So that was a fantastic article that I read to the end and it made several fascinating claims:
1. The recent disconnect between government debt and the economic cycle as the debt-to-GDP ratio has shot up when unemployment is low. Who knows how bad that's going to look as unemployment inevitably shoots up and government receipts go down as a result.
2. The fact that corporate income has basically been flat since 2014. That was a surprise to me and particularly surprisingly the almost unprecedented stock market rally over that period. When earnings become divorced from returns, it tends to signal the end of the boom and everything comes crashing back to earth at some point.
3. Seeing just how high China's USD-denominated debt is. I've read a few things on the possible US-China trade war in the last couple of years and I'd come round to the view that China was in a far weaker position for a protracted trade war than many thought. This data point fits that view.
4. The US tax "cuts" aka the GOP Donor Class Handout Act may well go down as one of the most foolish missed opportunities of the modern era, particularly given the trillions the government is clearly going to spend on Covid-19 bailouts.
5. The Federal Reserve is likely going to have to go on an unprecedented money printing spree to buy government debt.
What I'd like to know is will any of this impact inflation?
Probably not, as Philips Curve fueled inflation hasn't been a problem for a very long time in the US, income & wealth inequality just eats that segment of inflation up
Central banks through the western world have been getting consistent under target inflation rates for many, many years now, and that's a chronic issue that won't change unless strong systemic changes happen which fuel Phillips Curve inflation once again
Last year the ECB published this amazing, amazing paper which cover how labor costs affect inflation, specifically the Phillips Curve which I can't recommend to all the other MacroEcon people to review
It depends how you measure inflation. Over the past decade or so we've seen what I've heard described as "biflation" - imported deflation in the prices of many goods alongside pretty high rates of inflation in some services, goods and assets (like company shares or real estate in some markets). Traditional measures of consumer price inflation are pretty heavily skewed towards goods and within those slightly skewed towards goods which come with imported deflation so when that all gets averaged out it shows slightly below target inflation but the headline numbers really don't tell you as much as they used to.
Whether this continues I have no idea but it's worth thinking about the components of "inflation" and what is and isn't included when considering its impact on the economy.
Won't the M2 measure of the money supply increase by some 40% as a consequence of the current stimulus and bailout packages? Hard to see that this won't cause some inflation.
No. Look at the papers about QE from the financial crisis. Increases in bank reserves had very little effect on consumer price inflation. Even with large scale monetary intervention, we haven't seen significant inflation in any developed economy in decades. There are many reasons for this (decreased wage-push inflation from weaker labor unions, wealth inequality, trade, structural and demographic factors, etc).
Someone else on this post commented on the potential for a bifurcated inflation system, where some goods and services (and assets) are sensitive to local currency, inequality, and labor market conditions and others (e.g. imported goods) are more sensitive to other factors. This is a reasonable hypothesis but last I checked the evidence is not all there yet.
I'd say that the 2-week 20% stock market rise in the middle of a global pandemic is at least partially due to the expectation of asset inflation, and not just due to childlike optimism that the economic consequences of the pandemic will be gone in 6 months.
This is just the first thought that makes sense though, would love to see some discussion of it.
I expect this bump to be a dead cat bounce. Some people rushed back in thinking the bottom was passed. I think there will be a new bottom in the next 6 months. However, the companies that do survive this pandemic will be even stronger and more valuable. The FTC will allow all kinds of M&A activity when it should be going to bankruptcy instead. If people think Tech and FAANG dominated before, you ain't seen nothing yet.
What would cause it to crash down again? Seems like virus spread is slowing and were not going to see the insane number of deaths being predicted during last crash. Travel industry might be hurt for a year but most people will likely just have an even bigger vacation this winter or next summer
No one can know, but a lot of business won't recover. That means sustained unemployment for a long period of time. I think it is not fully understood how interconnected small businesses are. Those unemployed people are don't have money to support a bounce back of other business. We'll see how 2020 plays out.
"GOP Donor Class Handout Act" - Did people not see a tax decrease? My taxes noticeably decreased. Could be due to state taxes no longer being subsidized, but it still should even out for most
> The dollar’s claim to fame is that almost all oil is priced in dollars, globally
This is the petrodollar hypothesis, a debunked theory of global trade.
Oil is globally traded. It can be and is priced in many currencies. Most international trade was historically priced in dollars for two reasons. The second was, until recently, the unique speed and breadth of the Fedwire system.
The first is the American consumer. When Americans buy, we spend dollars. This puts dollars in vendors’ hands. Those dollars can be reused for trade or invested, the latter supporting dollar financial markets. Both support dollar hegemony, which in turn drives its dominance in global trade and finance.
Oil is priced in dollars, and countries borrow in dollars, because dollars reign supreme. Not the other way.
> In 2018, the strong dollar broke Argentina and Turkey’s currencies and drove the countries into recession
Argentina and Turkey’s currencies devalued relative to their trade-weighted baskets of currencies. The dollar was not a driver of their problems.
> foreign dollar-denominated debt means there is a ton of demand for dollars
Domestic demand for cash eclipses foreign demand. The Fed and Congress have printed trillions, yet we’re still on the precipice of deflation.
> the United States government is heavily reliant on foreigners lending it money by buying its Treasuries. Foreigners currently hold $6.7 trillion in U.S. government debt.
Out of $25 trillion [1]. Also, $7 trillion is comparable to the amount Congress and the Fed just created.
Currency crises are broadly studied. They are also complex. This analysis is overly reductive.
> Most international trade was historically priced in dollars for two reasons. The second was, until recently, the unique speed and breadth of the Fedwire system.
> The first is the American consumer. When Americans buy, we spend dollars. This puts dollars in vendors’ hands. Those dollars can be reused for trade or invested, the latter supporting dollar financial markets. Both support dollar hegemony, which in turn drives its dominance in global trade and finance.
That has certainly not been my takeaway from history (though those could be more minor and related points)
My understanding is that most international trade was historically priced in dollars because the dollar became the world's reserve currency after Bretton Woods. Why it became the international currency is more complex, but to the best of my knowledge it is because:
1. The US was in strong monetary shape compared to the rest of the world after WWII
2. The US held many foreign assets after that war (was a creditor to the world)
3. The US held most of the world's gold after that war
I'd add that US political system is much more stable and trustworthy unlike countries without democracies and/or corruption perceptions. Presidential powers are far more limited, well scrutinized and things can easily be challenged in courts. If I held US dollars today I would be relatively more certain that it will retain value than other currencies. If all else fails one can count on US to exercise its military might to protect the dollar.
The US's war-might is limited. Look how poorly Afghanistan and Iraq went - the US's last two tests were seemingly ineffective. Syria was another trainwreck.
Internal polarization seems to be very high. Trump has eliminated or not replaced key diplomatic positions. The secretary of the navy was never confirmed and has just resigned. The defense secretary stepped down. A captain of a capital ship was ousted publicly to cheers of support from his crew.
NATO is a trainwreck. France and Germany have expressed desires to move away from US dependence while Trump demands more money.
The US's soft and hard power, to me, is just not fully there anymore.
The war in Iraq and Afghanistan were won almost as quickly as they began. It was the "peace" that was never won.
...but winning the "peace" isn't relevant for USD to be dominant. For that, the US just needs to be able to destroy enemy armies - which it can do globally with impunity.
That simply isn't true - the amount of cost sunk into not achieving objectives was enormous. Destroying the Iraqi army was never going to be the hard part. And how you can say we "won" in afghanistan, even though the taliban still exist and will have a part of the future there, is just...wow.
> ...but winning the "peace" isn't relevant for USD to be dominant. For that, the US just needs to be able to destroy enemy armies - which it can do globally with impunity.
Comments like these make me want to ask people who make them: how did empires ever fall, then?
The US army isn't a perpetual motion machine. It requires soldiers, equipment, and technology.
* 71% of young people between 17-24 are unfit to serve, 31% of that is due to obesity alone
* Equipment requires a strong manufacturing base, much of which has been decimated since World War 2, the skill required for that workforce simply doesn't exist.
* Cost. US military equipment costs are extremely high. The cost proposition is almost always a losing one for the US in any long term war.
Greater generals have overcome greater differences in strength than between the US and China. Pride comes before the fall.
>That simply isn't true - the amount of cost sunk into not achieving objectives was enormous.
