Ricardo Martin — Monetary Sovereignty

The main lesson I want to draw from this post is (excluding being autarkic/poor or being in a monetary union): 

If a country wants to maintain a fixed exchange rate, the country must accumulate a lot of foreign reserves to be sovereign (or maybe some capital controls?) 

If a country wants to have floating exchange rates, it must convince its trading partners (or its trading partners’ trading partners) to hold its national currency as foreign reserves.

losinterest
Monetary Sovereignty
Ricardo Martin

USD/CNY

Those who’re eagerly awaiting the end of the “dollar hegemony,” or the end of the dollar as the top global reserve currency, well, they’ll need some patience, because it’s happening at a glacial pace – according to the IMF’s just released data on the “Currency Composition of Official Foreign Exchange Reserves” (COFER) for the second quarter 2018.

What it confirms: Global central banks are ever so slowly losing their appetite for being over-exposed to US-dollar-denominated assets, though they’re not dumping them from their foreign exchange reserves; they’re just tweaking them....

Wolf Street
US Dollar Refuses to Die as Global Reserve Currency but Loses Ground

Wolf Richter

See also

The IMF released the Currency Composition of Official Foreign Exchange Reserves (COFER) data for Q2 2018 on Friday. The total of reserves that are broken down by currency went up by $123BN, and unallocated reserves fell by $243BN. The most notably observation in the COFER report is that reserve managers actively decreased their allocation to USD – more than offsetting the effect of dollar appreciation – while at the same time adding significantly to non-USD allocations and especially to Chinese Yuan reserves....

Zero Hedge

In Troubling Sign For The US, Reserve Managers Plow Into Chinese Yuan, Dump Dollars

Brian Romanchuk — Exports And The Cycle

Not all "automatic stabilisers" in the economy are due to government policy; there are patterns of private sector behaviour that tend to act in a counter-cyclical fashion. The role of the external sector is an important stabiliser (at least most of the time). This article is a basic primer on the subject....

Bond Economics
Exports And The Cycle
Brian Romanchuk

Joseph P. Joyce — Current Account Deficits and Safe Assets

Global appetite for US Treasuries as "safe assets." This is a primary function of a reserve currency as a saving vehicle that is regarded as a safe haven.

Economonitor
Current Account Deficits and Safe Assets
Joseph P. Joyce

Bill Mitchell — When economists ignore the elephant called reality and applicability

I have sat through many economic seminars in my time where there is a sense of suspended reality necessary so the presenter can run through the exercise of bringing their latest research idea to the academic community. This suspended reality normally relates to the a priori assumptions made to condition the exercise and the framework within with the exercise is conducted. It typically involves ignoring the elephant in the room called reality and applicability. The ruse goes like this – assume a, b and c (where none of these assumptions capture the most important aspect of the object of study); then use these analytical tools (none of which reflect how the actual mechanisms being studied operate); and QED we show this. I no longer go to seminars like this – life is too short....

Bill Mitchell – billy blog
When economists ignore the elephant called reality and applicability
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Christopher Smart — Sanctions and the Risk to the Dollar

This guy is as establishment as they come and he is warning about abusing power. That's how power is eventually lost.

Project Syndicate
Sanctions and the Risk to the Dollar
Christopher Smart, a senior fellow at the Mossavar-Rahmani Center for Business at Harvard University’s Kennedy School of Government, was Special Assistant to the president for International Economics, Trade and Investment (2013-15) and Deputy Assistant Secretary of Treasury for Europe and Eurasia (2009-13). He is also Whitehead Senior Fellow at Chatham House

Brian Romanchuk — Monetary Disorder: Some Views From France – Book Review

One of the entertaining part of economics is the divergence of views on a national basis. Within a country, partisan political views create a spectrum of opinion, but we can usually identify an "establishment view." But those establishment views can be quite distinct across countries. As an example, the French establishment has a fixation upon exchange rate regimes, and an interpretation of the current monetary system which bears little resemblance with mainstream American views on the topic. This was apparent from reading Désordre dans les monnaies [Monetary Disorder]: L'impossible stabilité du système monétaire international?.…

Bond Economics
Monetary Disorder: Some Views From France
Brian Romanchuk

Philip S. Golub — China rewrites the global rules

Recognising the challenge, the US intensively lobbied allied states in Asia and Europe to stay out of the AIIB, arguing that it would not meet IMF and World Bank standards of transparency, environmental and social responsibility, and democratic governance. The argument would have been more convincing had the IMF not been the arm of coercive Euro-Atlantic discipline for the South. With the exception of Japan, the US proved unable to sway its closest partners.… 

The decision to found the NDB and AIIB is the outcome of a movement building since the 1990s in East Asia and Latin America in reaction to IMF mismanagement of regional financial crises. The 1997-8 Asian crisis convinced many East Asian policy makers that it was time to take the future into their own hands and seek greater autonomy. The creation of the new system has huge implications: the ability to set policy frameworks and maintain international regimes through multilateral institutions is an essential dimension of power in world politics. Former Treasury Secretary Lawrence Summers wrote that October 2014 (when the AIIB was formed) “may be remembered as the moment the United States lost its role as the underwriter of the global economic system….

