I’m surprised all the countries the US is trying to bully aren’t considering moving to the Euro as the reserve currency (even China might go along with this). It would be so damaging for the US they might actually understand they have been benefiting from a win-win situation since the end of the Second World War.
Why does a reserve currency even need to exist? Bretton Woods was a result of the extraordinary circumstances of WW2. The move to the petrodollar was a good deal at the time letting the US play world police. Now it's clear that the US isn't a reliable security partner even if other countries wanted it. The oil producing nations would surely be happy to start selling in other currencies.
You're always going to have one currency that is used for most of international trade, because it's much cheaper for country A exporters and country B exporters to settle in one currency. 1-N systems are generally stabler than N-N systems.
If you are manufacturing complex things with complex supply chains (like a Boeing 787 or a Caterpillar power shovel), the imports being expensive bit also drives up the price of exports.
But regardless of what happens with trade balance, it will also make borrowing money much more expensive, which is not great for the US since our debt to GDP ratio is over 100%.
It also removes another non-military weapon from our toolkit.
They would have to unwind USD denominated investments, which make up a large chunk of many pension and sovereign wealth funds' portfolio. This can't be done overnight, but over a few years, definitely possible.
* The US is able to get very cheap loans, which enables the US to throw around money when necessary to do things that are important (emergency projects, economic stabilization, etc).
* The US has an extraordinary power to influence global politics due to their ability to control trade and banking systems.
* The US dollar is stable in part because of its status as a trade currency. And a stable currency is extremely important for citizens of a country.
> Because it enables us to run unsustainable deficits?
No, it it actually the primary reason that enables the US to run huge deficits sustainably. The currency is important enough to the world that giving a loan to the US is safer than giving one to another country whose currency is not as important.
But that sounds bad! Why should we be borrowing all this money from foreigners when we’re a rich country? What if I want the U.S. to build stuff, instead of moving money around and trying to “influence global politics.”
I’d also love a sane domestic politics that acknowledges that borrowing money from foreigners every year because we can’t square our spending with our taxing is a bad thing.
Taking out a loan and promising to repay it is a voluntary exchange of value that markets are comfortable with -- to issue debt is to play by the rules. Printing money directly is just an exercise in pissing on the users of that currency. People don't want to use currencies that do that. When people buy US debt, they are implicitly validating their trust in the currency to be paid back later.
It is related to the general definition of inflation.
Those with existing assets (including retired folks in the US) theoretically "lose" in this situation.
You can split the US and see inequality arise from printing: (1) US federal govt vs non-govt entities (2) US citizens with assets vs US citizens without assets, (4) people who received money first vs people who last bits of the "trickle down".
In various cases, certain people "win" and others "lose"
Because "borrowing" money 1.) recycles foreign dollars back into the US economy 2.) maintains foreign interest in accepting US dollars for goods and thus sustains US trade deficit 3.) prevents idle foreign US dollars that would other wise buying US assets that then inflates their price (eg real estate)
Okay, but then doesn’t that undermine your point about the importance of the US being the world’s reserve currency? What does that matter if most of our debt is to ourselves anyway?
Japan runs huge structural deficits and most is held by its own citizens.
Basically this is why times have been great for industries like finance and tech in the US, but sucked for manufacturing. In turn leading to wealth inequality and, dare we say the class struggle that seem to have reached a boiling point.
the american standard of living would collapse if america could not run deficits. in the very long term, like in 50 years, it might actually be better for america, but this generation of americans would be hurt big time.
Why? How? The US balanced the budget under Clinton. I was pretty young, but I don't remember the standard of living collapsing in the early 90s (quite the opposite in fact).
I mean, the CBO has a range of policies for fixing the federal deficit, most of which are pretty reasonable. I'm a fan of taxing the better off more (but I'm not a US citizen or taxpayer so that's easy for me to say).
Define "the better off?" I also agree with you in principle, but you're overlooking an important fact about American politics. The mainstream "left" in the U.S. is dominated by affluent professionals who hate paying taxes as much as any Reagan Republican. They pay lip service to the idea of "taxing the better off more," but by that they mean "billionaires." That's not a big enough tax base to raise the $1-2 trillion we would need to fix the deficit.
That's why you get a ridiculous situation where even the center-left party is promising not to raise taxes on people making under $400k/year. In reality, such a tax plan wouldn't even meaningfully raise taxes on people making $1 million a year. You can't solve the deficit by raising taxes if you're unwilling to tax 99.5% of the population.
Which countries are we currently invading? Regardless, in the 2023 budget Social security far outstrips defense, Medicare is just a shade higher, and Medicaid is not far behind. I'm entirely in favor of slimming down the US military industrial complex, but doing so isn't going to fix the deficit. You could 0 out the defense budget entirely and there would still be another trillion dollars of deficit to deal with.
Just listing the ones from my short life so far: Afganistan, Iraq, Syria, Libya, Palestine & Lebanon (indirectly through massive support to Israel). I'm sure I missed a few since there are so many.