The Afghanistan war is a different story, but the iraq war was won though in messy fashion. US achieved every objective it set out when it first initiated the war. Iraqis now also have a democracy and levels of violence in Iraq are at the lowest levels in a long time. Honestly, looking into the Iraq war doesn't demonstrate the US militaries inefficiency. It shows how far ahead it is of every other country on earth. No other nation would even be able to bring it's military over to the gulf. They just don't have the logistic capability.
The debate should not be on the efficacy of the US military, but on how to use it and I don't think congress has had such a debate since the mid 20th century. They need to pull back the military and then reassess what should be the next steps.
It remains to be seen whether the US objectives in Iraq were successful or not - the recent tiff b/w Trump and Iran shows that many Iraqi's are not pro-USA. Violence may be down, but at extreme cost in both dollars and men, and the problem really never left - it simply shifted to Syria. Not to mention the abandonment of key allies in Iraq, the Kurds. The fact is, US objectives are hard to quantify in Iraq, because people keep changing them to make the US look good.
You're overrating the "logistic capability" of the US here. The US used its network of allies for staging into these regions. Without that network, it would've been much more costly and difficult. On top of that, Iraq had no realistic threat to US dominance at sea. In a war against a real state actor (like China), the US would not be able to operate with impunity. Simply knocking out 2 or 3 capital ships would devastate the US capability to project force.
> and the problem really never left - it simply shifted to Syria.
I think the reason that some say that the Iraq war was never won is because they keep moving the goalposts from the stated mission during 2003.
Make Iraqi military surrender check
Overthrow Saddam Hussein check
Eliminate al-qaeda leadership in Iraq check
Establish new leader check
Establish a democratic system check
Levels of sectarian violence are also low nowadays as a bonus. Did this all take longer than estimated. Yes, but all are objectively completed. The debate is not whether the war was won, but whether it was worth winning which is kind of what you are starting to get into. Anyway, nothing much more to be done in Iraq. It is up to the Iraqi people to now decide their destiny for good or ill.
>You're overrating the "logistic capability" of the US here. The US used its network of allies for staging into these regions. Without that network, it would've been much more costly and difficult.
A network of bases in ally regions is a part of logistical capability.
>In a war against a real state actor (like China), the US would not be able to operate with impunity. Simply knocking out 2 or 3 capital ships would devastate the US capability to project force.
They could, but China has never actually demonstrated capability of doing so. The only time we have seen China in a modern fight was during the Sino-Vietnamese War. They did not fair too well with their next door neighbor. They also haven't been able to test any of their technology since then while the US at least has been able to test some of theirs except their newest big tech.
Also, I don't see US using a fullout assault on China, but more so an embargo meant to starve the China of food and energy imports. China in it's current state would not be able to deal with that.
There is no clear benefit to war anyway so I don't see China and the US getting into a direct war. China fighting with one of it's neighbors and the US helping with supplies, resources, and money is the much more likely scenario.
1-3 are the same thing. The US held most of the world's assets (was a creditor during the war), so became the world's most well capitalized bank. In that capacity, the bank's notes, i.e. dollars, became the world's currency.
Despite a run on the "bank" in the 70's, this arrangement remained.
Good point on the Petrodollar hypothesis being debunked, but I'd like to add more to the point that the US dollar is valuable simply because the US has the world's largest consumer base.
Imagine you're a foreign country. You've put in a bunch of labor and manpower to make goods for the US. You sell them to the US, and they pay you with green pieces of paper.
Now what? Why are these American dollars valuable to you?
Because you can give them to other countries and they'll give you goods in return? Then why are these American dollars valuable to those other countries?
Because it's turtles all the way down?
I think it's because somewhere along the line. Some country will take those dollars and buy a F35. Or a IP license from Intel. Or the rights to distribute the latest Marvel movie in their country. What do these things have in common? No other country in the world can produce a equally good substitute.
That's the core of what still gives the USD its value. The US being able to produce goods and services that the rest of the world has no substitute for. And because the rest of the world must have USDs to buy American technology and expects this to continue into the future, this allows the US to consume more from the world and have a large consumer market.
This is missing a huge piece of the puzzle. US Treasuries. Any excess dollars are simply used to buy T-Notes, lowering the US government’s borrowing costs and anchoring the US economy. There is simply no need to go hunting for someone to buy your dollars all the time when you can always go to the US government itself.
The US special role is based on two things, size and stability. Everything else is icing.
US Treasuries pay in dollars. Buying a Treasury is a bet that dollars will still be valuable in the future. Am I wrong to see the high value (low interest rate) of Treasuries as a consequence of the value of the dollar, not a cause? If people lose faith that the dollar will hold its value, the fact that the US government is willing to pay 1% interest in dollar loans will not help bolster confidence.
Foreign central banks don’t really care so much about making or losing money on their dollar treasuries. They’re not currency speculators. They care much more about stabilising their currency and economy with respect to the global economy.
I don’t think you can un-pick dollar stability from its desirability. The value of fiat currencies is based solely on confidence, nothing else. You simply can’t say a currency is stable because people are confident in it, or that they are confident in it because it is stable. They are both different ways of saying the same thing. We measure confidence in a currency by analysing how stable it is in the market.
Right up until the point you find a US citizen anywhere in the world with a bill from the IRS. Then you find the true nature of the demand for US dollars - you can always sell them to an American with the IRS breathing down their neck.
Yes this is basically the reason. Those countries need USD to buy american products.
If they exchange the dollars with the euro then someone in the EU will end up with those dollars and that person can't do anything but buy US products.
Ever heard of Eurodollars? That’s exactly what the original article is talking about. There are foreign banks that loan dollars—fractionally—outside of the US banking system. Dollars are needed to settle those debts, and they exist fully outside of the US.
You are leaving out the single most important element of this whole mess: Eurodollars. There are banks outside of the US that take “real” US dollars and multiply them through fractional reserve lending but totally outside of the Federal Reserve System. When the financial crisis of 2008 hit, everyone “discovered” that Eurodollar liabilities were so entangled with real USD liabilities that pulling them apart would be impossible without completely shutting down global trade and finance for an extended period of time. So, the Fed just temporarily gave access to its liquidity for foreign institutions outside of the FRS to keep things running.
Anyways, my point is that Eurodollars can be created, passed around among foreign entities, and destroyed without ever necessarily touching the US flow of funds.
I guess this explanation is flattering to US citizens but actually the reverse is happening: https://en.wikipedia.org/wiki/Triffin_dilemma. Due to reserve currency status of the US dollar, there is additional external demand for dollars. This means that the US will necessarily experience a trade deficit, importing more goods from other countries than exporting US goods to them.
> Why are these American dollars valuable to you?
You need them to service your dollar-denominated debt or to put them in your reserves.
Market is a dynamically evolving system with feedback loops. If you take into account the passage of time, then what looks like circular reasoning on a static picture, is often a feedback loop in a dynamic system. So it's both true that one came before the other, and that each needs the other to exist.
> This is the petrodollar hypothesis, a debunked theory of global trade.
The petrodollar is a real thing, I'm not sure what you mean by a debunked hypothesis. I assume you are speaking with knowledge that Nixon used the petrodollar to stabilize the dollar after the abandonment of the gold standard. [1] Can you elaborate on how this is "debunked"?
> Oil is globally traded. It can be and is priced in many currencies.
Not if you're buying oil from Saudi Arabia or OPEC. Which is the point of the petrodollar.
> Those dollars can be reused for trade or invested, the latter supporting dollar financial markets. Both support dollar hegemony, which in turn drives its dominance in global trade and finance.
There is nothing unique to the dollar in this statement. Swap the dollar for the pound, and it is also true. All currencies are traded, and more trade in that currency makes the currency stronger. The point is that the petrodollar artificially strengthens the US Dollar, because it is artificial demand for the US Dollar.
> Oil is priced in dollars, and countries borrow in dollars, because dollars reign supreme. Not the other way.
This is very circular logic. Please help me understand your point here. Because it seems like you are saying "The dollar is supreme, therefore the dollar is supreme." But _why_ is the dollar supreme in the first place? And it certainly isn't just because "American consumers spend in dollars." All countries's consumers spend money in their local currency. We must look at why the dollar is unique.
> Argentina and Turkey’s currencies devalued relative to their trade-weighted baskets of currencies. The dollar was not a driver of their problems.
The dollar is a large portion of their "trade-weighted basket of currencies". Seems weird to admit that and then say it had nothing to do with their problems.
