggest, growing-healthy economy, which hasn't been true for a long time.

Obviously, we're violating the first, and the second is wearing thin. I'm pretty sure the fed is well aware of this, and actually trying fairly hard not to upset the applecart, by devaluing the dollar in concert with other CBs, so far.
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Old 05-04-2012, 08:44 AM   #4
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Originally Posted by benjamen View Post:
2) The U.S. dollar is still used as a de facto world reserve currency. Part of that new USD can be absorbed by other countries.
..It not only can be absorbed, in many cases, it must be absorbed - like for example in China, where Fed's QE operations resulted in "imported inflation" - like you said, loads of these freshly printed $$$ made their way to be invested in China/import & consume their stuff. There, The People Bank of China maintains a peg to the dollar - i.e., when more dollas arrive at their door, they must print more yuans, to maintain the peg - their Yuan reserves can not magically match increased supply of dollas, without creating some Yuans. They are not very happy with that, as you could guess - that Fed has effectively exported the inflation mostly to China, and other BRICs

Some goes for other currencies - when dollar looses its purchasing power, due to printing, their respective countries are gretting less competitive on international markets (cuz relatively to dollar-denominated stuff, their stuff starts to be expensive - not because efficiency/productivity increased in the US, but merely, because dollas are cheaper to buy). So they must follow suit, to maintain their exports, and cheapen their currencies.

It is not only because $ is a global reserve currency, it is also, because of the sheer size of US economy - if it was another Zimbabwe, it would be ignored by other international players, and let simply hiperinflate it's economy into oblivion, alone - cuz it couldn't influence their exports in any significant way. But it is US, capable and eager to eat as big a piece of the international exports, as possible - so cheapening currencies in the race to the bottom, is what everybody does (China, Japan, EU, Brasil.... others will join, if not joined already). Thus you need METALS, man

"Currency Wars" by J.G. Rickards details it all, it is quite a reading, have been mentioned here couple of times - recommended read!

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Old 05-04-2012, 09:07 AM   #5
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You're forgetting that the dollar can lose value (against real things - gold/oil and such) without losing value compared to other fiat currencies. That's the plan, in fact - we all devalue together. This has been going on "forever" as the dollar loses value since the inception of the fed - what are we at now, about a penny of the original?

As long as we don't "break troth" with the other major currencies, things work out for governments, and no one gets too upset about using the dollar as a reserve. If we go down too quick - that's a problem for people holding too many dollars (like China). If we go up -- relatively --, that's a problem for us (like the Swiss).
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Old 05-04-2012, 09:44 AM   #6
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Absolutely correct DC! I just watched the USD make a 24pip bounce against teh Euro in around fifteen minutes time. These guys just don't get it. As soon as someone devalues their currency a little, the circle jerk begins. At some point this thing goes all geometric and blows up. It is the only possible end for fiat.
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Old 05-04-2012, 10:19 AM   #7
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DCFusor, from what I remember/seen, dollar is down 97% of it's original value from the inception of the Fed, so give or take, one old penny to today's $ is very close approximation. Pretty much agree on all other stuff you've said, that is what I meant in that "race to the bottom" devaluation - as long as it is not too fast, it suits other governments very well, because printing their paper is as beneficial to them, as it is for US govt - stealing people's savings and their purchasing power with inflation - "invisible tax".
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Old 05-04-2012, 10:25 AM   #8
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The idea is to create controllable inflation (GoodLuckWithThat), else all this debt can not be paid off even in theory...via that stealth tax.

Remember, that stealth tax is applied to everyone almost equally (only those who get first spend on the new money don't see it much - eg the government). For whatever reason, the holders of all these debts seem to prefer getting paid back in full nominally with dollars actually worth less, than to just negotiate a haircut. They are really afraid of setting that precedent that contracts can change after signing, as a lot depends on that...
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Old 05-04-2012, 11:26 AM   #9
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Originally Posted by DCFusor View Post:
The idea is to create controllable inflation (GoodLuckWithThat), else all this debt can not be paid off even in theory...via that stealth tax.

Remember, that stealth tax is applied to everyone almost equally (only those who get first spend on the new money don't see it much - eg the government). For whatever reason, the holders of all these debts seem to prefer getting paid back in full nominally with dollars actually worth less, than to just negotiate a haircut. They are really afraid of setting that precedent that contracts can change after signing, as a lot depends on that...

...but even so, HOW all these new dollars, inflated ones, are created? They are again borrowed into existence, increasing the total amount of debt - in one place or another (be it corporate, private or sovereign - or the preferred gov.t way - extracted from another country's monetary supply, by exports). This is completely fecked up system, and the implosion is inevitable, no matter how you slice & dice it...
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