Category Archives: Currencies

The Distortions of Doom Part 2: The Fatal Flaws of Reserve Currencies, by Charles Hugh Smith

Why reserve currencies come and go. From Charles Hugh Smith at oftwomind.com:

Part 1

The way forward is to replace the entire system of reserve currencies with a transparent free-for-all of all kinds of currencies.
Over the years, I’ve endeavored to illuminate the arcane dynamics of global currencies by discussing Triffin’s Paradox, which explains the conflicting dual roles of national currencies that also act as global reserve currencies, i.e. currencies that other nations use for global payments, loans and foreign exchange reserves.
The four currencies that are considered global are the US dollar (USD), the euro, the Japanese yen and China’s RMB (yuan). The percentage of use in each of the three categories of demand for the reserve currencies–payments, loans and foreign exchange reserves–are displayed below.
Many observers don’t seem to grasp that demand for reserve currencies extend beyond payments. Many of those heralding the demise of the USD as a reserve currency note the rise of alternative payment platforms as evidence of the USD’s impending collapse.
But it’s not so simple. Currencies are also in demand because loans were denominated in that currency, so interest and principal payments must also be paid in that currency. There is also demand for the currency to be held as foreign exchange reserves–the equivalent of cash to settle trade imbalances and back the domestic currency.
Notice the minor role played by the yen and yuan, despite the size of the economies of Japan and China. There’s a reason for this that’s at the core of Triffin’s Paradox: any nation seeking to issue a reserve currency must export its currency in size by running large, permanent trade deficits (or an equivalent mechanism for exporting currency in size).
The reason why the yen and yuan are minor players is neither nation runs much of a trade deficit, and neither exports its currency in size via loans or other currency emittance mechanisms.
Triffin’s Paradox is the tension between a currency’s domestic role and its global role. The nation’s issuing central bank prioritizes domestic concerns–bolstering employment, tamping down (or generating) inflation, supporting the private banking system, etc.–but the rate of interest, etc. set by the issuing central bank has enormous impacts on nations using the currency for payments, loans and reserves.
No currency can serve two masters at the same time. If the issuing central bank raises interest rates for domestic reasons, the increase in rates may be ruinous to offshore borrowers who must convert weakening home currencies into the strengthening reserve currency to make interest payments.
Higher yields strengthen reserve currencies and weaken emerging market currencies. This increases the costs of servicing loans denominated in reserve currencies.
The question for any wannabe reserve currency is: how do you export enough currency into the global system to support the demand for payments, loans and reserves? If the issuing nation runs a trade surplus or modest deficit, trade doesn’t export enough currency into the global financial system to meet the demands placed on a reserve currency.
The alternative mechanism is debt. If the issuing central bank issues lines of credit to banks, then institutions can make loans denominated in the reserve currency to offshore borrowers.
The EU banks have issued loans in euros, and the fatal consequence of this is now becoming clear. Emerging market borrowers will be forced to default as their currencies weaken against the euro and the USD, driving the costs of servicing their debt denominated in euros and USD higher.
Loans denominated in USD and euros will bring the periphery crisis home to the core’s banking sectors as these loans default. It was all fun and games when the USD was weakening thanks to the Fed’a ZIRP (zero interest rate policy), because it became progressively cheaper to service loans in USD as USD weakened and emerging market currencies strengthened.
Now that dynamic has reversed: every click higher in U.S. yields vis a vis other currencies will only push the USD higher.
The system of reserve currencies is dysfunctional for everyone, creating and incentivizing fatal imbalances in trade, yields and debt. Some look to a basket of currencies (SDRs) as the solution, but all this does is tighten the coherence of a system that’s already dangerously hyper-coherent, i.e. highly susceptible to contagion.
There is no perfect reserve currency. Even gold has its limitations. As a result, the best available solution is a world of multiple currencies, some of which are not borrowed into existence, i.e. gold and bitcoin. Given a transparent range of options, nations, borrowers and lenders could choose whatever mix of currencies best suited them.
Some years ago I proposed using bitcoin as a reserve currency: Could Bitcoin (or equivalent) Become a Global Reserve Currency? (November 7, 2013)
The way forward isn’t to replace the USD with another dysfunctional reserve currency– the way forward is to replace the entire system of reserve currencies with a transparent free-for-all of all kinds of currencies.
Advertisements

The World Is Quietly Decoupling From the U.S. – And No One Is Paying Attention, by Brandon Smith

The world is finding ways to get around the US’s currency and its payment mechanisms. From Brandon Smith at birchgold.com:

Blind faith in the U.S. dollar is perhaps one of the most crippling disabilities economists have in gauging our economic future. Historically speaking, fiat currencies are essentially animals with very short lives, and world reserve currencies are even more prone to an early death. But, for some reason, the notion that the dollar is vulnerable at all to the same fate is deemed ridiculous by the mainstream.

This delusion has also recently bled into parts of the alternative economic movement, with some analysts hoping that the Trump Administration will somehow reverse several decades of central bank sabotage in only four to eight years. However, this thinking requires a person to completely ignore the prevailing trend.