So I am no expert and I am not the commentor you replied to but...
I thought the idea behind PetroDollar was that countries sold their oil, that gave them big trade surpluses, then they used that to buy US Government Bonds. They chose US government bonds because they are secure, inflation proof, liquid and it gives them geopolitical clout.
The fact that many oil transactions are priced in USD isn't really relevant because if you get paid in Euro\Yuan\Rubble and immediately turn them into USD, then USD is where the demand will actually be. As OPEC members all wanted dollars because that's what you use to by US Govt Securities, that makes the USD the "petrodollar", even if they all insisted on being paid in say Euros and then sold those euros to buy USD it would make no difference.
So that answers why it doesn't really matter what currency oil transactions happen in.
But it represents another problem for the PetroDollar hypothesis: Who is buying US government debt and how much are they buying (net). Because that is where the real strength is, people want US bonds, not US Dollars.
When all this started, there were few countries with long term surpluses, just Opec really. But since then Japan and China (Japan apparently holds more than China as of 2020 I think, but the link says the reverse as of 2017) has eclipsed them. Saudi are minor holders actually, other Opec holders not even making the top 20.
Also, oil prices for the last 20+ years have been very unstable. At times (Iraq wars, the 2008 crash etc) the oil price has been high and that means Opec have a lot of cash to purchase bonds. But at other times (like now) the oil price has been low. Right now, Saudi has a trade deficit. So they are SELLING their US securities to fund that. Also, the slow erosion of market share of Opec has meant that even high prices are no longer as big a revenue boon for them.
Similarly, China has become a much bigger purchaser of bonds. That sort of works in favour of the "petrodollar" (should it be petro\sino\japan dollar now?) hypothesis as it makes it easier for the US to run a government deficit. But right now, China is coming out of quarantine so their economic numbers are about to stall right?
So if the Saudis (and Opec) can't afford US bonds and the Chinese and Japanese are not buying them (as their economies stall), just how interest rate resistant is the US deficit? I suspect people know that the treasury will print dollars to maintain the deficit as they have been since 2008. But that only happens without inflation when everyone else (Brits, Eurozone etc) are doing it too. But if they manage Covid-19 better than the US (and respectfully that doesn't seem hard), they wont need the same deficit funding. And similarly EU social structures mean they can deal with disasters like this without the use of central government funds.
So really is this a case of Who Knows what will happen?
Sorry if I am missing something here or it's all armchair economics :)
I’m not sure where there’s a structured rebuttal, but the main reason why commodities are generally priced in dollars is due to currency liquidity and the forex markets. There are only a handful of currency pairs that don’t involve USD. If I have Japanese Yen and I want to buy Saudi Riyals, that trade needs to settled twice, JPY -> USD and then USD -> SAR adding both currency risk and settlement overhead. Pricing in USD cuts all of that out, along with the inertia of everybody being comfortable with dollars and the extremely liquid and large market for both dollars and dollar denominated debt. It’s just easier.
The US dollar isn’t the largest and most liquid market on earth because the US is mean to people, if anything that would make it less useful for third parties. It’s used because it makes the most sense. Look at the USD as a gift card. If Starbucks only accepted star-bux, requiring me to buy starbux to buy Starbucks, we’d still be valuing drinks in dollars regardless of the exchange rate. Even if I could use those starbux at Target, I wouldn’t start caring about my starbux currency risk as long as I could convert to dollars. It’s the same for other countries. Japan doesn’t care about its exchange rate to the riyal because both float reasonably stably to the dollar. Saudi doesn’t want yen and japan doesn’t want to buy riyals so they split the difference and transact in dollars.
Your explanation involved a bit of mind-reading here to deduce that the Japanese don't want riyals and that people wouldn't value things in star-bux.
Going by actual evidence, if the Japanese are trading with the Saudis it is pretty clearly they don't want riyales, yen or dollars; they want goods and services that they are trading for. They would be ambivalent about what they traded for that oil in as long as they ended up with the most product out for the least yen in.
There is evidence that the Japanese want dollars (their foreign reserves are jumping), but there is no particular evidence that they want to trade in dollars. If anything it is more likely that they are trading in dollars because SWIFT is the cheapest way of moving money around internationally and it has some sort of favouritism for US dollars.
Parent is making an accounting point. Unless you have perfectly balanced trade, your balance sheet will continuously expand in either your currency, the foreign currency, or both. The Saudi government either isn’t inclined or can’t find counterparties to run enough of a trade deficit to provide the rest of the world enough riyals to satisfy their demand for Saudi oil. The USA on the other hand is willing to run such a trade deficit, it's pretty much the only game in town.
Meanwhile, the USA is able to find counterparties for its massive trade deficit because the USA itself has a huge and incredibly diversified economy and demands dollars in payment. You can buy oil from the USA in dollars for the same price you can get it from the Saudis. You can also buy all kinds of other things you can't buy from the Saudis. The dollar has massively superior optionality compared to the riyal (and most or even all other currencies) and that increases demand for it.
Another way of putting it is: dollars have a network effect going for them, and it’s stronger than Facebook’s network effect in social media. This network effect was intentionally built during the Cold War. And with the USSR’s collapse, it became that much stronger.
The Saudi Riyal has been pegged to the US Dollar since 1986, as are most Gulf countries: UAE, Qatar, Bahrain, Oman. Kuwait was the only one to break it under pressures from the 2008 GFC. This is the historical backbone of the Petrodollar and has survived decades of political and financial strain.
Also, >It's just easier< strikes me as very fragile logic, because it is only True until it isn't.
Is anyone pricing oil with Bitcoin? It seems that crypto would be the ideal type of currency for international trading. Is that not a thing because government wouldn't want to give up control to a decentralized system that they don't run?
Because, to use a technical term, the fuck is Saudi Arabia going to do with $400bn worth of bitcoin? After 1 year, assuming Saudi Arabia was able to procure every bitcoin that can ever be mined, past present and future, they would be worth $20,000 each. And then they have all the bitcoin that nobody wants.
Whatever anyone would do with $400bn worth of an asset?
If Saudi Arabia started buying Bitcoin in bulk, then the price of Bitcoin would go up. This would create demand for the asset that is increasing in value and other people would start buying and holding. Saudi Arabia would not be able to acquire all the Bitcoin, but it doesn't really matter anymore, because now everybody wants it, because it has increased in value.
The fact that cryptocurrency is prone to such fluctuations is a significant part of the reason it's a bad currency. Nobody wants to have a bank account that can halve or double in a few months.
I think most people view Bitcoin as digital gold nowadays. (with the added benefit that the supply is known) I would not use it for short term cash needs, but from a long term store of value it has provided real benefit over a 10 year period. If the monetary supply is going to be dramatically expanded by the Fed, then it is a great way to hedge against the dollar. Couple that with the recession and the likelihood that the effects of the global pandemic is seemingly going to be here for a while, I can't think of a better place to put my money right now.
I doubt "most people" think anything of the kind. Digital pyrite, perhaps. Considering that btc has tanked along with the market (only more so) why would it make a good hedge? BTC is for gambling, and everyone knows it, so when the world gets scary the bottom falls out of cryptocurrency first.
There is no reason to believe BTC will not crash that's more solid than people smiling knowingly and saying "it can't, it's the future". It's not, though.
A global pandemic is a pretty extraordinary event. All markets are going to react poorly. BTC is by its nature more volatile, so it has a tendency to experience more dramatic corrections
It acts as a hedge, because the dollar gets devalued every time the Fed expands its balance sheet. If nothing else happens, then the value of Bitcoin will increase relative to the dollar. This is the same reason why people buy gold. Only with Bitcoin the amount of the commodity that can exist is well known and finite. (i.e. there are not new discoveries of Bitcoin repositories that will suddenly increase the global supply)
Bitcoin is unlike most other cryptocurrency assets (except for maybe Ethereum?), because it has been around for more than 10 years and has become well integrated into the traditional economy. BTC crashing is pretty unlikely at this point. Maybe it gets replaced over the long term by some other asset, but that will take time and not be a sudden event.
BTC is absolutely not well integrated into the traditional economy. Getting it is difficult compared with any real currency, spending is difficult compared with any real currency.
> BTC crashing is pretty unlikely at this point.
BTC just crashed in the last month. It's extremely likely to happen, which you can observe easily because it keeps happening. It's value is not stable. It never has been.
