The Dollar As the World's Reserve Currency. Poor
by Gary North: The
Big (Stupid) Idea: Universal Personal Bankruptcy to Save America's
main reserve currency is the U.S. dollar. This is less relevant
than most hard-money writers think.
What they never
mention is that the U.S. dollar is a more popular reserve currency
today than it was in 1995. You
can see the evidence here.
The U.S. dollar
is not the only game in town. It is 60% of the game. There is also
the euro. It is 27% of the game. The euro is in far worse shape
than the dollar.
The other currencies
of the U.S. dollar as a world reserve currency is economically crucial
for most Americans in one area only: the domestic price of oil.
States is not an energy-independent nation. For as long as oil is
the main source of transportation in the USA, we will remain energy-dependent.
There is no way around this. The
world consumes about 80 million barrels of oil a day. Of this,
the United States consumes about 19 million. In other words, we
consume 25% of the word's oil. This is because we are the richest
nation on earth. This is because we are the most productive nation
is generated by the USA than in any other nation. This output is
consumed mostly in the USA. About 30% of the American economy is
export-import related. In
2008, the trade sector of the economy was about $4.3 trillion.
in 2008 was about $14.5 trillion.
common estimate of the money we spend for imported oil is $1 billion
a day. This means under $400 billion a year. This is a lot of
money. It accounts for about 20% of our total imports of $1.8 trillion.
It is the largest expenditure for any commodity or good.
for the dollar's importance in the oil market is the decision of
most OPEC member nations to accept dollars for oil. The oil-exporting
nations then deposit this money in dollar-denominated bank accounts
around the world.
is the currency of choice for other reasons than oil. The main reason
is the complete dominance of export-driven mercantilism. While the
older mercantilism of hiking tariffs and quotas against imports
is, for the moment, not dominant politically, export-driven mercantilism
is universal, especially in Asia. Central planners believe that
exports should be subsidized. The main subsidy is to have the central
bank create new money and then use this money to buy government
IOU's from importing nations or trade blocs, e.g., the European
For as long
as export mercantilism is dominant in the thinking of Asian politicians,
the U.S. dollar will continue to be the reserve currency of choice.
The euro is
clearly in trouble. Euro holdings by central banks account for 27%
of foreign exchange holdings. All other non-dollar IOUs account
for a minuscule 13%.
the U.S. dollar means replacing it with other nations' IOUs. Which
as the euro declines, central banks will add to their holdings of
dollars. They could buy British pounds, but why? Great Britain's
banking system is as shaky as ours.
buy Swiss francs. There are not enough Swiss franc bonds to buy.
There is not enough demand from Swiss domestic buyers of imported
Here is the
famous bottom line: the United States is the third most populous
nation after China and India. Fourth is Indonesia. If we could count
the European Union as a single trading bloc, which is reasonable,
the United States is #4. The EU has 450 million people. But these
people are not so wealthy as US residents are. Furthermore, the
eurozone may break apart.
If you were
an official at the People's Bank of China or the Bank of Japan,
why would you sell U.S. dollar-denominated debt? Because it pays
such low interest? True, it does, but central bankers do not own
the assets they control. They are merely trying to achieve domestic
policy objectives. The rate of interest paid on foreign governments'
IOUs is hardly worth considering. What is worth considering is the
domestic politicians' demand that the currency be kept low.
The Swiss central
bank has promised to keep down the value of the franc. This can
be done only by inflating. So, the supposedly conservative Swiss
are saying: "Nuts to stable money! Subsidize exports!"
It's beggar thy neighbor. It's subsidize the tiny export sector.
It's destroy the currency a year at a time. It's inflate or die.
Yet there are
gold-promoting writers who think the U.S. dollar will be abandoned
as a reserve currency.
Give me a break!
If OPEC decides
to substitute yen for the dollar, that will be good for Japan. Japan
must buy dollars to buy oil. The value of the dollar in relation
to the yen would fall. The demand from Japan to buy dollars to buy
oil would cease.
candidates does OPEC have?
IN CHARGE HERE?
OPEC countries done this? First, because of the U.S. weapons industry.
We make planes. We sell the OPEC nations planes and missiles. Then
they become dependent on spare parts.
USA is a powerful nation. It has an operational empire. Oil-exporting
nations don't pull the lion's tail very hard. They yell at the lion.
They say they will not be pushed around by the lion. They hike the
price of oil when they can. But they accept payment in dollars only.
How well did
Saddam's tail-pulling work? How well did Ghadaffi's resistance to
borrowing from Western banks work? These people know who is in control.
They aren't. They serve at the discretion of the West's politicians.
Arab spring has been a sprung trap. The rulers of Arab North Africa
have been sent a message: "You have no defense against your own
people unless the West backs you up."
An empire cannot
set the terms of trade for every good, but it can do so in crucial
goods. Oil is the crucial good.
Do you think
the House of Saud is going to switch to a different currency? Which
currency? For how long?
The House of
Saud is the 800-lb. Gorilla in the oil markets. What it says has
enormous influence. What it says is clear: "Sell oil for dollars."
