Reserve currency status of US$ -- underpins PP?

[murphy_p_t]

there's lot's of chatter in the news that the US$ could lose reserve currency status.

my question for US$ based PP'ers: if the US$ were to lose reserve currency status, how might the PP perform? what would be the real return, after inflation?

from a historical view of the PP, did HB take into account that the US$ had reserve currency status? (loss of reserve currency status is a scenario not yet tested by the PP)

will gold be able to carry likely "real" (inflation-adjusted) loses in ST, LT, TSM areas of PP?

[craigr]

Nobody knows. But yes Browne was aware of this possibility and I heard him talk about it before in one of his shows. The reason the Permanent Portfolio holds such a large slug of gold is because of the fickle nature of fiat currencies.

But if it makes you feel any better, people in Europe are using the portfolio in Euros and it performs just fine. The Euro is of course not a reserve currency.

There isn't much to do about it either way and also realize this talk has been going on for decades. So even if it does happen one day, we just don't know when that day is. Could be another thirty years for all we know.

[LifestyleFreedom]

If you want to build the cash component of the Permanent Portfolio with a mixture of currencies, there are ways to do this.

Everbank, for example, offers investment products denominated in foreign currencies.  I've never used Everbank myself, so I can't vouch for it.  But I've bookmarked the site as something to consider at some point.

[Gumby]

Keep in mind that any global reserve currency will always have long term problems. It's a paradox known as the Triffin dilemma, which is:

The Triffin dilemma is the observation that when a national currency also serves as an international reserve currency (as the US dollar does today), there are fundamental conflicts of interest between short-term domestic and long-term international economic objectives. This dilemma was first identified by Belgian-American economist Robert Triffin in the 1960s, who pointed out that the country issuing the global reserve currency must be willing to run large trade deficits in order to supply the world with enough of its currency to fulfill world demand for foreign exchange reserves. The use of a national currency as global reserve currency leads to a tension between national monetary policy and global monetary policy.

It's also important to realize that when the world switches from one global reserve currency to another, it takes a very long time. Look at how the US Dollar overtook the Pound Sterling. It took a long time for that switch to happen.

There's also a number of reasons why countries will continue to do their business in US Dollars:

Renminbi to Replace the Dollar as King of Currencies? Not Likely

[KevinW]

If you want to build the cash component of the Permanent Portfolio with a mixture of currencies, there are ways to do this.

Well, my reading is that the three non-gold assets need to be denominated in the same currency.  You need inflation, deflation, prosperity, and recession to all be defined relative to the same economy.  (Gold is excepted because by definition it's denominated in ounces).  So if you have US stocks and US bonds, you ought to have US cash.

Now, while the assets should be in the same currency, that currency doesn't need to be your own native currency.  An American investor could build a PP in GBP, Euro, Yen, or whatever.  And vice-versa.

As craigr said, we have a lot of evidence that a Euro PP works (ref. Marc de Mesel).  Clive has offered evidence that a UK or Japan PP works too.  None of those use reserve currencies.  In fact GBP is a former reserve currency and the UK PP seems to work as expected.  So there's some hope that a US PP would continue to work if the USD lost reserve status.

[Wonk]

There's also a number of reasons why countries will continue to do their business in US Dollars:

Renminbi to Replace the Dollar as King of Currencies? Not Likely

Interesting article.  The author touches on the same point I made recently in this thread:

http://gyroscopicinvesting.com/forum/in ... opic=688.0

I gave a figurative example of U.S. inflation being exported abroad.  The drivers are not only trade denominated in USD as world reserve currency, but also sovereign monetary policy in overseas destinations.  If China, for instance, sent USD back onto the currency markets instead of printing local currency to maintain an advantageous trade environment, the USD would naturally depreciate and we'd likely see the inflation manifest in prices.

It's no wonder gold and silver are bullish.  Maybe precious metals aren't popular in the U.S., but if we lived in China with 10%+ inflation, I'm sure we'd have a different perspective.