You can buy BTC using USD via exchanges, you can buy BTC futures, you can buy funds that contain BTC along with a mix of other assets. This is what I mean by the traditional economy, NOT you can go down to your neighborhood grocery store and pay for your groceries. The point is that major financial firms have integrated fiat economies and the Bitcoin ecosystem, which makes Bitcoin much more valuable compared to other cryptocurrencies.
When I talk of BTC crashing I'm speaking of the price of BTC going to 0 and never recovering. What you are observing is the volatility of Bitcoin. Bitcoin is a highly volatile asset, but that doesn't mean it still can't provide good long term value. Plotting a linear regression on the price of BTC will show an upward trend and that's over a 10 year period even with all of its ups and downs.
Keep in mind that basically nobody else uses the word "crash" to mean "goes to zero and stays there". Traditional economy is generally a reference to the act of exchanging money for goods and services.
You can use words however you want, but if you want to be understood it's helpful to use the common definition.
I was trying to stay in context with how you originally phrased your response of..
"There is no reason to believe BTC will not crash that's more solid than people smiling knowingly and saying "it can't, it's the future". It's not, though."
This quote implies that BTC lacks long term value, which again I argue that BTC does have long term value for reasons previously stated. Certainly, I understand that sharp declines in value are often described as crashes.
In regards to the term "traditional economy", I actually meant to insert the words "integrated with", so the start of the sentence should have read "This is what I mean by integrated with the traditional economy..."; just an error on my part. The point I'm making is that the integration with the traditional economy is occurring on the backend finance side and adds legitimate value and use to Bitcoin over many other cryptocurrencies.
Bitcoin has had several big moons/busts now, but the software and network has persisted and grown dramatically in size. The long term trend is up. I think it is really hard at this point to make the case that this is a bubble.
Bitcoin is an “asset”, not an intermediary. Saudi doesn’t just sit on their dollars, they buy stuff with it, either actual goods and services or fixed incomes. Since nobody wants bitcoin for their labor and it’s a highly speculative asset that isn’t a particularly good store of value, it doesn’t accomplish either of the key things that are needed.
Bitcoin is both an asset and an intermediary. I don't think it is a good intermediary due to its volatility and tax treatment, but it certainly has and can be used as such.
If you had bought a hundred dollars worth of Bitcoin back in April of 2011 and sold it at it's most recent all time low on December 16th 2018 you would have $320,000. If you sold it today you would have $681,800. Volatile? yes. Good long term store of value? All available data indicates yes.
It's speculative in so far as the software and the network are speculative. The speculative risk of both of these attributes has reduced over time. (i.e. The more time that goes by the more likely that bugs in the protocol will be discovered and the network size and volume has dramatically increased)
The real danger to Bitcoin is probably another cryptocurrency that comes along and does it's job better. This will be very hard though as Bitcoin is essentially the Facebook of the cryptocurrency world. I think that it is possible that this will happen, but it will likely be a process more than an event. Offering holders of Bitcoin to diversify overtime should other cryptocurrencies come into being.
Whether Saudi Arabia should buy it or not is an entirely different matter. IMHO if they have some reserves that they don't think they will likely need to touch for a 5 to 10 year period then I would invest some in it. It would be akin to trading in some of their dollars for Gold. (https://tradingeconomics.com/saudi-arabia/gold-reserves)
Dollars are similarly useless in Saudi Arabia. They use the riyal there.
Outside of the US, dollars are really just government bonds that people hold as a store of savings. They have to be sold before you can do local transactions or pay local taxes.
Saudi needs dollars to buy everything else since they make nothing and import everything. Everybody else will take their dollars, so it’s a worthwhile thing to have around for them. Sure, you can’t buy a kebab on the streets of Jeddah with them, but the chicken that kebab was made with was almost certainly bought in some way using those aforementioned petrodollars.
How does the seller selling the kebabs in riyal get the chicken given they only earn riyal?
You need somebody who wants riyal for dollars. Why would the chicken seller not take the riyal since that helps his customers and do the FX magic themselves? "Local currency sales" is what marketing men recommend. It's just the latest form of vendor financing.
Who wants riyal for dollars. People who buy kebabs in Saudi. Those who live and work there.
As I said the dollars are useless in Saudi, because that's not the local currency stuff you need day to day is priced in.
The point again is that in aggregate you can buy things in the currency you have and you can sell things for the currency you want. The financial system smooths the path to that deal - for a price.
As anybody with a Paypal account and who trades internationally understands.
>How does the seller selling the kebabs in riyal get the chicken given they only earn riyal?
They buy the dollars they need to buy the chicken off the Saudi national bank for Riyal. That’s their job. Controlling that rate is a primary way the SA government manages their domestic economy.
According to Wikipedia, the last arms deal that Saudi Arabia struck with the US was, that alone, around $350 billion.
That's more than most of the nation's GDPs.
Trying to put a Ponzi scheme such as Bitcoin on par with the US dollar is either an entirely clueless assertion or a disingenuous claim made in line with all the other pump-and-dump schemes that plague the so called crypto currencies.
Currency is slightly more fungible than this. Not enough to invalidate your point, but worth noting that I've purchased food, transportation, lodging, and knickknacks in Saudi/Bahrain/UAE and Oman using USD. All of the above items, in each country. It's certainly not a universal currency though, I'd say the vast majority of vendors were not interested in taking USD. Even then though, generally you could find a private citizen/local expats from many other continents that would be willing to perform currency exchange to/from popular currencies at a rate profitable for them.
Vendors/citizens of some other countries - Jamaica, many parts of Mexico, many parts of Canada, also are happy to deal in USD as a customary business practice, at least in my experience.
Sure. It's the same here. I can buy stuff with Euros in York rather than the usual GBP.
But generally people want the local currency because they have fixed liabilities in the local currency - taxes and debts.
Chances are they'll take your money and then swap it out for the local version rather than hold it.
The point of the article is that around the world very large amounts of loans have been denominated in US dollars, even in countries that don't use USD. That means there is always a constant and large demand for USD to repay those loans.
So outside of the US, no USD is not just a store of savings, it's a means of repaying debt. Hence why people want it and will accept it as a first preference over most other currencies when international transactions need to be made.
Not in USD it doesn't. You got your loan in USD, spent it to buy whatever you needed, you have assets, not USD. You need USD to repay the loan, where do you get them from?
The price of bitcoin would probably grow way way way way higher than 20k if Saudi Arabia decided they were only going to sell only for bitcoin, as in “add a large number of zeros” higher.
Can you use Bitcoin to buy a few billion dollars in really safe and liquid treasuries when you need to park a trade surplus somewhere? If not, it isn't really useful in the oil trade.
Wrong. It's a great intermediary to buy and sell international assets cheaper and faster than with SWIFT. Also it effectively bypasses local bureaucracy.
Just because something is priced in dollars doesn’t mean it is paid for in dollars.
Fundamentally in every real transaction in the world the seller gets the currency they want to hold and the buyer gets to use the currency they earn in. Because otherwise there is no deal.
The whole purpose of the global financial system is to sort out those mismatches so deals get done - and make a turn while doing so.
There are at least 96 oil producing countries in the world ([1]). It makes sense to trade oil with USD across the board instead of fragmenting the oil market into 96 different sub-markets (oil to each country's local currency).
Now, the buyer and seller can of course convert USD from/to their desired currency on FX markets. Oil trades tend to be big, so that would cause demand for USD liquidity. That demand, and the fact that these dollars are effectively "locked" inside the FX markets (reducing supply), would make the dollar price go up (everything else being equal), hence strengthening the dollar.
You can't convert currency. You can only exchange it (outside of those currencies that are fixed to the dollar or whatever). That means that somebody has to want the dollars for you to get the local currency you need to pay staff and pay local taxes. In aggregate that's a wash.
Which is the point I'm making - expand your view beyond just buying and selling the oil, and think how you get into the position in the first place. From the ground to where it is used.
Whatever currency you hold those selling oil will take for their oil - because there is a big financial system whose job it is to make that happen and to shuffle the currency holdings around until everybody holds what they want to hold.
The FX system is part of the oil market. It lubricates the parts oil can't reach.
This is called settlement overhead, and is the reason you're incorrect. Every time you change one currency for another on any meaningful scale, it eats into your profit margin..
Tl;Dr - there's no such thing as "no foreign transaction fee!!!1!" in oil baron sized transactions.
