We’ve already had this debate twice, so let’s just agree to disagree. I would like to clarify that I try never to paint anything in black or white terms. If Petrodollar Warfare exists, it would only have an effect to a certain degree and not completely ruin our hegemony.
The reason we’re the reserve currency is much more practical and has already been stated above; we’re the only country with enough dollars to go around.
Also, and this shouldn’t be trivialized, almost all illegal transactions are done in dollars and America wants to keep it that way. This is the primary reason the Treasury takes bitcoin seriously. The drug/arms/whatever else trade being done in dollars also helps keep our hegemony in tact.
Canada’s currency via the yen is 85% correlated with WTI. That’s a pretty strong. You make a distinction between hedging energy demands and hedging liabilities but for places like Japan that distinction is muted. Their external flows are cash out for energy in, and goods out for cash in. If that energy is skyrocketing, their balance is upset. Having reserves correlated for energy would help confidence in the yen in such an imbalance. If energy costs go down, confidence is not an issue because Japan’s economy is then rolling along exporting like crazy.
correlation will mean absolutely nothing if the USD and U.S. economy starts falling apart. do you seriously think that the CAD will appreciate meaningfully if the USD and U.S. economy is tanking, while the rest of the world is doing “fine”? i’d expect to see that 85% CAD/JPY correlation turn into an 85% CAD/USD correlation should the U.S. and USD hit the fan for the same reason that the CAD/JPY had an 85% correlation in the past.
i don’t think we are that far apart on the issues, other than the idea that leaving the USD being a reason sufficient to start bombing people. I agree that one of the main reasons we are a dominant reserve currency is that we are a major stable world power with enough currency to go around.
I don’t argue that there aren’t reasons to like CHF and SGD and NOK and even CAD, but there just aren’t enough of them to take the place of USD as a global reserve asset, and most of those countries are going to be in big trouble if the US 's military guarantees ever start being seriously questioned.
Its true that the USD might get increasingly replaced by a basket of currencies, but that’s just a lot more work to manage as exchange rates wobble around. The US has to get a lot more unstable before that starts looking seriously attractive.
CNY might have enough depth to start to become an attractive alternative, given their size and balance of trade. But trusting your system to a non-transparent authoritarian government with a history of xenophobia sounds like a big jump up in risk tolerance to me.
Well, it’s about that time…another government shutdown on Oct 1st?
By the way, I found another estimate on the USG NPV. Estimated using the “Alternative Fiscal Scenario”, which assumes each time tough choices must be made, the government decides to postpone such choices. While this might be considered the worst case scenario, I’d actually call this base case.
To give some perspective, this negative $222T NPV is around 2.5X the national wealth of the entire US. In fact it’s almost the amount of the “national” wealth of the entire world ($263T). Since this estimate is a number of years old, it may have crossed that mark by now.
The U.S. fiscal gap, calculated using the Congressional Budget Office’s realistic long-term budget forecast – the Alternative Fiscal Scenario – is now $222 trillion. (2012)
Hmm, sounds like current state, except the non-transparent authoritarian government with a history of xenophobia and ill-thought thru financial schemes (subprime) is bankrupt. It would actually be a decrease in risk, which is why nations are going about cutting the USD out of the loop.
So the Chinese start backing away from USG debt, and stick the US investors with it…
"For all the dire warnings over China’s retreat from U.S. government debt, there is one simple fact that is being overlooked: American demand is as robust as ever.
The buying has been crucial in keeping a lid on America’s financing costs as China – the largest foreign creditor with about $1.4 trillion of U.S. government debt – pares its stake for the first time since at least 2001."
American funds have purchased 42 percent of the $1.6 trillion of notes and bonds sold at auctions this year.
“As you develop a more pessimistic view on global growth, inflation, and rates, asset managers are going to buy Treasuries in that environment,” said Brandon Swensen, the co-head of U.S. fixed-income at RBC Global Asset Management.
The Chinese pullback has led some to raise troubling questions about the U.S.’s ability to borrow and refinance its obligations at ultra-low rates year after year.
And what happens when the US asset managers want to get rid of all those USG bonds?? Who is going to keep buying this increasing large pile of stinking poo?
The white house cut long-term GDP growth rate forecasts today. No big bump in positive cash flows coming anytime soon. Yet rapidly growing negative cash flows every year. No surprise they cut their interest rate forecast too.
Uhh, yeah…so all I could make of this; in general they are just going to rig the model to say whatever they want it to say. Use all optimistic assumptions like beneficial feedback of government policies, to show there is still lots of space left on the credit card. Ignore all risks, don’t model any negatives feeding back into the model, and slam it thru because they are in control. Maybe this is the final push, before the eventual pop? Like the 2006-2007 of subprime.
I updated my model this week. A few things. My model puts their NPV at negative $240T now. This is of course absurd, that will never be realized ($100T+ comes from interest payments) because they will default way before. Around 2040 the cash flows are such that they probably have to pull the trigger, but at least by 2050 (I think it will happen much sooner). If I were brought in to consult, I would advise defaulting on the oldies, and never accumulating the coming explosive debt, which will bring default anyhow. But that has horrifying consequences inside the country.
Also they flat out admit now in the report that the “plan” is unsustainable and that interest will eat them alive. They’ve got a fun chart on pgii. It’s 100% mathematically certain they will default. And this is all before the tax cuts, AND the coming additional spending increases.
Naw, if the CFs say mathematically certain default even under the gov’s own optimistic assumptions—game over.
I’ve plugged in alternate scenarios for 10 years now, it makes no difference. There’s good evidence in their extremely long and tedious document that they are hiding the true CF hit of the Boomer retirement, if it’s -$80T NPV instead of -$50T (which I suspect), then the magnitude of the default will be that much greater.
If you have to ask that then the only “concern” that needs to be discussed here is your clients’ . You do not know the purpose of government yet try (and fail) to predict its value.
. Take your naive, amateur analysis and go back to school.
. You do not know the purpose of government yet try (and fail) to predict its value.