Why a Strategic Currency Reserve is a very bad idea, etc.

[kevink]

Great post this morning from Cullen Roche that addresses three topics that are likely of considerable interest to many fellow retirees: the proposed crypto currency reserve, the impact of tariffs and Ray Dalio's prediction of a U.S. debt crisis.

As usual I cam away wishing Roche were in charge of our fiscal policy, or at least running the Fed, but I don't think he'd accept a government job even with a gun to his head. Smart guy.
"
"The Reserve Currency Issuer Doesn’t Need a Strategic Currency Reserve

First, the USA is the global reserve currency issuer by a huge margin. Foreign reserves of USD are 54%. The Euro is a distant second at 19% and the Yen is just 5%. There is no currency that even comes close to the USD. Importantly, people seem to get the causality of this wrong. There’s a lot of half-truth narratives about Bretton Woods, the Petro-Dollar or other myths about how the Dollar is only a reserve currency because the USA somehow strong-armed everyone into using the USD. There might be shreds of truth to these stories, but it’s really much simpler in my view – foreign economies use Dollars because the US economy is the largest, wealthiest and most trustworthy economy in the world. So, when China does business with the richest consumers in the world they get Dollars. They’re not using Dollars because they got fooled into some agreement. They’re using Dollars because they like getting revenue from the largest and wealthiest consumers on the planet. So, as a result of this foreign governments end up stockpiling Dollars.1 That’s it. It’s really that simple. And that isn’t changing any time soon. In fact, the US economy appears increasingly robust compared to every foreign economy."

Three Things – Bad Ideas

 

[aja8888]

Great post this morning from Cullen Roche that addresses three topics that are likely of considerable interest to many fellow retirees: the proposed crypto currency reserve, the impact of tariffs and Ray Dalio's prediction of a U.S. debt crisis.

As usual I cam away wishing Roche were in charge of our fiscal policy, or at least running the Fed, but I don't think he'd accept a government job even with a gun to his head. Smart guy.
"
"The Reserve Currency Issuer Doesn’t Need a Strategic Currency Reserve

First, the USA is the global reserve currency issuer by a huge margin. Foreign reserves of USD are 54%. The Euro is a distant second at 19% and the Yen is just 5%. There is no currency that even comes close to the USD. Importantly, people seem to get the causality of this wrong. There’s a lot of half-truth narratives about Bretton Woods, the Petro-Dollar or other myths about how the Dollar is only a reserve currency because the USA somehow strong-armed everyone into using the USD. There might be shreds of truth to these stories, but it’s really much simpler in my view – foreign economies use Dollars because the US economy is the largest, wealthiest and most trustworthy economy in the world. So, when China does business with the richest consumers in the world they get Dollars. They’re not using Dollars because they got fooled into some agreement. They’re using Dollars because they like getting revenue from the largest and wealthiest consumers on the planet. So, as a result of this foreign governments end up stockpiling Dollars.1 That’s it. It’s really that simple. And that isn’t changing any time soon. In fact, the US economy appears increasingly robust compared to every foreign economy."

Three Things – Bad Ideas

Nice article, thanks!

 

[pb4uski]

My thought was that all of the strategic reserves that we currently have, other than gold, are for things that we use like oil, medical supplies/pharmaceuticals, helium and home heating oil.

I don't see the point of adding a strategic reserve for cryptocurrency other than to curry political favor with cryptocurrency advocates since as a society we don't "use" cryptocurrency. I agree... bad idea.

 

[isisdave]

Here's my simplistic two cents:

1. What is a currency? It's a promise to pay something of value. What makes the Dollar the world reserve currency is all that stuff about wealth and output blah blah blah, but mostly that the Treasury says it will give a dollar of value, at least when you have to pay the United States, and everyone believes it. If it ever stopped doing that, there will be many difficulties that make today's woes look amusing. Our currency used to be backed by gold and later by silver; now it's just backed by the government's word and global assets. At least for today.

With a cryptocurrency, a bunch of unknown and hidden people assert the same thing. There is no underlying value whatever. What could possibly go wrong?

2. The Emperor isn't wearing any clothes.

 

[MC Rider]

There is no underlying value whatever.

I believe I read Bill Gates shares that opinion.