Think a little bit wider than that. How do you pay your staff in the local area you work in? How do you pay taxes to the local government? How do you sell your oil to people who don't have, or don't want to, hold dollars. Are you really going to turn them down just because they hold GBP?
That's the whole point though, those people don't really exist. Basically everyone who does business internationally is, well, doing business internationally. You can either restrict your market to only people who hold your non-dollar currency, hold every currency in the world, or hold dollars. And keep in mind, everyone else holds dollars...
This is sometimes referred to as the network effect.
I'd like to echo the question of how that theory could even be debunked? It is a pretty reasonable theory to explain why the US has that bizarrely close relationship with the lunatics who run Saudi Arabia; and it is undebunkable with facts. Also reported by people like Bloomberg [0].
It is an unproven theory. Unless someone believes what they read from Andrea Wong; in which case it would be a proven theory.
The US gets very little oil from Saudi, so why does it care? Because oil is the penultimate (after water) commodity, incredibly liquid. If the supply to big Saudi consumers (e.g. China) is disrupted those consumers will seek oil elsewhere, driving up the cost in the US (and giving US producers an incentive to export). So stabilizing the flow of oil from Saudi and, yes, Iran is in the interest of US consumers who never use a drop.
The import and export statistics are all in the US Energy Information Administration web site. The US imports (mostly from Venezuela IIRC) and exports about the same amount of oil, and so is essentially net 0.
Sorry but this is nonsense. US wants higher prices because US shale producers can only profit with higher oil prices. The US only recently even legally allowed export of oil. You are linking a state that has only existed for the past few years with a 50+ year old foreign policy.
US needs to control oil because it is the ultimate power lever.
> is in the interest of US consumers who never use a drop.
What is in the interest and what the actions of US government vs interest of US consumers are very often diametrically opposed.
I think you've missed the most obvious one in that you have to price in something and the US$ is the best known to use. I'm about to buy some petrol and it really doesn't make a difference to me if the price is £1 or $1.23 or 41 baht or whatever.
Same reason the contract will be in English - you have to use something and that's the best known.
The full sentence is: The dollar’s claim to fame is that almost all oil is priced in dollars, globally. If France buys oil from Saudi Arabia, for example, they don’t pay in either of their own currencies; they pay in dollars. The same holds true for many other commodities.
That's because dictators who are well on their way to end up in a ditch usually start embracing "anti-imperialist" rhetoric to paint their opposition as being western traitors and legitimize their struggle for power. They dont just wake up and decide to ditch the dollar, it's just a convenient talking point that really seems to attract a huge portion of western sympathy. It switches the narrative from a revolution caused by brutal oppression to a "revolution" caused by US economic interest trying to topple a resistance leader or whatever.
I'm not saying the US doesn't usually have a lot to do with their demise, but simply that their fall isn't caused by moving from the petrodollars. Because it literally does not make any economic difference for the US , at all.
The difference between "This is the only currency that matters" and "You can do these transactions in any currency and it doesn't matter" is critical politically.
Currencies trade confidence, not fundamentals, and if confidence in a currency disappears to the point where it stops being the default choice for transactions, the effects are almost literally incalculable.
Short term trades can go up or down within a range bound by fundamentals. The further things get from their ‘correct’ value the more obvious the correlation becomes.
Aka, when people change their vacation plans etc based on currency fluctuations that’s a massive effect in aggregate.
You say journalist, I say imperialist spy. The line is blurred more and more these days, especially given the CFR's influence over American/Western media.
Try to look at this from the perspective of a country whose resources you are trying to protect from non-local usurpation by global Western organisations:
And no, I was referring to the spies posing as journalists in Venezuela, Libya, Syria, Afghanistan, and so on. This is most definitely a rabbit hole any enlightened western observer of world affairs should go down.
The question is, putting people to death for crimes against the state, i.e. death penalties, etc.
A lot of "states" murder "spies". [ * ]
The proposition was that only a select few states murder journalists for such crimes. Journalism is the opposite of spy craft, so combining them for political purposes is deadly, indeed.
It should be stated up front that I, personally, don't think the state should have the right to murder anyone, and I also mean by means of war, asymmetric or otherwise.
( * -The moment someone murders in the name of the state, the state is over and its time for a new one.)
It seems unlikely that horror at the invasion of Kuwait, and concerns that Iraq might annex the Saudi oil fields were all just pretend. Certainly the Saudis didn’t seem to be pretending to be worried.
I could make a fair moral case for invading anywhere bigger than the mini-states like Switzerland.
Are there any countries in the Middle East where there isn't a good justified reason to invade them? I can think of reasonable reasons to invade Israel, Iraq, Iran, Afghanistan, Syria, Saudi Arabia, Yemen and Pakistan. Some of those reasons have actually been used.
Similarly I can think of great justifications for an invasion of China, North Korea, Russia, pretty much all of Africa, the United States (they have a substantial amount of blood on their hands!).
Europe I personally struggle to think of dirt on in the last 50 years, South America I don't know much about. Most of South East Asian nations seem pretty well behaved to me which makes them a global rarity.
The fact that the US invaded somewhere where there were real reasons for concern is nice, but as far as I can tell that would be true of any invasion of any country short of sending the troops into Canada or re-invading Germany. In the Middle East it doesn't really mean much.
No, you really couldn’t. You could come up with all sorts of reasons for disliking them, or wanting to harm them, but that’s not the same as a reason for expending the huge economic, military and human cost of invading them. To invade a country you have to be willing to pay the price of doing it. Nobody has a good reason to want to pay the price of invading Pakistan. Not even India.
That could change, sure, but that’s not the situation as it stands, and if you can’t see how that works, I’m not sure how I can help you get there.
Wait, explain me to this: Why isn't Saudi Arabia pricing oil in Saudi Riyal? This is their gateway to dominate large portions of global economy. Who ever holds this golden key can print whatever sums they need at whims and offload it to rest of the world (just like US doing massive QEs at whims and never have to experience bad side of it). KSA infact is not just pricing oil in dollars but also mandating riyal to exactly follow the dollar! Most other countries do sell their produces in their own currencies such as China.
A large fall in oil prices (like the one we just saw) would wipe out the currency before Saudi Arabia would even be able to print anything to respond to the crisis. The USD is stable because of the full faith and credit of the United States government, not because oil is traded in USD.
Our consumer economy just shrank by 30% or more. We've used up all our credit. We were spending beyond our means. And now our consumption will shrink. What's this do to king dollar?
Probably not much if every other economy responds in exactly the same way.
It's too early to say; what matters more is what a recovery, if any, looks like. The US has a history of enduring greater short-term pain but bouncing back faster.
People have been talking about unsustainable US debt for decades. The market can stay irrational longer than you can stay solvent.
It's very early days, and this is a recession unlike any other, so it's hard to say what will happen, because this type of recession has not occurred in modern history.
The US will ensure global dollar hegemony is maintained(1). Just ask some of the countries - Libya, Iraq, Venezuela - that tried to move away from king dollar how that went.
If you are lucky the US applies economic pressure. If you are disliked enough, things have a tendency to get downright kinetic.
> And now our consumption will shrink. What's this do to king dollar?
Every time we consume we're exporting those little green pieces of paper, you know?
Shrinking consumption actually props up the dollar, because we're giving out less, and the rest of the world, with dollar denominated debt and liabilities, has bills to pay.
China was in recession/depression before shutting down their entire economy for almost 2 months and have barely recovered. They suffered a supply shock. And now because the entire worlds demand has declined, China is now suffering from demand shock. And foreign manufacturers are now FLEEING which adds to massive loss of permanent jobs. That’s on top of a debt overload and they don’t control the worlds main currency
Japan and Germany were close to recession before the virus hit. Plus they are mainly exporters. Plus automobile is their big export...which now the demand has collapsed around the world.
Do you have a source about the claim that manufacturing leaving china? I could find US companies leaving the country because US policies — not covid-19.
Tangent but it seems to me that this Covid situation is ripe ground for the next crypto bubble. The envisioned endgame on which the 2017 bubble was based was “hyperbitcoinization,” the prospect that national currencies would give way to bitcoin, but nobody could really explain why. This new space of financial instability seems like ripe ground for the next wave of hyperspeculation.
I am confused by this article, was it that many words to say that "the US will have a strong dollar until it doesn't have a strong dollar"?
