The stock market

[whiskynovember]

I know you have strong feelings about the American dollar remaining the standard for global currency, and I get the reasons you’ve laid out. That said, I’m a little nervous too. I keep hearing more and more that countries may have been preparing themselves to abandon the dollar. Maybe they saw it as “The giving tree” and used it up in a sense? I’m definitely not calling the sky falling but maybe a temporary struggle for more stability and some bad bets made on the sides of those betting against the dollar? IDK but the situation itself is starting to push boundaries and what is quickly conceivable maybe.
In other words I hope the dollar holds up, but I don’t think there will be many alarm bells and time to move if it doesn’t. Just IMO

Currency is both unit of account and store of value, and when speaking of a reserve currency you also have to add in reserve asset for central banks. Transacting in dollars is a choice for global trading partners: no one is putting a gun to their heads to use dollars. So why do they keep doing it? Because the earnings from that trade is used to buy US Treasuries which in turn are used as collateral in global funding markets (repo). Non-US banks use that collateral as asset basis for loans. And even if they didn't they could still make dollar loans simply by expanding their balance sheets and taking on risk. All of this they do without coercion by the US. It's true that the US and Europe froze Russia/(Iran) out of the SWIFT system, but everyone else in the world uses dollars voluntarily. Even Russia and Iran are purchasing dollars through proxies in order to conduct trade/buy gold/buy pristine collateral. Again why? Well, it would cost a borrower a lot more to borrow in an illiquid currency, or a currency controlled by a madman or unstable theocracy. Putin, an example of a madman, raised interest rates to 20% (I think) in order to keep the Ruble from crashing. Who in their right mind would want to operate in that currency or to have debt denominated in Rubles?

[whiskynovember]

What if the yuan was declared the world currency? I mean just think about how hard it is to balance stuff here.

China doesn't want responsibility of providing
1. liquidity to the globe for trade and settlement
2. stability of value: a reserve currency has to balance its domestic economy's needs against the needs of the global economy. It''s much easier to eat at the restaurant than to own it. See Putin's domestic needs above. Xi is no different.
3. geo-political equanimity: as facilitator of global dynamics a reserve currency/asset country can't be quick to engage in battle or to be petty in trade disputes. there's too much at stake.

[whiskynovember]

As we de-globalize/re-shore industry/re-form supply chains the globe will fractionally and gradually de-dollarize. Regional trading partners will transact portions of energy trade in their local currencies. More gold will be bought as reserve assets by the central banks of those countries. Global funding entities will lend more in non-dollars. But there will be risks involved in all three which will have periods of time which backfire and cause losses and instability. In those times the dollar will once again and as always in modern times become a safe haven. Any market crash will send capital screaming into the dollar. This will allow the US to continue exporting inflation and funding its debt appetite.

[whiskynovember]

Great content from Gromen. Most pertinent is the difference between the dollar as a transaction currency as opposed to a reserve asset (Treasury bonds). He covers: de-dollarization; gold; oil; "the whoosh"; the 4 possibilities going forward in the current geo-political/monetary/macro-economic/sovereign debt mash-up we have right now; and as always he gives solid historic context for each category.

My personal favorite is his nod to Keynes (Gromen is NOT a Keynesian!) whom conservatives/GOPers love to bash. Keynes proposed a neutral reserve asset called "Bancor" to settle imbalances on the Bretton Woods agreement that made the dollar the global reserve currency. It utilized gold! HAR!! Suck on that all you hard money Austrian hacks!!!