Multipolar geopolitical political systems based on national sovereignty are potentially much less stable than unipolar systems, but only if the unipolar system is run in the interest of all instead of a hegemon. The US blew this opportunity badly. Now the future is uncertain as power blocs and spheres of interest again form.

Le Monde Diplomatique — English
China rewrites the global rules
Philip S. Golub
ht Yves Smith at Naked Capitalism

Joseph Joyce — The Continuing Dominance of the Dollar: A Review of Cohen’s “Currency Power”

Good summary of currencies and why the USD will continue to dominant for the foreseeable future. Short, too.

Angry Bear
The Continuing Dominance of the Dollar: A Review of Cohen’s “Currency Power”

Joseph Joyce

Dan Steinbock — The Internationalisation of the Renminbi

In the past half a decade, the RMB has achieved dramatic progress in commodities, trade, investment and sovereign reserves. It is increasingly central to commodity trading.

The RMB’s catch-up with the Japanese yen and the British pound will take longer – and even longer to gain parity with the dollar and the euro, which still represent 45% and 28% of international payments, respectively.

Nevertheless, the RMB’s role as a major reserve currency is now a matter of time. In the short-term, the transition means increasing market volatility. In the medium-term, it has potential to support China’s rebalancing and thus growth prospects globally.

The RMB will be the first emerging-economy currency that will join the sovereign reserves. In that role, it will pave way to other major emerging-economy currencies in the future.

Economonitor
The Internationalisation of the Renminbi
Dan Steinbock | Research Director of International Business at India China and America Institute (USA) and Visiting Fellow at Shanghai Institutes for International Studies (China) and the EU Center (Singapore)

Bloomberg — Yuan Taking on Dollar Set to Forge $16 Billion Panda Bond Market

Deutsche Bank AG sees China expanding its panda bond market to about 100 billion yuan ($16 billion) over five years, as President Xi Jinping promotes the yuan’s challenge to the dollar’s supremacy....

“Capital account liberalization will accelerate,” said Liu. “We will see more foreign investors coming in. We will see more market opening for foreign issuers.”....

Bloomberg
Yuan Taking on Dollar Set to Forge $16 Billion Panda Bond Market

Joseph Joyce — The U.S.: Inept Diplomacy, Indispensable Currency

All this demonstrates the discrepancy between the diplomatic and financial power of the U.S. On the one hand, the U.S. must deal with countries that are eager to claim their places in global governance. The dominance of the U.S. and other G7 nations in international institutions is a relic of a world that came to an end with the global financial crisis. On the other hand, the dollar is still the predominant international currency, and will hold that place for many years to come. The use of the renminbi is slowly growing but it will be a long time before it can serve as an alternative to the dollar. Consequently, the actions of the Federal Reserve may have more international repercussions than those of U.S. policymakers unable to cope with the shifting landscape of financial diplomacy.

Angry Bear
The U.S.: Inept Diplomacy, Indispensable Currency
Joseph Joyce

Michael Pettis — Are we starting to see why its really the exorbitant “burden”

This may be excessively optimistic on my part, but there seems to be a slow change in the way the world thinks about reserve currencies. For a long time it was widely accepted that reserve currency status granted the provider of the currency substantial economic benefits. For much of my career I pretty much accepted the consensus, but as I started to think more seriously about the components of the balance of payments, I realized that when Keynes at Bretton Woods argued for a hybrid currency (which he called “bancor”) to serve as the global reserve currency, and not the US dollar, he wasn’t only expressing his dismay about the transfer of international status from Britain to the US. Keynes recognized that once the reserve currency was no longer constrained by gold convertibility, the world needed an alternative way to prevent destabilizing imbalances from developing. 

This should have become obvious to me much earlier except that, like most people, I never really worked through the fairly basic arithmetic that shows why these imbalances must develop.…

China Financial Markets
Are we starting to see why its really the exorbitant “burden”
Michael Pettis | Professor of Finance at Peking University’s Guanghua School of Management

Charles Hugh Smith — Certainty, Complex Systems, and Unintended Consequences

Of particular interest because Smith is regularly posted at Zero Hedge. This should explode some heads over there.

Of Two Minds
Certainty, Complex Systems, and Unintended ConsequencesCharles Hugh Smith

Michael Pento — De-crowning the dollar, and the 'collapse' ahead

This is a nonsense post  that repeats the shibboleths of US public debt and unfunded liabilities.

China, the largest U.S. creditor with $1.28 trillion in Treasury bonds, recently put out a commentary through the state-run Xinhua news agency stating that, "Such alarming days when the destinies of others are in the hands of a hypocritical nation have to be terminated."

Congress finally reached a deal to end the 16-day shutdown, but it wasn't pretty. CNBC's Rick Santelli makes the case that the dollar's weakness is more about the Fed and a mediocre economy.

