Why Dollar is King despite printing $1 Trillion a year

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modeljc
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Why Dollar is King despite printing $1 Trillion a year

Post by modeljc » Wed Dec 11, 2013 10:37 am

Good Article from the Wall Street Journal by David Wessel:

The U.S. was the epicenter of the worst financial crisis in 75 years. Its central bank is printing money at a rate of $1 trillion a year. Its government debt load is huge and its political system is visibly dysfunctional. It represents a shrinking share of the world economy as China and other emerging markets rise.

You'd think the U.S. dollar's reign as the world's supreme currency would be ending—or at least vulnerable.

So now comes economist Eswar Prasad with a surprising argument: "The global financial crisis has strengthened the dollar's prominence in global finance."

The dollar, he predicts, will remain the world's reserve currency for a long time. "When the rest of the world wants safety," he says, "there is no other place to go."

Neither the euro nor the Japanese yen is a plausible rival. China's yuan may be someday, but not soon. China still lacks the legal and other institutions and deep financial markets that make U.S. Treasury debt so attractive to so many.

Mr. Prasad is no flag-waving naif. He's a University of Chicago Ph.D. who spent 15 years at the International Monetary Fund, where he did a stint as chief of its China desk. He now splits his time between Cornell University and the Brookings Institution.

In a lucid book to be published in February, "The Dollar Trap," Mr. Prasad argues that the dollar's persistent dominance is a "suboptimal" reality.

The professor isn't predicting that the dollar's value in euros or yen or pounds or yuan will rise inexorably. Like many a card-carrying Ph.D., he sees the size of the U.S. trade deficit and expects the greenback to fall over the long run and eschews predictions about the dollar's near-term direction.

Mr. Prasad expects China and others to price more of their exports in their own currencies. The yuan recently overtook the euro as the second-most used currency in international trade finance, according to Swift, which runs a major electronic financial pipeline.

But as a safe, secure place to park money, the dollar is stronger than ever. The made-in-America global financial crisis strengthened the dollar's hold.

Here's why:

Banks around the world have been ordered by government to hold safe, easy-to-sell assets so they'll be better equipped for future crises. That adds to demand for government bonds; the U.S. issues more of them than anyone else.

Emerging markets want more safe assets, too. There's ever-more money sloshing around the globe, much of it moving in and out of emerging markets. That has led them to make two relevant calls:

One, inflows of capital tend to push up exchange rates and threaten exports. So governments are increasingly prone to intervene—that is, to restrain the rise in their currencies by selling them in exchange for foreign currencies. That adds to demand for dollars, which are then invested in U.S. Treasurys.

Two, those same governments have decided it is essential to have a lot of insurance in case foreign capital flees; that means building a big pile of foreign-currency reserves to scare off speculators and to demonstrate they've got the money to pay foreign creditors. That, too, adds to the demand for dollars and U.S. Treasurys.

This demand is occurring at a time when safe assets are in short supply: The Federal Reserve has taken $2.2 trillion of U.S. Treasurys off the market through its bond-buying program. The euro has its issues, and the sovereign debt of some euro-zone members is hardly ultrasafe. Japan and Switzerland have strong institutions and financial markets, but are actively pushing down the value of their currencies; that makes them unappealing as stores of value.

"The entire edifice of global financial stability seems to be built on this fragile foundation: If not the dollar, and if not U.S. Treasury debt, then what?" Mr. Prasad writes.

So what makes this "suboptimal"?

For the U.S., Mr. Prasad says, the global appetite for dollars keeps U.S. interest rates low and makes it easier for the U.S. to pursue foolish budget policies aimed at too much deficit reduction now and too little later.

For other countries, the world's heavy reliance on dollars makes nearly every economy acutely sensitive to moves (or expectations of moves) by the Fed to increase or decrease the supply of dollars as it tries to steer the U.S. economy. And their stockpiles of dollars exposes them to losses if the dollar's value declines, which gives them a reason not to do anything to harm the dollar.

The more angst in the world, the more investors and governments want to hold dollars. This makes the dollar's dominance "stable and self-reinforcing," Mr. Prasad concludes.

