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Currency War’s Prize: Privilege to Print “World Reserve Currency”?

22 Mar

Dali: a surrealist artist for a surreal currency [courtesy Google Images]

Salvador Dali: a surrealist artist for a surreal currency
[courtesy Google Images]

Salvador Dali (1904-1989) was one of the world’s premier surrealist artists.  During his peak popularity he enjoyed a peculiar privilege: Whenever he wrote a check, he embellished the check with so many distinctive flourishes and artwork, that many people refused to cash his checks. 

Why?  Because they believed his check (an intrinsically worthless piece of paper) was—as a work of art signed by the Dali—worth more than the face value of the check. 

Result?  Dali frequently didn’t have to actually pay for many of the goods and services he purchased by check with a deduction from his bank account.  Dali could buy dinner or a new pair of tools and discharge his debt with nothing more than a few doodles.

Dali was essentially printing his own fiat currency (an intrinsically worthless piece of paper just like a US fiat dollar).  His celebrity allowed him to use that “currency” to discharge his debts without redeeming that currency at Dali’s bank.

In that regard, Dali was able to emulate the US government’s ability to issue fiat dollars (the World Reserve Currency) and never have to actually redeem the fiat dollar. 

I.e, whoever prints the world reserve currency doesn’t have to actually pay his bills.  At least not for a couple of generations.

 

Bill Holter recently wrote that China:  1) is (like the rest of the world) heading towards an economic depression; and 2) wants the Chinese yuan to become the world’s reserve currency:

 

“I believe China will fare poorly when the paper and derivatives markets around the world collapse.  They have a very over levered real estate market . . . . Their real economy and manufacturing will suffer as global demand drops further because of economic depression.

“It won’t be ‘pretty’ but China will survive and eventually thrive.

“Why?  Because undoubtedly, China is working toward the yuan becoming ‘a’ reserve currency and, given time, “the” reserve currency.”

 

Holter’s article didn’t explain why issuing the World Reserve Currency might mitigate China’s exposure to the effects of economic depression.  But I see that cause-and-effect relationship as profound and worth an exploration and explanation:

 

•  If China foresees that it will soon suffer an economic depression, can China therefore seek to mitigate the effects of that depression on the Chinese people by snatching the status of “World Reserve Currency” for its yuan?

Yes.

History tells us that the fiat dollar’s status as World Reserve Currency has allowed the US to enjoy an unearned and unprecedented prosperity over much of the past 45 years.  During that time, the intrinsically worthless dollar was (and still is) accepted as payment by the world creditors because the dollar was the World Reserve Currency.

It should follow that, even in the event of a global economic depression, whichever nation(s) issue(s) a “World Reserve Currency” will tend to prosper to a greater degree than the nations that do not issue a world reserve currency.

Issuing the World Reserve Currency won’t guarantee happiness in a time of economic depression.  Still, doing so, will function like a life preserver after a ship sinks:  while the rest of the survivors struggle to grab some debris to keep them afloat, the person who issues the World Reserve Currency can bob up and down in the water without much effort or concern.

 

•  Today, in the midst of a global economic depression, the US economy may not be very strong, but it’s still stronger than most other national economies. At least part of the reason for America’s relative economic strength is the fact that the US fiat dollar is still the—or at least “a”— World Reserve Currency.

There’s little doubt that the dollar’s status as World Reserve Currency has kept it alive and relatively valuable ever since the dollar became a pure fiat currency in A.D. 1971.  Likewise, most agree that if the US dollar lost its status as World Reserve Currency, the dollar’s perceived value would plunge.

Thus, it appears that the US economy depends on the perceived value of the dollar, and the dollar’s perceived value depends significantly on retaining the status of World Reserve Currency.  It should therefore follow that if a global or national depression is coming, whichever nation(s) that can retain or acquire the status of World Reserve Currency for its national currency should be highly motivated to do so.

 

•  The US government has allowed the fiat dollar to slide into deflation on the US Dollar Index (USDX) for the past eight months. Why that evidence has been allowed remains a mystery.

However, that deflation might be explained as an attempt to shore up the dollar’s claim on the status of World Reserve Currency.  If the dollar’s value fell much further due to inflation, so might its claim to title as World Reserve Currency.  On the other hand, if deflation was allowed to increase the dollar’s value, its claim to title as World Reserve Currency might be strengthened while competing claims from China were weakened.

We can therefore speculate that one of China’s solutions to its upcoming depression might be to acquire status as (a) World Reserve Currency.

Is status as “World Reserve Currency” the ultimate prize in all of the currency wars that are now being waged among the world’s fiat currencies?

 

•  Mr. Holter continued:

 

“[China] understands the dollar game fully. They have known ever since and even before 1971 the rules were “never pay” or settle as the key component.”

 

And that’s the great advantage of issuing the World Reserve Currency— like Salvador Dali, a government that issued the World Reserve Currency might never have to repay its debts in full.  A government able to print the World Reserve Currency can just discharge its debts with paper or digital fiat currency “spun out of thin air”.

Without our dollar being the World Reserve Currency, could the US have fought the war in Viet Nam?  Could we have invaded Iraq, meddled in Libya and Syria, and provided massive support for Israel?  Probably not.

The privilege of issuing the World Reserve Currency grants incredible power to the issuer.  He can acquire property or alliegiance without conquest or actual payment.  However, like all incredible powers, issuing the World Reserve Currency also tends to corrupt the issuer.  Even so, the temptation to wield such power is beyond the capacity of most men, governments or central banks to resist.

As issuer of the World Reserve Currency, you never have to say you’re sorry—at least not until your fiat currency finally fails about two generations after its onset.

