The “Demise of the Dollar” is a long-running story in hard money circles, and has gotten a recent push by the growth of transactions in the Chinese yuan in international transactions. Although it seems likely that the yuan will grow in importance, this is largely a nothingburger from the perspective of the United States.
To be fair, we haven't really seen any big change in reserve currency status since the breaking down of Bretton Woods , the Euro standing basically replaced the previous national currencies of the eurozone, the dollar has been on a very very slow decline so I'm not sure what these floating rate decades really taught us in terms of reserve currency shifts (especially potentially quick ones in relative terms).
I would also hardly describe Janet Yellen as a hard money bug when she admitted concerns about the long terms status of the dollar, probably she was more focused on the potential loss of coercive power (read: ability to sanction) which on itself would represent a significant change in the status quo with far reaching real world consequences even if it could be a "nothingburger", as you said, from a pure macroeconomics theory perspective.....actually we could say (and many did) that in the long run the "loss" of reserve currency status could actually be beneficial at least to the ordinary citizens of the United States (re-industrialization, etc...) the so called exorbitant burden of being a reserve currency theory opposed to the more well known exorbitant privilege one.
Finally, as far as I recall, despite being mentioned here and there, I never seen any serious attempt (by gold bugs or otherwise) to try to quantify the supposed premia in terms of exchange rate courtesy of the privilege of being the dominant reserve currency.
1) my wording was unclear. We have decades of experience showing that reserve purchases have no measurable effect on yields. Foreign ownership of Treasuries goes up and down with the oil cycle and Asian mercantilist policy intensity. Historically, reserve currency changes resulted when the “main” economy went into the toilet, and it’s going to be hard to determine the direction of causality.
2) Yellen has no choice but to fret about reserve currency status to be taken “seriously.” Not sure whether any American official could get away with saying “it’s our dollar, and your problem” without it being a [redacted]-storm in financial media.
3) The gold bugs are not going to do anything quantitative, but the “how much are Chinese purchases reducing Treasury yields?” was a burning question in some quarters in the mid-2000s. That was when the “serious” people were very concerned about a US balance-of-payments crisis.
Cogent stuff. I don't read the current mumblings about central bank diversification away from $USD reserves as having all that much economic utility -- it appears more to be a geopolitical driven strategy to reduce exposure to asset seizure should the US State Department disapprove of something their governments might do.
You write, "Japan has a large bond market, but QE has made it less liquid." How do we measure the liquidity of Japan's bond market (or any bond market)? And why has QE made Japan's less liquid over time?
To be fair, we haven't really seen any big change in reserve currency status since the breaking down of Bretton Woods , the Euro standing basically replaced the previous national currencies of the eurozone, the dollar has been on a very very slow decline so I'm not sure what these floating rate decades really taught us in terms of reserve currency shifts (especially potentially quick ones in relative terms).
I would also hardly describe Janet Yellen as a hard money bug when she admitted concerns about the long terms status of the dollar, probably she was more focused on the potential loss of coercive power (read: ability to sanction) which on itself would represent a significant change in the status quo with far reaching real world consequences even if it could be a "nothingburger", as you said, from a pure macroeconomics theory perspective.....actually we could say (and many did) that in the long run the "loss" of reserve currency status could actually be beneficial at least to the ordinary citizens of the United States (re-industrialization, etc...) the so called exorbitant burden of being a reserve currency theory opposed to the more well known exorbitant privilege one.
Finally, as far as I recall, despite being mentioned here and there, I never seen any serious attempt (by gold bugs or otherwise) to try to quantify the supposed premia in terms of exchange rate courtesy of the privilege of being the dominant reserve currency.
Great article as usual, Thank You!
1) my wording was unclear. We have decades of experience showing that reserve purchases have no measurable effect on yields. Foreign ownership of Treasuries goes up and down with the oil cycle and Asian mercantilist policy intensity. Historically, reserve currency changes resulted when the “main” economy went into the toilet, and it’s going to be hard to determine the direction of causality.
2) Yellen has no choice but to fret about reserve currency status to be taken “seriously.” Not sure whether any American official could get away with saying “it’s our dollar, and your problem” without it being a [redacted]-storm in financial media.
3) The gold bugs are not going to do anything quantitative, but the “how much are Chinese purchases reducing Treasury yields?” was a burning question in some quarters in the mid-2000s. That was when the “serious” people were very concerned about a US balance-of-payments crisis.
Cogent stuff. I don't read the current mumblings about central bank diversification away from $USD reserves as having all that much economic utility -- it appears more to be a geopolitical driven strategy to reduce exposure to asset seizure should the US State Department disapprove of something their governments might do.
Yes, the worries about sanctions is the source of the chatter. But translating that into meaningful reserve changes is the issue.
You write, "Japan has a large bond market, but QE has made it less liquid." How do we measure the liquidity of Japan's bond market (or any bond market)? And why has QE made Japan's less liquid over time?
1) Liquidity = can you transact in size without moving the market? Trading volumes will give you an idea, but that information is patchy.
2) The BoJ bought everything up, so not much left to trade.