 

[Texas Proud]

Just to be clear, it was never really backed by gold and silver... There was a big pool of gold and silver and they agreed to give you gold for the dollar if you wanted it... but there was not enough gold to cash in all dollars out there...

I cannot find the ratio now but it was an X factor of the gold..

 

[azxracer]

Just to be clear, it was never really backed by gold and silver... There was a big pool of gold and silver and they agreed to give you gold for the dollar if you wanted it... but there was not enough gold to cash in all dollars out there...

I cannot find the ratio now but it was an X factor of the gold..

Originally, in about 1870 or so when the US went on the gold standard, the value was set at $1 = 25.8 grains of 90% pure gold. There are 437.5 grains in an ounce of 100% pure gold.

 

[indiajust]

Sovereign wealth funds have a unique social and economic function. They resolve a problem of concentrated commodity assets, like gold or oil. By professing a citizen/country perspective, distributing the wealth from a concentrated asset using a 100 year or more horizon reduces social stress and wealth disparity (reducing the chance of a French Revolution). Roughly speaking, successful sovereign wealth fund = sweden. Singapore and Temasek is another example. Venezuela is a complete failure. Chavez took all the wealth for himself and a few cronies. Which led to the most extreme social pyramid/GINI ever, and that always leads to internal strife. All seven deadly sins, all the time.

Strategic Reserve funds are shock absorbers. They are used by much smaller countries to monitor and react and respond to changes in trade, investment flows, and such. The US has no need of such a thing. But note that US companies with international customers routinely manage their cash flow or buffer investments by using currency swap/trade/futures markets. This is no different than an individual selling a covered call on a big investment to finance a house downpayment. We use the derivatives markets to create short term insurance for big transactions. A deep enough derivatives market might eventually be large enough to handle entire countries. Until then, countries use reserve funds and banking system controls.

The fundamental missing piece from the article (which I am happy to supply) is Triffins Dilemma. As bad as the US paper currency has been (we are now on our third central bank) the dollar is the cleanest dirty shirt in the worldwide currency washtub. What the world wants from the US is better money, because their money is so much worse. Completely understandable, I sympathize. Unfortunately, their need for honest money encourages our sovereign to print money (borrowing it into existence) which impoverishes the US citizen, undermines our economy, and ultimately ruins the currency. They call it Triffins Dilemma for a reason. Ironically, crypto is a better fit for the rest of the crappy monetary planet, since they have the most to gain from better money. Bonus, the US would get a less co-dependent economy.

Kissinger created the PetroDollar economy. Not a myth. He explicitly made an empire agreement with Saudi Arabia. US military all over the Holy Land, defense umbrella for the OPEC states that toe the US line, in exchange for all revenues funnelled into 30 year US debt, and all purchases/sales in dollar denominated transactions only. No other currency permitted, NO GOLD. The house of Saud said yes. He said now devalue the dollar by 75% relative to oil. Yes. And the decade of energy driven stagflation began. Meanwhile the entire planet needed dollars to buy energy. Which the treasury/Fed printed with abandon. US citizens got more war, planet wide military base expansion, more entanglements, and inflation. The US empire got mountains of money to spend. DC won, we lost, and the rest of the world got better money and cheaper energy (unless we killed them).

Fast forward 30 years of money printing and sovereign debt. The US went from 20% debt/GDP to 80% debt/GDP. We ran up the credit card. But the Fed controls the interest rate, so DC started monetary suppression. It's a bit like calling VISA and changing the interest rate from 18% to 1.5% APR. They aren't going to be happy and they wont raise your limit ever again.

By 2014, the fix was in. Not one central bank is dumb enough to buy US debt. DC weaponized the dollar, professing that our laws follow the dollar, worldwide. Your country is our country, and that dollar is mine. We seized accounts and assets, planet wide. Then we took the russian gold deposits. Now, no one trusts us. We are thieves. Which turns US debt and dollars into a worldwide game of toxic hot potato.

The consequence is that 50 years of toxic monetary hot potatoes are coming home. We are in the midst of an accelerating sovereign debt default. It took Rome centuries of repeated collapses to fade from view. Perhaps the internet will make it happen faster.

I like Lyn Alden and Luke Gromen in this space.