The U. S. USES IT’S DOLLAR TO DOMINATE THE WORLD?

[Temperament]

 
http://chinascope.org/archives/6458




How much truth or how much do you agree?

[Duskerdawn]

Some truth but mostly biased article. Qiao Liang is part of the Chinese Communist Party and he speaks in the interest of China and the communist party. His points of argument mainly relies on the fact that U.S. acts as "one unified body", which we all know is nonsense. United States as we all know is a country that is made of many different parts that has very diverse points of views and it is ever so clear now in the recent Trump presidency. I do not doubt that U.S. as a country acts in its best interests but I do not think that all the actions that the U.S. has done was part of a "clear coherent strategy" that this person claims.

My point of view is that this speech although does seem thought-provoking is high biased and should be read with a lot of salt. It has an intended purpose and readers should be clear of the intended purpose when they read each and every point/argument.

[tanjm]

When a country exports goods or services to anywhere, it receives payment in a foreign currency. If it does not immediately convert it to local currency, it has to hold it. Which is why the term "reserve currency" comes into play. There are good reasons for reserve currencies. Of the reserve currencies, the USD represents the largest and deepest market. EUR is a contender, but unfortunately, its currency is split among different countries with different credit profiles, so it isn't so attractive. JPY is also a contender, but most of its debt is held domestically.

Therefore, the USD, by virtue of its very large, and highly liquid sovereign debt market, is the defacto world's premier reserve currency. China at one point accumulated 4 trillion dollars of USD - it had no where to put it except to buy USD government debt. It's the same with every nation that ever accumulated large surpluses with the US (e.g. OPEC). As US sovereign bond buyers, they are effectively lending the money to the US. And since the amounts are so large, they effectively lower the interest rate that the US government pays on its debt. And as a monopolistic supplier of USD, the US dictates the "price" of money. What this means effectively is that the US has been getting a discount on its imports.

In other words, the USD as a reserve currency, allows the US to indirectly lower the price of goods and services that it consumes, and allows it to accumulate large USD debt, without immediate harm.

So, its not deliberate, but its certainly beneficial to the US to have the USD as a premier reserve currency. There are no replacements in sight. Even if China fully opened up its currency, it doesn't consume (read : pay for goods and services) in sufficient quantity for other countries to put a large stock of CNY in circulation. Neither does it ever have a mature enough financial system (bond markets) to support a reserve currency. The only way for CNY to eventually become a true premier reserve currency with the benefits that the US enjoys from the USD, is for China to become like the USA ! I don't see it coming within the next few decades. Probably longer.

The PLA general should not stray outside his competency.

[grubb]

As a counterargument, i would recommend you to read this:

http://foreignpolicy.com/2011/09/07/an-e...nt-burden/

[tanjm]

As a counterargument, i would recommend you to read this:

http://foreignpolicy.com/2011/09/07/an-e...nt-burden/

Actually, this article isn't inconsistent. I said that the USD as a premier reserve currency lowers the cost of goods and services for US consumers, and allows the US to expand its debt much more. I did not say that it is good or bad. If, just before the GFC, I told you that low interest rates and flush liquidity were good for the housing market in the US, would you agree with me? 

In any case, I was responding to the original article by the PLA general, who said that this was all engineered. It's not engineered, it is just a function of the US being a overwhelmingly large economy, its consumption patterns and its very large, internationalized debt markets. China could have this for its renminbi but only if it became like the US. 

As for SDR. You need some kind of underlying backing for a currency. In the old days, this was the gold standard. Now, with fiat currencies, there is actually a backing - it is the real productive capacity of the country. That's why you get inflation when you issue currency far beyond the productive capacity of the country. With the SDR, you can't have this kind of backing. At most, you can say that you can compose the SDR with a basket of currencies. In that case, what are the weights you would propose? Trade weighted? GDP weighted? Does it have to be adjusted, and how often? Then you would have to develop a market in which the SDR can be "deposited" for variable periods - effectively a debt market. How do you do it? And why would the US (which has power in the IMF) back it. Even if you did, the transition issues would be interesting - you have a very large US debt market, which would need to be reduced in order to fund the SDR "debt" market, which in itself would have to have a large US component (if using currency baskets). And would the renminbi be a part of this basket? It gives me a headache to think about it since the renminbi is not freely convertible.

