Complex factors make up currency, but price at the end of the day is what values a country.Its a mark on its performance, it is trust to perform the right policy. Make the hard decisions for the sake of the good, sadly its rhetoric and politicised, lies for the sake of power, we are now beyond Power is Money. Central Bankers and the Boards now wield control over the periphery like never before.
The US has enormous levels of debt across all sectors. Debt is good for stimulating and spending into the economy as it expands. High debt levels can work as an anchor, questioning how it is to be sustained, interest on debt and more importantly future generations and how they will cope with the inheritance.
One flow is M2 the actual sovereign generated side ,earned dollars, actual physical currency that pays loans buys goods ,saving accounts etc. Its falling as it is meant to because thats what the policy is, reduce spending and liquidity to impact the economy. Interest rate increases vs inflation. Thats the narravtive but there is an underlying reality.
If the US losses its status as being the number one trading currency what impacts in the US would be felt?
Exchange Rate and Trade: The value of the U.S. dollar would likely decline relative to other currencies, as demand for it decreases. This would make imported goods relatively more expensive and could impact international trade dynamics. Exporters may benefit from increased competitiveness due to a weaker currency, but overall trade imbalances could be affected.
Interest Rates and Borrowing Costs: As the dominant reserve currency, the U.S. enjoys certain advantages in borrowing costs. If the status changes, there might be upward pressure on interest rates, as lenders and investors demand higher returns to compensate for perceived risks. This could increase borrowing costs for the government, businesses, and individuals.
Inflation and Purchasing Power: A weaker currency can lead to higher inflation, as imported goods become more expensive. This could erode purchasing power, affecting consumer spending and overall economic growth. It may also impact the ability to import goods and services at favorable prices, potentially leading to changes in consumption patterns.
Financial Markets: A shift in the global reserve currency status could lead to significant volatility in financial markets, including currency markets, bond markets, and stock markets. Investors may reallocate their portfolios, affecting asset prices and potentially leading to market disruptions.
Geopolitical and Strategic Influence: The reserve currency status is closely tied to a country's geopolitical influence and ability to shape global economic policies. Losing this status could impact the U.S.'s position in global affairs and potentially diminish its ability to set the terms of international trade and finance.
As some countries are now trading direct without the use of the USD it seems to have started especially in the east. I understand that this will take a long time to run through and the many implications geopolitically, pricing is done globally in USD for commodities what are the consequences of this method being displaced
If the use of the U.S. dollar as the primary currency for global commodity pricing is displaced, it could have several consequences for various stakeholders. Here are some potential impacts:
Currency Volatility: If pricing commodities shifts away from the U.S. dollar, it could lead to increased currency volatility. Commodity prices would become more sensitive to fluctuations in different currencies, potentially impacting the stability and predictability of pricing.
Exchange Rate Risks: Companies involved in international commodity trade would face increased exchange rate risks. Pricing commodities in different currencies would introduce uncertainty and potentially complicate risk management strategies for businesses.
Shift in Global Trading Dynamics: The displacement of the U.S. dollar as the dominant currency for commodity pricing could lead to a redistribution of trading power and influence. Countries whose currencies gain prominence in commodity pricing could experience increased economic and geopolitical leverage.
Impact on U.S. Dollar Demand: If the use of the U.S. dollar declines in global commodity pricing, it could reduce demand for the currency. This could put downward pressure on the value of the U.S. dollar, potentially impacting its status as a reserve currency and affecting the cost of imported goods.
Diversification of Currency Reserves: Central banks and governments may seek to diversify their currency reserves away from the U.S. dollar if it loses prominence in commodity pricing. This could result in shifts in global currency holdings and impact currency exchange rates.
Geopolitical Implications: The displacement of the U.S. dollar in global commodity pricing could have broader geopolitical consequences. It could influence alliances, trade relationships, and the balance of power among nations, potentially reshaping global economic dynamics.
Impacting Dynamics in the Global Monetary system
The displacement of the U.S. dollar in global commodity pricing would likely have significant impacts on the international monetary system. Here are some potential consequences:
Shift in Reserve Currencies: The U.S. dollar currently serves as the primary reserve currency, with central banks and governments holding significant amounts of U.S. dollar reserves. If the dollar loses prominence in commodity pricing, it could lead to a reassessment of the composition of global currency reserves. Other currencies, such as the euro, yen, or renminbi, may gain greater importance in international reserves, potentially altering the dynamics of the international monetary system. The commodity based countries cant afford to miss the opportunity presented.
Reduced Dollar Dominance: The dominance of the U.S. dollar in international trade and finance has allowed the United States to exert significant influence over global economic / political policies. If the dollar's role diminishes, it could lead to a more multipolar monetary system with multiple currencies playing larger roles. This could lead to a shift in power and influence among countries and potentially reshape global economic governance.
Currency Valuation and Exchange Rate Volatility: The displacement of the U.S. dollar in commodity pricing could introduce greater currency valuation and exchange rate volatility. Different currencies used for commodity pricing would experience fluctuations in their exchange rates, affecting international trade, cross-border investments, and financial markets. This could increase uncertainty and potentially complicate international economic interactions.