Being able to trade arbitrarily-devaluable IOUs from a future America for real goods today is a fantastic deal. Putting it in the kid terms that seem to be necessary for this dynamic of endless "questioning" - if Bobby can get ice cream treats from the corner store by giving them pieces of paper with his picture on them, that's pretty awesome for Bobby.
In the bigger picture - the reserve currency dynamic has allowed many things to grow detached from reality, and those things are in dire need of reform (eg the everything bubble). But that the destroy-America-first platform can include condemning the whole dynamic is itself just another symptom of that detachment and entitlement. Talk about wanting to kill the goose that lays golden eggs because you don't understand it, and don't want to spend any effort trying to understand it.
> In the bigger picture - the reserve currency dynamic has allowed many things to grow detached from reality, and those things are in dire need of reform (eg the everything bubble)
It seems like you don’t even disagree about the problem, you just think we should chip away at the symptoms instead of getting at root causes.
Free ice cream is bad! Bobby is going to not learn how to work for a living, and he’s going to get diabetes on top of that.
The root causes are stability and general wealth. Working to "fix" those is abjectly retarded.
If letting our industrial base wither is a problem, then spend some of the resources we get for merely exporting our currency on explicitly building it back up. Those IOU's can be traded for machine tools just as easily as disposable "fast fashion".
If the all-asset bubble is a problem, then stop letting the Federal Reserve drop interest rates to the point that wild or highly-leveraged speculation makes sense.
If the churn of cheap non-repairable throwaway crap is a problem, then ban it and/or mandate repairability outright.
If the proliferation of do-nothing middle managers in government/academic/industry is a problem, then figure out how to increase accountability, actual meritocracy, and general nimbleness. Turning the financial and authoritarian screws mostly hurts people who are focused on doing their jobs rather than focused on keeping them.
Humans are not wild animals. Free ice cream is an unequivocally good thing - it can always not be eaten. If little Bobby is eating unhealthy amounts of ice cream, then his parents should stop him from doing that independent of financial constraints.
If little Bobby is not developing a work ethic, then teach him to work hard directly and teach him how to save his money for larger goals. Certainly don't think that teaching him to live hand to mouth for ice cream treats is doing him some kind of service.
These are all problems of abundance. The destructionist movement seems to be based on wanting to revert to some idyllic version of the past with a struggle we understood. Whereas we really need to be solving the new problems we face.
As it stands, the destructionist approach is going to leave us without financial wealth or industrial wealth. Tariffs and allowing increased corporate externalities are basically the economic equivalent of "thoughts and prayers" .
Consider that this is the point of all the machinations. The US having the reserve currency is a liability in many ways and the direct reason why it's a consumer not producer economy.
Losing reserve status will be damaging to some parts of the american economy and create a boom in others.
Take a look at what current tariffs are across the world. The US isn't necessarily bullying as equalizing.
> Losing reserve status will be damaging to some parts of the american economy and create a boom in others.
Which parts will benefit from higher inflation?
The only reason the US has been spared from >20% inflation after engaging in what would be called "money printing" by American press when practiced by a 3rd world country is that there are deep pools of unused reserves slowing the overall velocity. Americans don't know how good they have it.
All domestic producers which produce products that cost less than imported competitors.
I agree with you. The question to be answered is what kind of economy do americans want to have going forward. It's great to be in America at present, but what happens if global relations continue to deteriorate and fracture?
> All domestic producers which produce products that cost less than imported competitors
Who will afford to buy their expensive products? Cheap imports are what is making minimum wage-earners circumstances bearable. Full-on reshoring is untenable without reforging the entire economy for higher salaries at the bottom. The whole system has feedback loops (higher wages -> higher product prices) which will cause pain for a long, long time before things stabilize. I don't think Americans have the stomach for it now, moreso with the threadbare social safety nets being shredded. Any politician or political group pushing for this will not survive long enough to see it through. The task is impossible for leaders incapable of considering second order effects, and beyond.
> Who will afford to buy their expensive products?
Fewer and fewer people. Yes, a shrinking of the consumer economy. It will work, just not like it has in the past. As I see it, you are absolutely correct in your assessment. Absent a proactive approach, the alternative (which I think we will live to see) will be watching the system break.
Perhaps a lame duck president rebalancing tariffs can slow the slide, but I think the end result will be the same.
I could be wrong, but think the German economy just broke last week when they blew the cap off their debt ceiling and kicked current day payments to future generations. Note that Germany protects its production with tariffs and VATs, the rough average I've found is 19-21%.
I think China is the one to watch. They have double the energy output of the US and are basically the production capital of the world for the foreseeable future unless something changes.
Germany doesn't protect its production with tariffs any more than, say, North Carolina does. There are no German tariffs, because Germany is part of European Union, which sets up common, shared tariff regime, and tariff-free goods movement within EU. Germany can lobby within EU to propose tariffs that it considers beneficial to it, just like North Carolina can in US, but if other EU members don't like it enough, it will not go through.