As an interesting aside, crypto currencies like bitcoin seem to have engineered a third kind of backing. The backing is that of computing power and algorithms. It's quite interesting. Not sure if this is enough for Long term viability.

[tanjm]

Another way to think about a SDR regime with a basket of currencies is to treat it like a ETF.

That is to say, I can redeem or create blocks of SDR with the underlying basket. So I guess some of the issues I'm thinking about aren't insurmountable, assuming the US were in favor of it. China would have to agree to let its currency float though. And we still have the issue of a debt market in SDR.

[tanjm]

Another way to think about a SDR regime with a basket of currencies is to treat it like a ETF.

That is to say, I can redeem or create blocks of SDR with the underlying basket. So I guess some of the issues I'm thinking about aren't insurmountable, assuming the US were in favor of it. China would have to agree to let its currency float though. And we still have the issue of a debt market in SDR.

The more I think about it, the more I think a private company could do this! Buy suitable govt bonds in a specific tenor (say 5 years) in various currencies. Then sell as a target maturity ETF. Repeat and rinse for multiple maturities. This will simulate a SDR with debt market, purchasable on a stock market.

[Temperament]

i still puzzled why USA wants to peg their $ to OIL?

Can any country pays for oil in other currencies or barter trade now?

If suppose now, there is no or very little advantages to be the reserved currency of the World, why US still wants it?

There must be some reasons or motives?

[donmihaihai]

i still puzzled why USA wants to peg their $ to OIL?

Can any country pays for oil in other currencies or barter trade now?

If suppose now, there is no or very little advantages to be the reserved currency of the World, why US still wants it?

There must be some reasons or motives?

It make no sense to peg USD to Oil price. Will never happen.

USD is not the only currency to pay for oil since the beginning of oil

Maybe it is not a case of whether US want it or not. More like there is no choice.

When you are the biggest monster in the world, whatever you do or not will get question especially by someone not your ally. China is becoming the next monster of the world. It will get questioned soon enough. Anyway it is not angel.

[gutman]

There are many books/articles available that can explain USD and their role in oil.  I have read quite a few of these while trying to understand how the global order works, and would try and share them here in a few quick points:



Petrodollar System
Until alternative energy becomes a norm, we probably have to agree that whoever controls oil controls the world. The big names have said so

• Winston Churchill once said: “He who controls oil will win the next war.”
  

• Henry Kissinger said : "He who controls oil controls nation"
  

After dropping the gold-backed dollar system, US has to create a demand for the USD internationally. The Petrodollar was introduced, whereby in exchange for US providing weapons and military protection over the oil fields of OPEC countries, OPEC agrees that oil will be traded exclusively in USD. This oil for dollar system allows USD to be in demand as long as oil is in demand. 


Running the Printing Machine
With USD in demand internationally, US can continue to run the printing machine as well as borrow more dollars from other countries with the issuance of bonds.  This helps to solve the economic problems US faced (the big budget deficit and the huge debt, which is still growing), while they can continue with their extravagant spending, including in military and technology. This allows US to build up their military might and technology edge over the world and continue their dominance. 
  

Control over how USD is used
The world recognises USD as the defacto currency and accumulates the dollar. You can then spend the USD by buying US technology or weapons if you are an ally. Or buy their bonds, as in the case of China, if you are not allowed to buy either. In a way, US have control over the use of the dollar.


Challenge from Euro
When Euro was formed to challenge the supremacy of the dollar as a reserve currency, it was taken down quickly. It started with the 3 rating agencies attacking the Euro over sovereign debt issue. It is probably no coincidence that these 3 rating agencies Standard & Poor's (S&P), Moody's, and Fitch Group are all Amercian agencies. This is not to say that Euro does not have its inherent weakness. But over sovereign debt? US certainly has more debt than the EU countries...

Those who do not use USD for oil trades, just to name a few: Russia, Iran, Venezuela, are all considered "enemies". Iraq tried to change to trade oil in Euro from USD in year 2000. We all know what happen next: US invaded Iraq in 2003 over claims of weapons of mass destruction. Of course, they found none, and Iraq continues to trade oil in USD today. 

The next currency that can challenge the USD's supremacy is RMB...   


We can continue the discussion as there are more reasons and rationale but I would not be able to discuss them fully here. I am just dropping a few points that I have gathered over these years and hope they are of help to Temperament.