If the dollar's role isn't sturdy—if it is more like a sand pile just a few grains away from collapse—then the world is in trouble. Despite years of yammering, the world hasn't built an alternative to the U.S. dollar.
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Re: Why Dollar is King despite printing $1 Trillion a year

Post by annieB » Wed Dec 11, 2013 11:09 am

Not the best argument for gold.
But,change happens.
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Re: Why Dollar is King despite printing $1 Trillion a year

Post by Ad Orientem » Wed Dec 11, 2013 11:14 am

Is there a link to the article?
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Re: Why Dollar is King despite printing $1 Trillion a year

Post by modeljc » Wed Dec 11, 2013 12:01 pm

Ad Orientem wrote: Is there a link to the article?
I could not get the link to work.  Google will bring it up.  The article was in Wall Street Journal on A 4, Thursday December 5, 2013.
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Re: Why Dollar is King despite printing $1 Trillion a year

Post by modeljc » Wed Dec 11, 2013 12:34 pm

TennPaGa wrote: The title of the article is:

Why the Dollar Dominates, and Why That's Not All Good
The title is: Why Dollar is King Despite U.S. Woes
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Re: Why Dollar is King despite printing $1 Trillion a year

Post by Libertarian666 » Wed Dec 11, 2013 2:52 pm

Every Ponzi scheme looks brilliant until it collapses.
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Re: Why Dollar is King despite printing $1 Trillion a year

Post by PVolt » Sat Dec 28, 2013 9:41 pm

I've been a lurker for 1+ year, and this is my first post.  You've got a really great forum going on here.
modeljc wrote: One, inflows of capital tend to push up exchange rates and threaten exports. So governments are increasingly prone to intervene—that is, to restrain the rise in their currencies by selling them in exchange for foreign currencies. That adds to demand for dollars, which are then invested in U.S. Treasurys.
Can someone please explain the above paragraph?  I understand why govt will want to keep the local currency restrained to be competitive in exports.  I also understand that selling their local currency and buying dollar is one way of accomplishing that.  BUT, why does capital inflow tend to push up exchange rates?  Is it simply because the capital inflows bring in a glut of dollars and thus there will be a relative scarcity of local currency thus causing it to appreciate against the dollar?  Or is it something else?
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Re: Why Dollar is King despite printing $1 Trillion a year

Post by MediumTex » Tue Dec 31, 2013 8:56 pm

The U.S. economy is like the really hot girl who thinks that she's fat and ugly.
Q: “Do you have funny shaped balloons?”
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Re: Why Dollar is King despite printing $1 Trillion a year

Post by Libertarian666 » Tue Dec 31, 2013 9:23 pm

MediumTex wrote: The U.S. economy is like the really hot girl who thinks that she's fat and ugly.
I think you got that backwards.
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Re: Why Dollar is King despite printing $1 Trillion a year

Post by MediumTex » Tue Dec 31, 2013 10:20 pm

Libertarian666 wrote:
MediumTex wrote: The U.S. economy is like the really hot girl who thinks that she's fat and ugly.
I think you got that backwards.
Her perception of reality is that she isn't attractive, and yet the constant attention from boys is something that she cannot deny.

Why do you think that investors from all over the world like the U.S. so much?
Q: “Do you have funny shaped balloons?”
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Re: Why Dollar is King despite printing $1 Trillion a year

Post by Libertarian666 » Thu Jan 02, 2014 10:08 am

MediumTex wrote:
Libertarian666 wrote:
MediumTex wrote: The U.S. economy is like the really hot girl who thinks that she's fat and ugly.
I think you got that backwards.
Her perception of reality is that she isn't attractive, and yet the constant attention from boys is something that she cannot deny.

Why do you think that investors from all over the world like the U.S. so much?
As a place to hide their wealth from their tax collectors. The US is a wonderful tax haven for anyone who isn't a citizen or resident, as there are no capital gains taxes on such persons.
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Re: Why Dollar is King despite printing $1 Trillion a year

Post by moda0306 » Thu Jan 02, 2014 11:07 am

Libertarian666 wrote:
MediumTex wrote:
Libertarian666 wrote: I think you got that backwards.
Her perception of reality is that she isn't attractive, and yet the constant attention from boys is something that she cannot deny.

Why do you think that investors from all over the world like the U.S. so much?
As a place to hide their wealth from their tax collectors. The US is a wonderful tax haven for anyone who isn't a citizen or resident, as there are no capital gains taxes on such persons.
tech,

Smart investors don't let tax-tail wag the investing dog.  Taxes can't explain everything.  They're only a factor.
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Re: Why Dollar is King despite printing $1 Trillion a year

Post by Bean » Thu Jan 02, 2014 11:56 am

moda0306 wrote: tech,

Smart investors don't let tax-tail wag the investing dog.  Taxes can't explain everything.  They're only a factor.
The avoidance of taxes is extremely profitable.  Look at GE.
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Re: Why Dollar is King despite printing $1 Trillion a year

Post by Libertarian666 » Thu Jan 02, 2014 2:31 pm

Bean wrote:
moda0306 wrote: tech,

Smart investors don't let tax-tail wag the investing dog.  Taxes can't explain everything.  They're only a factor.
The avoidance of taxes is extremely profitable.  Look at GE.
The hiding of money from their governments is a major concern for many overseas investors, even more than here, and the US is very convenient for them.
So is Canada, apparently, given that most of the ridiculous increase in housing prices there seems to be driven by foreign investors.
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