Isn't the premise sort of undermined by the fact (posited in the text) that overseas US denominated debt is actually better offset by US dollar denominated holdings than ever before?
And I don't entirely understand the importance of say a Turkey or Argentina default to this scenario. If large amounts if USD debts can't be serviced that alleviates the so-called "squeeze" because the haircuts represent money that doesn't need to be "found".
There was a lot of words in there and it seems like a pretty big pile of assumptions stacked on top of assumptions and it doesn't make a straightforward argument in favour of the premise that we should expect the US dollar to devalue relative to other currencies in the medium term.
(Also the link that explains trade deficits is a pretty bad explanation of trade deficits and how they do and don't matter.)
Exactly. And then at the way end, there's a graph with the two scenarios predicting what will happen based on all of the article's analysis:
Scenario 1: Dollar goes up, then down.
Scenario 2: Dollar goes down.
In each Microsoft Paint drawn scenario, there's only a vague implied scale. Scenario 1 going up to ~$130 around 2025, then falling to ~$92 around 2035. Scenario 2 falling to ~$75 by 2035.
So if the dollar goes up, the author is right. If it goes down, the author is right. If it stays the same? ¯\_(ツ)_/¯
That paints an astonishingly bleak picture. I'm not an economist, but that seems almost unreal.
We have a lot of levers (some unpleasant) that we can tweak that aren't mentioned. Getting into a cold war with China and shaping trade seems like something America is uniquely positioned to do.
It may even be possible to cancel US treasury debt to China if the entire world gets on board with that plan (suing the CCP over covid-19 coverups and unanimously agreeing to prevent credit rating downgrades). I've seen this idea floated around the internet, and it doesn't sound implausible.
> It may even be possible to cancel US treasury debt to China
Then the credibility of the United States would be forever harmed. If the U.S. can do this to China as retaliation, what guarantees that it won't do something similar to another country when the United States doesn't like that country? Plenty of countries aren't allies with the U.S., and they'd be dumping their treasuries like there's no tomorrow. The downward price pressure then wreaks havoc on investors in the U.S. and U.S. allies: treasuries are supposed to be the safest asset classes; when they crash, plenty of things will crash.
Credit ratings don't even matter; without a credit downgrade everyone would know these ratings aren't objective any more. Not to mention that would potentially trigger total chaos in the U.S. sovereign CDS market, and potentially bankrupt financial institutions that sold these CDSs.
I can't even imagine the scale of damage this would do.
It wouldn't get cancelled, it would get frozen for the duration of hostilities. Being able to transfer US treasuries is only really possible with the consent of various pieces of US banking machinery, and that consent is revokable.
For what it's worth, this is the fate of whatever treasury debt the sanctioned Iranian regime owns. Really hasn't been all that much of a problem in terms of causing dollar flight.
You're getting over-excited. The US has a vested economic interest in China that despite rhetoric, it cannot extract itself from immediately, maybe not even in ten years. It doesn't have that entanglement in Iran. Trying to crash China's economy is in shooting-own-foot territory, and trying to do it by reneging on Treasury securities that are a part of complex financial transactions (they might be lent out, have you thought of that?) must be the dumbest way of all.
My comment will probably just be removed or buried, but I am going to put some "crazy" beliefs out there.
1) The financial system is hopelessly oversimplified and hopelessly unfair.
2) It does need to be completely redone. We should understand that money is a fundamental _technology_ and actually come up with a totally new set of high technologies that replace its current incarnations with things that are much more sophisticated.
3) Failing that, it is quite possible that countries other than the US may see so much death and destruction due to the failing financial system (excessive debt etc.) that they become desperate for a way to unhook from the dollar. A certain amount of hunger and chaos could motivate a global war.
3) Up until just recently, it seemed pretty clear that it was not feasible to defeat the United States in war.
4) The Covid-19 pandemic _may_ have unfortunately proven that there is now a type of warfare that the United States cannot win - bio-warfare. I am not suggesting that Covid-19 was actually a bioweapon, but due to the very feasibility that a _similar_ virus could have originated in a lab in China, the effect of this disaster could nevertheless be seen to be the bio-warfare equivalent of Hiroshima. Again, does not appear to actually be the case, but research in similar microorganisms was documented to occur in Wuhan. So you can't say it isn't potentially plausible in the future. And so this is an effective demonstration of the power of such a weapon, and the way that tight controls on citizens and information makes it a feasible type of weapon for China.
I am not writing this to try to create a rumor or something. But people have to realize that if money doesn't work for a certain number of entire countries they will fight for survival. And the US and it's outdated dollar system could actually be what they have to fight against.
I'm sure this is pointless because we have wildly divergent worldviews.
But one example would be massive wage disparity between adjacent countries, where people doing the same job in one country earn only a small amount compared to the other. And although cost of living may be lower in the other, important costs are not and objectively it's unfair.
The financial system is rigged in the favor of bigger players; especially stock market. Big players with a lot of capital can easily add “insurance” to their investments via hedging strategies that a small investor would not be able to utilize due to the high capital requirements currently in place. They are other regulations that make it tough for small players to get into the game such as the mark to market feature which abolishes/ makes one exempt from the “wash sale rule”; the requirements to get this is an uphill battle for a small investor.
On the surface wash sale rule seems to make sense but in reality it limits the amount of trades you can do especially in times of high volatility. And as Nassim Taleb mentions in his book “Antifragile” things that are harmed during times of high volatility are extremely “fragile”.
The technology is already there to make proper investing available to the masses; unfortunately regulations heavily hinders the feasibility for a small company to roll something like this out.
What do you mean by “high capital requirements in place” for hedging a portfolio? Do you know what options are? They can be used for hedging, and the bid/ask is the same for an institution or an individual.
You or I could’ve followed the 50 cent VIX call trader and made several thousand percent, all for 50 bucks a contract.
Hedges cost a percentage of a portfolio, it doesn’t matter whether it’s 100,000 or 1,000,000,000 dollars, if the overall composition is the same, the hedge will cost the same percentage of the portfolio.
You and I can trade mark-to-market assets too, CME micro futures have pretty cheap margin requirements.
It sounds like you have a lot of theoretical knowledge, but don’t actually have a practical knowledge of trading/investing. All of the stuff you complain about not existing actually exists.
Sure, you and I aren’t going to be able to put on a hedge like Ackman did, but only because the notional value of the derivatives used is so high. Use the tools available to the average investor, there are plenty.
Wow thanks for the response really appreciate it. I’m actually dabbling in trading atm, very familiar with bid ask spread and would def consider myself a practitioner, and not an economist/only thinking of things from a theoretical point of view.
I have a trading bot that trades crypto at the moment.
Anywho, what I was trying to convey in my initial post is that regulations make it tough for the little guy; especially on the stock market side.
My knowledge on options is definitely lacking, plan on learning more about that eventually, but when I referenced “insurance” I was def alluding to options / inversely correlated positions.
Any who what I mean by large capital requirements is to safely trade equities and crypto you typically want to trade based on a position sizing algorithm. Which reduces your position size based on the risk you’re exposed to.
In crypto the capital requirements are very low in the sense that you can buy a fraction of a share for as little as a few cents or even less in some places.
In stocks fractional shares are now becoming more and more accessible to people. But the problem there is you can’t actively trade a single stock unless you register as a active trader with the IRS. Also in most places fractional shares are $1. I would like to see this be even lower to truly allow anyone to run sophisticated strategies without needing a lot of capital.
$50 might not be a lot to me or you but it’s def a lot to others. Just wish system was designed in a way where you could trade sophisticated strategies with as little as $5 or heck 50 cents.
Hell, even some rich Western nations' currencies are fragile by this measure. I thought I was being smart by anticipating the coronavirus crash and selling half my global funds as an hedge. Timed it almost perfectly, a week and a half before the crash.
But it ended up being a complete wash! The funds were settled in Norwegian Crowns, which fell 30% relative to other currencies along with the stock market. And during the recent recovery, it has recoved in lockstep with the US stock markets, so the returns of my fund holdings measured in Crowns have been pegged at -5% to -10% throughout the whole crisis.
Turns out in retrospect that some big NOK-denominated bond funds investing international bonds were margin called on their currency insurance. They were therefore forced to sell a crapload of NOK bonds into the drop, in sum causing a 20-30% crash in two days.