Continue reading

Government Tracking of Crypto Is Growing, But There Are Ways to Avoid It, by Simon Chandler

Many cryptocurrencies are not at all “anonymous,” free from the prying eyes of governments. From Simon Chandler at cointelegraph.com:

Much noise has been made about the untraceable qualities of Bitcoin and other cryptocurrencies. Bitcoin “can be used to buy merchandise anonymously” said early primers on crypto, it offers users the kind of financial privacy that was previously available only from a “Swiss bank account,” say more recent commentators. And given its ability to provide people with a layer of anonymity and privacy, it has been smeared by politicians, experts and mainstream journalists alike as a hiding place for almost any hacker, drug dealer, gang member, terrorist or despot you could possibly name (even if cash is still the preferred financial medium of such personae non gratae).

Continue reading

The Tyranny of the U.S. Dollar, by Peter Coy

The world sends us goods, we send the world pieces of paper (or computer entries). Sounds like a good deal for the US. It is, but it may be coming to a close. From Peter Coy at bloomberg.com:

The incumbent international currency has been American for decades. Is it time for regime change?

There’s a paradox at the heart of global finance. The U.S. share of the world economy has drifted lower for decades, and now President Trump is retreating from the American chief executive’s traditional role as Leader of the Free World. Yet the U.S. dollar remains, as the saying goes, almighty. “American exceptionalism has never been this stark,” Ruchir Sharma, head of emerging markets and chief global strategist for Morgan Stanley Investment Management, said at a Council on Foreign Relations symposium on Sept. 24.

By the latest tally of the European Central Bank, America’s currency makes up two-thirds of international debt and a like share of global reserve holdings. Oil and gold are priced in dollars, not euros or yen. When Somali pirates hold up ships at sea, it’s dollars they demand. And threats to be cut off from the dollar-based global payments system strike terror into the likes of Iran, North Korea, and Russia. It’s no exaggeration to say that the dollar’s primacy is at least as valuable to the U.S. as a couple of aircraft carrier strike groups.

Continue reading

Debts & Deficits: A Slow Motion Train Wreck, by Lance Roberts

We’re borrowing from the future and sooner or later the future will present the bill. From Lance Roberts at realinvestmentadvice.com:

Last Friday, I discussed that without much fanfare or public discussion, Congress decided to push the U.S. into deeper fiscal irresponsibility with the passage of another Continuing Resolution (CR). To wit:

“The House on Wednesday passed an $854 billion spending bill to avert an October shutdown, funding large swaths of the government while pushing the funding deadline for others until Dec. 7.

The bill passed by 361-61, a week after the Senate passed an identical measure by a vote of 93-7.”

Without the passage of the C.R. the government was facing a “shut-down” just prior to the mid-term elections. So, rather than doing what is fiscally responsible for the long-term solvency and financial health of the country, not to mention the generations to come, they decided it was far more important to get re-elected into office.

Continue reading

Crypto-Mania Collapse Update: $638 Billion Gone, by Wolf Richter

Wolf Richter puts some dollars and cents on the latest cryptocurrency plunge. From Richter at wolfstreet.com:

Of the seven biggest, six have plunged by 78% to 92%.

Cryptocurrencies and tokens are multiplying like rabbits: There are now 1,926 listed on CoinMarketCap.com, 500 more than early 2018. And even as the number of cryptos continues to swell, each crypto constantly creates new units through “mining.” This dilution and hyperinflation is worse than with all but the worst fiat currencies, such as the Venezuelan bolivar.

Cryptos are “decentralized.” That was one of the major selling points in whitepapers full of intelligent-sounding gobbledygook and other propaganda promoted in myriad ways, including by an army of crypto trolls and celebrities paid by the tweet. Because cryptos are decentralized, everyone can create their own, and all kinds of outfits are mining new units of existing cryptos. It’s really just a big joke. But people are losing large amounts usually expressed in their hated fiat currency. The pain is real. And the numbers are big.

At the peak on January 7, total market cap was $704 billion, per CoinMarketCap at the time. Continue reading

Thirteen Reckonings Hanging in the Balance, by MN Gordon

The thirteen reckonings are essentially thirteen cases of you can’t have your cake and eat it, too. From MN Gordon at economicprism.com:

The NASDAQ slipped below 8,000 this week.  But you can table your reservations.  The record bull market in U.S. stocks is still on.

With a little imagination, and the assistance of crude chart projections, DOW 40,000 could be eclipsed by the end of the decade.  Remember, anything and everything’s possible with enough fake money.

Still, we consider DOW 40,000 to be about as probable as having a dinosaur step on our car as we drive to work today.  More than likely, a return to DOW 10,000 will first grace the front page of the Wall Street Journal.

In the interim, while still in the delight of this “permanently high plateau,” we’ll turn our attention to another equally suspect record that’s presently unfolding with imperfect precision.  If you haven’t noticed, the current economic expansion’s approaching its own record duration.  At 111 months and counting, this economic expansion is closing in on the post-World War II record of 120 consecutive months of growth that occurred between March 1991 and March 2001. Continue reading