Wednesday, September 26, 2018

Zero Hedge — Kolanovic: There Is A "Profound" Danger To The Dollar's Reserve Status

As a reminder, yesterday we reported that Europe has unveiled a "Special Purpose Vehicle" to do just that, which not only would bypass SWIFT, but potentially jeopardize the dollar's reserve status. As we explained, "given U.S. law enforcement’s wide reach, there would still be a risk involved, and European governments may not be able to protect the companies from it. Some firms will be tempted to try the new infrastructure, however, and the public isn't likely to find out if they do. In any case, in response to Trump's aggressive foreign policies and "weaponization" of the dollar, it is worthwhile for Europe, Russia and China to experiment with dollar-free business."…
Today, [JPM's head quant, Marko] Kolanovic picks up on this theme and begins with a generic analysis of fund flows, and - in the context of the most successful US "export" - he writes that one can look at the US Trade deficit "as a trade surplus in which the US is acquiring goods in exchange for USD bills." According to the JPM strategist - and many others - this "exchange of natural resources and labor for inherently worthless fiat currency, as well as broad USD ownership has many benefits for the US"….
Hardly groundbreaking, Kolanovic notes that this "exorbitant privilege" was recognized a long time ago by geopolitical rivals - such as China and Russia - that don’t enjoy this benefit. It was also summarized by former NATO secretary general, Javier Solana, who said that "the power of the U.S. today is not military, it’s the dollar."
And, as Kolanovic rhetorically asks, with the current US administration policies of unilateralism, trade wars, and sanctions increasingly affecting both friends and foes, "the question arises whether the rest of the world should diversify away from the risks of the USD and USD-centric finance?"
And this is where the risk emerges, because as Kolanovic expands "recently, there are developments that suggest such a diversification could take place, and is being catalyzed by policies of the current US administration."…
Whether or not buying gold would truly hedge the collapse the US-centric world, a process which would entail the ascent of either the Euro or the Yuan to the status of global reserve currency, and one which the US would not allow to happen without a major war, is debatable. However, what is most remarkable is that we now have reputable bankers in the face of none other than Marko Kolanovic, one of the most respected strategists at JPMorgan, contemplating a world in which the US Dollar is no longer the reserve currency, a "thought experiment" which until recently was relegated to the fringes of financial commentary. That this line of thinking is becoming increasingly more mainstream - and accepted - is perhaps the most troubling observation from Kolanovic's latest note...
Actually, it's not so much historical "extraordinary privilege" as contemporary control of the global financial system, giving the US ability to conduct economic and financial hybrid warfare against those countries that resist following the rules that the US makes or refuse to kowtow to US leadership.

Zero Hedge
Kolanovic: There Is A "Profound" Danger To The Dollar's Reserve Status
Tyler Durden

9 comments:

Ryan Harris said...

It would be the best thing to ever happen to the United States. Would reduce fiscal space, lower 2.5% CAD to less than 1% and reduce rent seeking by foreigners in our financial markets. It would boost domestic employment. It would reduce US hegemony and end our participation in endless wars. Hard to imagine a more beneficial change. Of course, when it's convenient, Economists prefer to think in terms of maximizing so called real benefits for an imaginary econo man, so economists will universally decry the tragedy by pretending war, debt, wealth transfers don't matter because the consumer is basking in real benefits.

Matt Franko said...

Agree ... It’s the ideal scenario Ryan....

Andrew Anderson said...

"exchange of natural resources and labor for inherently worthless fiat currency," zerohedge

Fiat is not inherently worthless; it can be needlessly expensive or practically cost-free but as long as fiat can pay debts, including taxes, fiat has value.

Bob Roddis said...

If fiat funny money wasn't inherently worthless, the government wouldn't threaten violence against you to make you use it.

Andrew Anderson said...

Of course, the value of fiat is less than it could be because only the banks, etc. in the private sector may even use fiat except for coins and bills - so the demand for fiat is artificially suppressed.

That made sense when fiat was expensive as when it was made or backed by gold but makes no sense now when fiat is near cost-less in safe, convenient account form at the Central Bank.

Andrew Anderson said...

Taxes are based on force regardless of what fiat is made of. If you want to avoid prison or loss of property for failure to pay taxes you need fiat, be it ever so inexpensive.

But you may say, "I should be able to use anything for private debts" and so you should but fiat has an inescapable advantage over private money forms since those can be taxed in fiat. But then you may say "There should be no taxes on private money forms" but that's as much as saying that there should be no taxes on anything since anything could conceivably be a private money form.

Konrad said...

Fiat funny money. Fiat funny money. Fiat funny money.
Fiat funny money. Fiat funny money. Fiat funny money.

Is this a result of Parkinson's disease, or schizophrenia, or Tourette syndrome, or OCD, or just plain stupidity?

You decide.

Andrew Anderson said...

The Bank of International Settlement’s Claudio Borio, Who Warned About the Crisis, Says the World Economy Is About to Get Very Sick

Negative interest is mentioned in the first comment and is pilloried when it need not affect ordinary depositors at all - IF all citizens had, like they should be able to have, checking/debit accounts at the Central Bank itself FOR FREE up to reasonable limits on account size and transactions per month.

Matt Franko said...

“stupidity?”

It’s simply the libertarian thesis within the dialectical context... libertarians do not support this type of system...