Second, how does VAT protect domestic production? VAT applies to both imported and domestically manufactured goods equally. VAT is really ultimately just a sales tax, just collected in a somewhat different way, and you pay the same sales tax regardless of where the good was produced.
Thank you for clarifying, it did not occur to me that member states paid VATs.
From outside the EU, the VAT is no different than a tariff. They are both taxes which inflate the cost to do business. From your example, I think it's fair to sum the state taxes into US tariffs for comparison.
You did send me down a research rabbit hole trying to better understand VAT. It's complex so I picked a car as a test product. As a comparison, I found that to import a car from Germany into the US it costs 2.5% of the cars value. North Carolina charges an additional 3% state tax on it for a grand total of 5.5%.
To import the same German car into France the cost is (cough) 20%.
To import an American car into France the same 20% is paid plus a 10% import fee for a total of 30%. I'm sure I'm glazing over many, many smaller charges/exemptions in these examples.
To answer your question about protection using the numbers above, companies outside the eu that want to compete at an equal price with an equivalent German car would need to do so with a product that is at least 10% cheaper.
To import the same German car into France the cost is (cough) 20%.
No, the cost to import is 0%. The 20% VAT you are talking about here applies equally, regardless of whether the car is imported, or (cough) French. Again, VAT is just a kind of sales tax, and you pay sales tax for all goods, imported and domestic.
To import an American car into France the same 20% is paid plus a 10% import fee for a total of 30%.
No. Importing an American car to EU is 10%, regardless of which country you import it to, and then it's 0% to move it between EU countries. As I repeatedly said, you pay 20% VAT on any car, imported or not. Often, you actually pay additional registration taxes on top of that. For example, to import a car to Poland, on top of 10% EU customs duty and 23% Polish VAT, on a car with engine over 2000cc, you'll pay additional 18.6% excise tax upon registration. So, a $25k Chevrolet Malibu imported from US will cost $38k to buy in Poland.
To answer your question about protection using the numbers above, companies outside the eu that want to compete at an equal price with an equivalent German car would need to do so with a product that is at least 10% cheaper.
Yes, EU does apply protectionist tariffs, but my point is that they are not German tariffs, they're EU-wide. Germany might benefit from these more than countries without car industries, but most large EU countries have substantial car industry. For example, Poland exports $40B of vehicles and vehicle parts each year.
> Losing reserve status will be damaging to some parts of the american economy and create a boom in others.
The primary effect of losing reserve currency status would be on the government's ability to borrow money. That's going to be a problem since US government debt to GDP ratio is >100%. We have no fiscal discipline now and neither party shows interest in making cuts or raising taxes. DOGE hasn't changed anything yet unfortunately, as daily government outflows are still roughly inline with where they were under Biden. Even if DOGE cut all discretionary spending (obviously impossible), we'd still have a budget deficit and massive existing debt burden.
If we lose reserve currency status, my guess is we'll go full Argentina with hyper inflation as the government prints money to pay debt and fund the government.
Oh, I think that's inevitable for the reasons you listed. DOGE would need to do way more to actually matter. Observing the current upheaval due to minimal cutting guarantees the future will be Argentina.
The upside is the debt decreases in value as the currency inflates. So there's that.
The dollar is appealing because you can buy US treasuries for however much you have of it (because America's debt appetite is almost unlimited). I don't think you do that with the Euro yet, holding it would be much more complicated because you couldn't stash large amounts of it as easily into bonds. Also, the EU might not like being a reserve currency, and can do what the swiss did when CHF was used abroad too much: negative interest rates.
The EU appetite for debt would grow if non-EU kept trying to buy it. It would force practical EU interest rates lower regardless of what the central banks do, allowing governments to choose to take on more debt-funded projects due to debt being cheap
The US dollar is just so, so, so incredibly ingrained into the global economy, it just ain't that simple. You can or course hold whatever else instead of USD, but then you'll find yourself just exchanging back and forth to/from USD.
It's a bit like coming up with a realistic scheme for a computer with no RAM, only hard drive and CPU caches.
You couldn’t switch overnight but it’s hard to imagine that if, say, the EU, Canada, etc. started shifting to euros that it wouldn’t have a significant effect over time. They have massive economy anchoring their currency and right now there seem to be a lot of countries who would be receptive to reducing their exposure to economic uncertainty here. The USD has been popular due to stability, but if we voluntarily give that up there isn’t some kind of magic moat.
China only has one currency, the renminbi or yuan. There are capital controls so it isn't fully traded on international markets. It has only been internationally traded since 2015, and I think there were various schemes before that.
I hadn't noticed that. I guess that is how they manage the capital controls. It sounds like they are supposed to be the same internally but that there is a spread. That seems like it could be a weakness.
Perhaps? I can't imagine that either could take the loss of production capacity the way the US has. The global inflation of product prices alone is staggering to consider.
I would suspect that some countries would definitely go to China due to the more sizable economy. But a large number of others - especially those with more democratic idealogies - would go with the Euro.