Financial Market Adjustments: Global financial markets, including foreign exchange markets, bond markets, and stock markets, would likely undergo significant adjustments if the U.S. dollar's role in commodity pricing is displaced. Investors would need to adapt their strategies to reflect changes in currency dynamics, potentially leading to market volatility and shifts in investment patterns.
Changes in Trade and Investment Flows: The international monetary system's evolution could impact trade and investment flows among countries. As the composition of currencies used in commodity pricing changes, it could affect pricing mechanisms, trade volumes, and patterns of investment. Countries and businesses would need to adjust their strategies and relationships accordingly.
In relation to US Treasury markets what impacts if foreign bond holders decide the current risk is to great to buy the issued debt:
Increased Borrowing Costs: Foreign investors, including central banks and sovereign wealth funds, play a significant role in financing the U.S. government's debt by purchasing Treasury bonds. If these foreign buyers reduce their purchases or become net sellers of U.S. debt, it could lead to increased borrowing costs for the U.S. government. To attract domestic buyers or other international investors, the U.S. government may need to offer higher yields on its bonds, which would increase interest expenses and potentially strain the federal budget.
Weakening of the U.S. Dollar: Reduced demand for U.S. Treasury bonds by foreign investors could put downward pressure on the value of the U.S. dollar. As foreign investors sell their U.S. Treasury holdings, they would need to convert their dollars back into their home currencies, potentially leading to a depreciation of the dollar. A weaker dollar could have implications for international trade, inflation, and domestic purchasing power.
Market Disruptions and Increased Volatility: A significant reduction in foreign demand for U.S. Treasury bonds could cause market disruptions and increased volatility in the U.S. Treasury market. It could lead to wider spreads between bond yields and higher price volatility. Such disruptions could impact the overall stability of the bond market and spill over into other financial markets.
Impact on Interest Rates: Reduced foreign demand for U.S. Treasury bonds could result in upward pressure on interest rates, especially if the decrease in demand is not matched by increased domestic demand. Higher interest rates would affect borrowing costs for businesses and consumers, potentially dampening investment, borrowing, and economic activity.
Government Financing Challenges: If foreign investors retreat from buying U.S. debt, it could pose challenges for the U.S. government's ability to finance its budget deficits. The government would need to rely more heavily on domestic buyers, such as U.S. investors, to absorb the increased supply of Treasury bonds. This could strain the domestic financial system and limit the government's flexibility in managing its fiscal policy.
If countries and central banks were to significantly reduce their holdings of U.S. dollars and move to other assets, such as gold, it could have several impacts on the United States and the global economy. Here are some potential consequences:
Appreciation of the U.S. Dollar: If there is a significant influx of U.S. dollars flowing back into the United States, it could lead to an appreciation of the U.S. dollar. As the supply of dollars increases, while the demand for them decreases, the value of the currency may rise. A stronger dollar could have implications for U.S. exports, as they become relatively more expensive, potentially affecting trade balances.
Lower Financing Costs for the U.S. Government: If countries reduce their holdings of U.S. Treasury bonds, it could potentially lead to lower demand for U.S. government debt. However, the repatriation of dollars back to the United States could also increase the pool of domestic savings available for financing the government's borrowing needs. If the U.S. government can tap into these domestic savings, it may help mitigate any negative impacts on borrowing costs.
Market Disruptions: A significant outflow of U.S. dollars from foreign countries could disrupt global financial markets, particularly currency markets and bond markets. It may lead to increased volatility, liquidity challenges, and potential disruptions in the functioning of these markets. Financial institutions and investors may need to adjust their strategies and risk management practices accordingly.
Impact on Global Liquidity: The U.S. dollar serves as the primary global reserve currency, providing liquidity for international trade and financial transactions. If there is a substantial decrease in dollar holdings, it could impact global liquidity conditions. It may lead to a tightening of credit availability, particularly in regions and sectors that are heavily reliant on dollar funding.
Diversification of Reserve Holdings: If central banks shift their reserve holdings away from the U.S. dollar and toward other assets like gold, it could alter the composition of global reserve assets. Central banks holding less U.S. dollars may reduce their dependence on U.S. monetary policy and have more flexibility in managing their reserves. This could potentially impact the effectiveness of U.S. monetary policy transmission and the influence of the Federal Reserve in global financial markets.
Geopolitical and Economic Implications: The shift away from the U.S. dollar as a global reserve currency could have broader geopolitical and economic implications. It may alter the balance of power among countries, influence trade relationships, and impact the international monetary system's structure. It could also prompt discussions about the need for international monetary reforms or alternative reserve currencies.
We are now entering one of the most historic moments in history, this current 1/4 will possibly shape the rest of the century,Brics summit in SA in Aug is shaping up as the most important event we will face as traders and Geoploitics may well change forever.Unfortunately the EU has succumbed to hegemony as well and will suffer the ultimate price as leader after leader will be dismemebered. The economic war in the last 12 months has raged on and now the fallout will become real. Europes coming winter is about to be remembered for decades to come
Thanks you sir!
Thanks again Syt, great read as always.