The rest of
the imports into the United States are marginal. If the dollar ever
falls to, say, 30% of the reserves of central banks, this will increase
the price of foreign goods. It will decrease these imports.
banks will not allow this unless there is a very good political
reason to stop subsidizing the domestic export industry. That would
mean a complete re-thinking of export mercantilism. There is not
a whisper of any such re-thinking going on. Asian central bankers
are still keeping their currencies from rising against the U.S.
are central planners. They do not believe in stable money. They
hate gold because it offered stable money prior to 1914. It restricted
the ability of central banks to inflate. They are taught to hate
gold in every Western university. Their best and brightest attended
major Western universities. They were taught Keynesian economics.
A few may have been taught monetarism. It makes no difference with
respect to the hatred of gold.
LOOK FOR ANSWERS
When you hear
that the dollar will fall in value in the U.S. because it will lose
its world reserve currency status, look for the following:
1. A discussion
of the superior currency
2. Reasons why it will get even better
3. A discussion of export mercantilist thought
4. Reasons why Asian leaders will abandon it
5. A discussion of imports from large nations
6. Reasons why the USA will not remain in the top
7. A discussion of Keynesian economics
8. Reasons why Asian leaders will abandon it
9. A discussion of the case for gold
10. Reasons why central bankers will accept gold
I admit that,
at the margin, there are reasons for substituting other assets for
the dollar in central bank reserves. But these reasons applied just
as well in 1995. The euro was substituted for non-dollar reserves.
But, with respect to the dollar, no asset substitution has taken
place. The dollar is a slightly larger component of foreign exchange
reserves than it was in 1995.
are run by people who have no ownership of the assets. So, their
motivation is to keep their jobs and the value of their pensions.
Their jobs are based on following rules set by governments. These
include the following:
Keep interest rates low
2. Keep the currency from rising internationally
3. Keep the economy out of a recession
4. Keep the largest banks in business
5. Keep the illusion of price stability
The only tasks
related to the type of reserve asset in the bank are #1 and #2.
The bank must buy government IOUs: first, domestic IOUs; second,
As I have argued
so far, the trend has been to retain the percentage of dollar-denominated
government IOUs in central bank portfolios. Second, the USA is the
buyer of choice for domestic exporters, with only the EU giving
WHAT IF THIS CHANGES?
change. It will not change fast. It will not change by much. As
economists say, the changes will be marginal.
With the single
exception of pricing oil in terms of dollars, the changes will be
imperceptible to most Americans. The changes will come over time.
of imported goods supposedly will rise in the USA. This will create
price inflation. No, it won't.
inflation is determined by the Federal Reserve System, not foreign
central banks. If foreign central banks decide to sell Treasury
IOUs and buy other IOUs, they will drive down the price of U.S.
Treasury debt. This is another way of saying that this will drive
up Treasury interest rates.
will cause a U.S. recession unless the FED inflates. The effect
of a recession is to lower retail prices, not raise them.
I read the
articles by pro-gold authors, who insist that the decline of the
dollar in international reserves is inflationary, and I wonder how
they are reasoning. The FED is inflationary. It can inflate to offset
rising Treasury interest rates. But without FED action, a reduction
in the percentage of dollars in central bank portfolios is price
bankers finally decide that the U.S. government's IOUs are significantly
less trustworthy than foreign governments of large importing nations
which might these be? then they will switch. But then
what will happen if they do this: higher T-debt rates. This will
produce a fall in the value of the remaining IOUs still in their
portfolios. It would raise U.S. interest rates. That would create
a recession in the U.S. Imports into the U.S. would fall. That will
create a crisis in the export sectors of the central banks.
Show me the
senior central banker who stands up and says, "I will take the risk.
I am selling U.S. Treasury debt. If my government doesn't like it,
The next central
banker to do this will be the first.
PHANTOM BASKET OF CURRENCIES
my adult life, I have heard this one. It is the pot of fiat money
at the end of the central banks' rainbow. The suggestion comes from
academic economists. No senior central banker ever presents a detailed
It is really
a silly idea. What basket of currencies? Which currencies? They
never say. What percentages? They never say. This must be achieved
by selling U.S. dollars. To whom? At what price (interest rate)?
They never say.
Who will agree
on which basket of currencies? The IMF. What authority does it possess?
Who will enforce
this basket of currencies on the world's central bankers? They never
Why would central
bankers give up their national sovereignty to agree to a basket
of currencies? They never say.
Why would a
committee of international economists be better able to establish
the correct ratio of currencies in the central banks' portfolios
than a committee in each central bank? They never say.
How would any
central agency produce an agreement among the world's 196 nations
and 193 central banks? They never say.
This idea is
the intellectual plaything of economists. It has no real-world plan
that is being pursued actively by any groups with real authority.
The world is
being led by politicians and central bankers who have no interest
in the one viable solution to the world's monetary problem: the
closing of all central banks and the opening of all markets to free
market coinage. This would mean getting government out of the money
They have no
interest in re-establishing an international gold standard, with
open coinage and free markets in money.
want to control money for their purposes. Senior officers of large
banks want to control money for their purposes. Usually, their goals
fit together well. They fit together because of the short-term effects
(politically positive) of monetary inflation.
system of reserve currencies favors the United States government
and American consumers. It is a subsidy to exports to the USA by
way of holding down interest rates for U.S. government debt. Central
banks inflate. They can buy any asset, but export mercantilism favors
the U.S. dollar and the euro. The crisis in Europe favors the dollar.
There are lots
of things to worry about, The loss of the dollar's world reserve
status is not high enough on the list to be of much concern.
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2011 Gary North
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