Yeah it’s def tough to perfectly anticipate what the market will do next. What I’ve learned on my end is just simply be prepared for the following outcomes:
Have you heard this joke? "If you owe the bank a million dollars, you are in trouble. If you owe the bank a billion dollars, the bank is in trouble." Follow up joke - if you owe a billion dollars to a bank, and no one likes you or the bank, no one will care about either of you going down.
As a neutral outsider, I see that there are actually three scenarios which can play out:
1 US comes out ahead after this
2 China comes out ahead after this
3 Both countries engage in a lot of tit-for-tat, impoverishing both sides, and making the world significantly more multi-polar.
As a neutral, I would prefer 3.
What I am saying is that no neutral country has an incentive right now to come on board to help either of these economic superpowers because both have been abusing and exploiting their powers for a long time now, and neither have been particularly trustworthy in their dealings with their friends and allies.
Getting into a kind of cold war with China will lead to an actual war. But, here's the kicker. Our economy has been decimated over the last 30 years as we've exported our production to 3rd world countries (like China). We now have the strongest currency and it's going to get harder to export as a result. Meanwhile, all the factory and production skills we had 30 years ago are gone now. Those people are retired or dead. We now have 2 generations (Gen Z and Millenials) who fundamentally lack production skills. We are in a bad spot. It will take years to retool our economy.
> Getting into a kind of cold war with China will lead to an actual war.
China does not want that, and we don't want to go to war with them either. MAD makes this an extremely unattractive option.
> It will take years to retool our economy.
No it won't. We're already manufacturing more high-skill goods domestically than at any point in our history, and now we have an opportunity to expand upon it.
We can replace China with manufacturing in Vietnam, India, Mexico, Ethiopia, etc. and own the factories. China is already starting to shift expensive manufacturing out with One Belt One Road, but we can do the same with even more immediacy and effectiveness.
India, Viet Nam, and Taiwan are itching to further distance themselves from China.
There's no reason we can't be at the top of the manufacturing game worldwide in fifteen years. Especially if we use trade as a means to get partners on board. The G7 would do it.
This is sadly quite ridiculous. The US can't move production out of China through sheer will power, and China is incredibly dominant in production in many industries -- the know-how simply doesn't exist in the US.
It doesn't need any of that. Automation will take care of most of manufacturing. The issue is, and always has been, redistribution of economic gains. China is a convenient red herring.
A huge part of our military spending is to ensure that we have the requisite domestic production to fight a war, without spending years retooling the economy. Additionally domestic manufacturing output is at an all time high for a huge number of products, even while overall employment numbers are down.
Slightly off-topic, but does anyone know where I can find good sources of similar analysis for the eurozone? I feel like I know more about U.S. monetary policy by now than my own area's.
There is, unfortunately, quite a lot wrong here (not just the topic...but obvious stuff like Triffin Dilemma).
But the key points are basically two-fold.
One, there isn't a shortage of dollars. Nowhere close to one. The Fed learned from what happened to Europe last time, and has already announced swap lines.
Two, there isn't one generic "dollar" funding situation. In 2008, it was really about Europe. Now, we have lots of countries each with their own situation (which the Fed is watching closely).
Japan has probably been where most of the growth in the market has come from. They are deep into CLOs but have a fairly neutral funding position (they borrow/lend in USD), and Japan has a huge stock of dollars...so a crisis seems unlikely. Canada is another big one but, again, this is US branches of Canadian banks...not an imbalanced position. The big mystery is China, which seems to be getting dollars from nowhere, but like Japan they have a huge stock of dollar reserves.
The situation with EM is also not that simple. A lot have a huge stocks of dollars. The reason why some are getting into trouble is: bad monetary policy, borrowers with bad credit, and (lesser extent) dollar strength. The last is going to continue but Turkey, as an example, has been in this position for years (I noticed their issues 6 or 7 years ago). What is happening now changes nothing.
Definitely, we have seen surprising moves in GBP and CAD which suggested that people were looking for dollars quickly but JPY rallied...so...who knows? I don't think it is something to be unduly worried about. The US has supplied tons of dollars, China and Russia will keep kicking up a shit fit about this but the US isn't taking advantage of the situation, the Fed is providing the market with liquidity. We have SDRs, there was no issue with the supply of dollars before this point (in fact, the issue was there was too much)...so...I don't see what there is to worry about here.
China is getting dollars from foreign purchasers of their goods paired with a forced exchange to yuan (holding large values of usd In China is illegal).
They aren't. As you say, you are unable to hold large USD balances in China. Whenever an exporter's account is credited with USD, the Chinese bank will take that convert into RMB, take those dollars to the PBOC who will then give them a PBOC note.
There is obviously some kind of leakage occurring. Again, no-one where that is coming from because the PBOC is still holding $3tn.
If somebody wires dollars to a Chinese bank, and that bank wires those dollars to another bank to exchange them, why can't that second bank make up any number when it wires dollars back to an American bank?
Is it because at any time, those dollars were not only on the books of the Chinese banks but also on the books of some international clearance bank?
Ultimately, unless they are holding physical currency (undoubtedly, they have some), the dollars are held in an account at a correspondent bank in the US and ultimately at a federal reserve bank. If China tries to spend money they don't have, someone in the chain is going to reject the transaction.
I never thought of this and find it an interesting. Are you saying that the primary counterfeit tracking of digital dollars is a distributed ledger where each bank knows where they got money and where they sent it? Do banks share these ledgers with each other or the fed?
I think it helps to go back and think of money as a physical object. I have some cash which I deposit at a bank. The bank holds the cash in a vault and gives me a statement telling me what I have. If I want to pay someone using the same bank as me, the bank can simply debit my account and credit the payee. The cash just stays sitting in the vault.
Now, I tell the bank that I want to pay someone at another bank using a wire instruction. My bank debits my account and tells the payee's bank to credit his account. However, my bank now has too much cash in the vault and the payee's bank, not enough. To settle the transaction, my bank must physically transfer the cash to the recipient's bank. The banks have large numbers of customers and handle large numbers of transactions, so they can net it all out and only transfer the difference.
Still, the banks don't really want to be transferring large amounts of physical currency everyday, so they deposit some of their currency with the federal reserve (think of it like the bank's bank). Then, instead of transferring physical cash, they can tell the federal reserve to transfer the money from one bank's account to another while the physical cash sits in the vault at the Fed (or more likely doesn't exist at all because the Fed is the source of truth).
This can all get several levels deep. If I wire money to a supplier in China, the Chinese bank receiving the money doesn't want to transport cash across the Pacific, so almost certainly, they have an account at a "correspondent" bank in the US which, in turn, holds an account at the federal reserve. Meanwhile, in order to facilitate foreign currency exchanges, the US bank likely also has an account at a correspondent Chinese bank . . . and I can't say anything about how the Chinese banking system works, but I'm sure it is analogous.
According to the article, it was published on February 26 (although archive.org didn't index it until just the other day). The Fed didn't announce new swap lines until three weeks later [0].
This is my first time learning of the Triffin Dilemma, so I'd be interested for you to comment on what about it is "obviously" incorrect. Wikipedia suggests this isn't a controversial notion.
The issue is that the Triffin Dilemma really only applied pre-Bretton Woods. It has been vogue again because of China and Europe bleating about people using the dollar but the reality is that central banks are very happy to hold gold, and dollars have been in ample supply. That is it. There are technical issues with Triffin too but the most important point is that doesn't represent reality today.
I am not going into the history of this but one thing that economists today assume is that Bretton Woods broke up because of the Triffin Dilemma/lack of gold...this isn't wholly accurate and Triffin expected that BW ending would cause deflation...it didn't, it caused massive inflation.
I'm not an expert on these things, but I like to try to break down things into simpler concepts.
I fear that in the reasoning like in the article, many things remain unclear or nontransparent.
Maybe there is an error in picking misleading metrics and running with them?
As an example, what if you were selling a product, and you were giving people unlimited credit to buy from you. Like you suppose everybody could buy a new iPhone on credit, that never needs to be paid back.
I can imagine iPhones selling like hotcakes in that scenario.
Now the question is, in that scenario, would Apple be doing great? They'd be selling a lot of iPhones, after all. And in the books, they would have the claim to a lot of money from the people who bought on credit.
Realistically, though, they might not be doing so great, because most of their customers would end up unable to actually pay back the credit.