 

•  Mr. Holter used China’s predicament as grounds to predict that China will inevitably reprice the yuan in terms of gold and will be forced to raise the price of gold dramatically.

I’m looking at the same predicament and speculating that:

 

1) Having the privilege of issuing the (or “a”) World Reserve Currency provides the issuer with enormous economic advantages and political power; and,

2) If a US, Chinese or global economic depression is coming; then,

3) The US should be working determinably to retain the dollar’s status as World Reserve Currency.  (This determination might even explain why the US has allowed deflation on the USDX over the past eight months); and,

4) China might also be working determinably to acquire the status of World Reserve Currency for the yuan in order to mitigate some of the adverse effects of the coming economic depression.

 

If so, this may be evidence that the real prize in the modern currency wars may be privilege to issue the World Reserve Currency.

 

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4 responses to “Currency War’s Prize: Privilege to Print “World Reserve Currency”?

  1. Toland

    March 22, 2015 at 1:03 PM

    Al, it does appear China is a contender for world reserve currency issuer. The institution that could make this possible is the new BRICS bank, sort of like how the IMF made the US dollar the reserve currency.

    China itself has called for the IMF to issue the alternate world reserve currency. This is probably because China’s economy, as currency structured, does not support it issuing a reserve currency. One reason is that China’s economy is based on running a trade surplus, but the reserve currency issuer needs to run a deficit. Economists call this the Triffin dilemma.

    “This dilemma was first identified in the 1960s by Belgian-American economist Robert Triffin, who pointed out that the country whose currency, being the global reserve currency, foreign nations wish to hold, must be willing to supply the world with an extra supply of its currency to fulfill world demand for these foreign exchange reserves, thus leading to a trade deficit.”

    http://en.wikipedia.org/wiki/Triffin_dilemma

    Here’s a detail every economics theorist should get right, to help the credibility of his or her theory:

    The US government does not issue fiat dollars. It hasn’t done so since the 1960s when Kennedy caused the Treasury to issue US government notes. These are sometimes called “Kennedy greenbacks” in comparison to the greenbacks issues by Lincoln (another President who was assassinated).

    Since those days, the only entity that has issued US fiat currency is the Federal Reserve, which of course is a privately chartered corporation. The government and the people of the United States then borrow this currency from the Federal Reserve banks at interest.

    “This act establishes the most gigantic trust on earth. When the President signs this act the invisible government by the money power, proven to exist by the Money Trust Investigation, will be legalized.” – Congressman Charles A. Lindbergh Sr., concerning the Federal Reserve Act, 1913

    “Most Americans have no real understanding of the operation of the international money lenders. The accounts of the Federal Reserve System have never been audited. It operates outside the control of Congress and manipulates the credit of the United States.” – Barry Goldwater, 1979

     
  2. Roger

    March 22, 2015 at 6:12 PM

    Toland, thanks for linking to that article on the Triffin Dilemma. It’s something every economics hack should read to fake the funk a bit more convincingly and perhaps do less damage to the financial futures of those who take them seriously.

    I agree that if another world reserve currency emerges, it could be centered around the BRICS Development Bank using the Chinese yuan. I mean, as Triffin points out, the issuer of a currency has to run a “currency surplus” – i.e. a trade deficit – in order for that currency to be accumulated by others as reserve. China of course has a large trade surplus, but banks run “currency surpluses” as part of their basic business model.

    On the other hand, quoting your Wiki article:

    In the wake of the financial crisis of 2007-2008, the governor of the People’s Bank of China explicitly named the Triffin Dilemma as the root cause of the economic disorder, in a speech titled Reform the International Monetary System. Zhou Xiaochuan’s speech of 29 March 2009 proposed strengthening existing global currency controls through the IMF.

    This would involve a gradual move away from the U.S. dollar as a reserve currency and towards the use of IMF special drawing rights (SDRs) as a global reserve currency.

    Zhou argued that part of the reason for the original Bretton Woods system breaking down was the refusal to adopt Keynes’ bancor which would have been a special international currency to be used instead of the dollar.

    (end quote)

    For the moment at least, the central banking cartel appears to be defending its US dollar: the linchpin of its global empire since WWII. Cartel members Bank of Japan and the ECB are giving their full cooperation.

    Note that the US Dollar Index (USDX), which measures the strength of the US dollar versus other fiat currencies, is back up around 100 where it started when the USDX was launched in 1973.

     
  3. Henry

    March 22, 2015 at 10:16 PM

    Roger said: “… the US Dollar Index (USDX), which measures the strength of the US dollar versus other fiat currencies…”

    Exactly, the USDX compares the dollar to a basket of 6 other currencies, each with its own weighting in the index. They are as follows:

    Euro 57.6%
    Japanese yen 13.6%
    Pound sterling 11.9%
    Canadian dollar 9.1%
    Swedish krona 4.2%
    Swiss franc 3.6%

    When the USDX is up, as it has been recently, this means the US dollar has got stronger compared to the 6 currencies in this basket. And that’s all it means. It’s a strictly apples-to-apples comparison among fiat currencies. The USDX makes no attempt to measure the dollar’s purchasing power with respect to goods and services.

     
    • Roger

      March 22, 2015 at 11:58 PM

      An interesting factoid is that in the 1990s the Swiss franc would have been the oddball on that list, because at the time this currency was 40 percent backed by gold.

      Then in May 2000, as a condition of joining the IMF, the Swiss ended the gold backing of their currency and made their franc a fiat currency. At the time the Swiss franc was worth about 1.70 US dollars. That is, it cost $1.70 to buy one Swiss franc.

      Today, 15 years later, the currency has declined in value so that it now costs only $1.02 to buy one Swiss franc.

       

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