Maybe something similar tends to happen on a larger scale, when the article says "a weak dollar is good for the economy" - it's just that "people" (in other countries) got access to free money to buy. Whether those sales turn out to be really good ones will only become clear in the long run. Money (dollars) is just debt, so "a weak dollar" may just mean it is cheap to borrow, a ka buy stuff for almost free.
I don't know what the best metric for understanding such a situation, but it seems to me simply calculating in dollar values is rather misleading. It is a much more complicated question involving the ability of debtors to actually pay what they owe.
It seems like every economic argument for US strength relies exclusively on "we have the global reserve currency". How long will this remain the case? No country can survive solely on this without underlying economic strength. Ray Dalio's analysis on the topic last week clearly showed how the reserve status lags behind most other indicators of a country's global status.
There are strong cultural ties to seeking precious metal as a hedge by individuals. Indians and the Chinese are used to huge ornate weddings and have a strong sense the jewelry bears a dual purpose. It's possible the last fifteen years of the diaspora has acculturated the precious metals practices of their cultures into America.
Real hedge doesn't go to jewelry. But the lower grade gold and silver has to come from the same feedstock. So the localised effect would be felt in the investment community because some of the bars are going out the door to metalworking not to another vault.
I'm less sure its indicative overall of risk these days. Real LME type trade is online. There is no shortage of metal worldwide is there? I thought most central banks de-gilded over the last decades anyway.
I wonder what's really behind this phenomena. You were so distracted by a simple error, completely unrelated to the main point of the article, that you had to stop reading the article.
And then other people are reading this as this is a problem with the article and not a problem with your brain.
How, exactly, is this a problem with the credibility of the article?
If you're unable to look past a simple misspelling in order to get to the real meat of an article, you're going to have larger problems. The world is an imperfect place, full of much more egregious mistakes than this. Being able to deal with that is a fundamental skill.
It doesn't mean that. I don't know why you want it to mean that, but even proofreaders can miss things. You're rejecting the credibility of the articles based on something unrelated to the actual information the article is talking about.
Spelling has nothing to do with the underlying information.
Obviously you're going to justify this however you want in your head, and there are others out there who agree with you, but I think most people, when hearing that you literally couldn't read an article because of a spelling error will just roll their eyes.
I don't understand why servicing a dollar-denominated debt causes an increase in aggregate demand. Sure, you need to buy dollars, but when you pay the debt, now the person on the other end gets them and puts those dollars back in the market.
In order to mitigate the risk of currency fluctuation, countries with dollar-denominated debt will stockpile dollar-denominated assets in advance as well. Those stockpiles are an increase in demand over what is just needed for immediate transacting.
If all debters with dollar denominated debt could perfectly coordinate with each other that would be the case. They could all run through your scenario one at a time without causing a dollar shortage and a spike in demand and price.
But the market is made up of independent actors all of whom want to make sure they get the dollars they need first. It's like a rush for the fire exit with everyone jammed at the door instead of an orderly line.
There is too much debt in the system. Decades of goosing growth everywhere by making debt easier has put lots of places into tenuous territory where market adjustments combined with sentiment can tank things in unexpected ways.
> The United States now has loose fiscal policy and loose monetary policy.
This is the key takeaway from this article. This will spell doom for the US consumer's purchasing power, it makes sense to own foreign currencies, gold, and foreign stocks. Getting out of dollar denominated assets before the dollar crashes is key.
You can't look at one nation's currency in isolation.
Since other nations are simultaneously loosening in a competitive devaluation, buying foreign currencies and equities won't necessarily protect you.
I've yet to see a step by step explanation of how the dollar is supposed to crash. While there are many hyperbolic and hand-wavy theories getting passed around, none that I've seen acknowledge the role of other nations or of second-order effects.
I agree it's prudent to own some gold and Bitcoin in case the bottom falls out, but the probability of hyperinflation seems pretty low to me even if the Federal Reserve prints a few trillion dollars during a crisis.
See, this assumes that free trade is the norm and autarky isn’t. We are all supposedly interdependent it is said, but it could very easily become a scenario where everyone closes their economies.
Heck, they’re already doing that now with COVID-19. Then there’s no need for the dollar as a reserve currency. Not saying this will happen but it is a possibility. The real test is if Trump will impose tariffs on foreign oil. Other countries may retaliate on other goods and it quickly spirals from free trade to autarky.
Gold and bitcoin (and other cryptocurrency) seem like the only rational way out to me. I never asked for my dollars to be diluted like this and I feel powerless watching it happen before my eyes.
Not really. Look at what happened in 2008. The Fed's LSAPs significantly increased the money supply with no feedthrough to inflation or a weaker dollar. The inflation process is much more complicated than laypeople tend to think. Weaker labor unions, wealth inequality, trade, demographic factors, etc. all contribute to the weakening of the linkage between increases in the money supply and the inflation rate/dollar strength.
One of the reasons for the monetary stimulus is that in a crisis, everyone wants dollars. Which is why the dollar continues to strengthen despite all of those efforts. Additionally, significant portions of the stimulus (repo, dollar swap lines, etc.) are unwound naturally and automatically as the crisis abates. So it's not like the money sticks around to weaken the currency.
Also, increasing bank reserves from monetary policy doesn't tend to increase lending one-for-one as banks have not been reserve constrained in a long time. Lending is dominated by capital requirements and risk tolerance. So asset purchases lead to increased reserve levels, which strengthens financial conditions and increases lending (and thus Main Street consumption and investment) somewhat, but it's not like $2 trillion of monetary stimulus => $2 trillion of ketchup bought off the shelf.
It does spell doom, but the problem is the whole timing thing. Since you can't predict the future, I think it makes sense to not get out of dollar denominated assets, but simply not go 100% in on it.
That's due to a couple of different things. A lot of people were writing GC contracts w/o actually having physical gold to cover. When some buyers of those same futures contracts wanted to take delivery, those contract writers who took the short position had to now go into the open market and buy gold. However, because of COVID-19, there is very little supply of gold as it is now. A lot of mining companies have no intention of continuing to mine, as they can just give their miners time off and sit on their gold reserves, wait til the price spikes, and start selling their inventory at a 25% markup. That's my theory anyway.
I read this last week (forgot where I read it) and haven't been able to find data to support what I read so take the following with a grain of salt.
Many investors owned gold as a hedge. The market's downturn happened so rapidly and violently, their other positions took a massive beating. That divergence happened because big players needed to get out of their gold position to cover margin for their other positions.
No, there's often a disconnect between paper and physical metals when there's economic volatility. The same thing happened in '08. The reality is that trading futures contracts (which generally settle in cash) isn't the same as trading the physical metals (where you have broker fees to contend with.) While the physical metals markets are based on the spot price, the discount/premium goes way up during periods of high volatility.
the day before all non essential store (precious metal brokers) closed here I went to two and the asking price for silver was double the online spot for physical 1 ounce coins (not a high grade collectors coin just silver rounds)
It looks like it’s still close to that online at the large sellers, like apmex and Kitco.
For example, the spot price for silver is around $15, but the cheap, generic silver rounds are at $20 an ounce, 25% premium. American Eagles 40% premium.
I've heard that retail sellers deliberately milk the "it's the end of the world" narrative. They price gouge under the guise of "See! The price of physical gold is dislocating from paper money!"
Premiums on physical silver are always pretty ridiculous, even in non-pandemic times. I've always preferred gold because the margins are a lot more reasonable.
1. The recent disconnect between government debt and the economic cycle as the debt-to-GDP ratio has shot up when unemployment is low. Who knows how bad that's going to look as unemployment inevitably shoots up and government receipts go down as a result.
2. The fact that corporate income has basically been flat since 2014. That was a surprise to me and particularly surprisingly the almost unprecedented stock market rally over that period. When earnings become divorced from returns, it tends to signal the end of the boom and everything comes crashing back to earth at some point.
3. Seeing just how high China's USD-denominated debt is. I've read a few things on the possible US-China trade war in the last couple of years and I'd come round to the view that China was in a far weaker position for a protracted trade war than many thought. This data point fits that view.
4. The US tax "cuts" aka the GOP Donor Class Handout Act may well go down as one of the most foolish missed opportunities of the modern era, particularly given the trillions the government is clearly going to spend on Covid-19 bailouts.
5. The Federal Reserve is likely going to have to go on an unprecedented money printing spree to buy government debt.
What I'd like to know is will any of this impact inflation?