In addition, Japan (our second largest creditor holding $1.14 trillion of U.S. debt) put out a statement through its Finance Minister last week saying, "The U.S. must avoid a situation where it cannot pay, and its triple-A ranking plunges all of a sudden."

The reverse is actually the case. The US absorbing lack of domestic demand in China and Japan allowing their economies to prosper through net exports by acting as the world's market of last resort is actually what is occurring. Without this largesse, both China and Japan would be struggling economically, while the US would be enjoying full employment and growing the world's largest economy and expanding its might as the sole superpower while other countries wallowed an economic doldrums.

The US public debt owned by China and Japan and other countries is their savings in USD, for net exporters resulting in a positive trade balance. This provide the demand they don't have domestically that allows them to run their export-driven economies. They would not have to save in dollars if they spent those dollars in the US through balanced trade or foreign direct investment. Instead, they choose to accumulate foreign reserves and this is usually done to protect one's own currency. Running a peg against the dollar, China must do this to remain a net exporter with a currency advantage.

Then the story really gets ridiculous

The real problems of government largess, money printing, artificial interest rates, asset bubbles and debt have not been addressed at all. Rather, Washington has merely agreed to perpetually extend its lines of credit and to have the central bank purchase most of that new debt.

Instead of placating the fears of our foreign creditors we have cemented into their minds that the U.S. dollar and bond market cannot be safe repositories of their savings. The eventual and inevitable loss of that confidence will ensure nothing less than surging prices and a complete collapse of our economy.

The fear of an economic meltdown was the genesis of a constitutionally-based third-party political movement.

The Tea Party was formed to prevent runaway inflation and an economic depression resulting from a crumbling currency and devalued debt. It appears by the absolute and universal vilification of its members by both Republicans and Democrats that U.S. citizens are not yet ready to undergo the pain associated with the removal of our pernicious addictions.

Huh? The US is threatened with inflation due to "money printing"? When the Fed is "printing money" to keep a struggling economy afloat when inflation is at a historical low and low rates are not spurring investment in capital goods ostensibly since business is receiving any signal from increasing demand at the counter to justify expansion at this time?

If there is an asset bubble "caused by money printing," it is in equities, and equites are doing well in spite of the lagging recovery because  corporate profits have been rising due to cost cutting and external operations rather than domestic expansion.

Those who are foreseeing the decline of the US or it's losing reserve currency status need to explain what is going to replace the dollar. The RMP, a currency that is still pegged to the USD? The yen, with Japan's public finance far worse than the US on the standard in terms of which the Chicken LIttles are judging the dollar? The euro, with the EZ in depression and threatening to break apart? A return to the gold standard? Seriously?

Is this a post or at rant? Or is it a book promotion? Hey, Peter Schiff and others have done pretty well selling such nonsense.

We'll be hearing a lot more of such clap-trap explicitly or implicitly aimed at "fixing the debt" by cutting the welfare state as the budget negotiations get underway.

CNBC NetNet
De-crowning the dollar, and the 'collapse' ahead
Michael Pento | President of Pento Portfolio Strategies and author of The Coming Bond Market Collapse: How to Survive the Demise of the U.S. Debt Market.

Dean Baker — If the Dollar Stopped Being the Preeminent Reserve Currency It Would Mean More Jobs and Growth

Baker's argument is that given the present state of domestic finance still being highly leveraged and a zero possibility of increasing the government contribution under the present political circumstances, the only way out if through the external sector and a falling dollar would support this. Moreover, if the world held fewer dollars in reserve relative to other global reserve currencies, then the trade deficit would be reduced, meaning fewer imports and less embedded labor. So with decreasing imports and increasing exports, US domestic investment would increase and so would domestic employment. In other words, there would be a US "rebalancing."

However, if the US would also adopt mercantilism, the global economy would likely buckle under the strain with the major marketplace accepting less from abroad and invading the marketplace of other countries. This is especially true now that the US is a major petroleum producer again, as well as natural gas.

The US is a very tough competitor and in a free market environment everyone else would at a disadvantage. That would likely result in calls for protectionism and an end to the era of free trade.

CEPR

If the Dollar Stopped Being the Preeminent Reserve Currency It Would Mean More Jobs and Growth

Dean Baker

Zero Hedge — Thanks, World Reserve Currency, But No Thanks: Australia And China To Enable Direct Currency Convertibility

The Hedgies don't seem to get that a reserve currency is a currency that exporting nations choose to save in. Oz has made a decision to save in RMB instead of USD in exporting to China. Is that taking on exchange rate risk, or is RMB as safe a store of value as the USD now? One could argue that as long as the RMB is pegged to the USD, it doesn't matter too much and if it increases exports, no big deal.

Zero Hedge
Thanks, World Reserve Currency, But No Thanks: Australia And China To Enable Direct Currency Convertibility

Posted by Tyler Durden

Ambrose Evans-Pritchard — A new Gold Standard is being born

My guess is that any new Gold Standard will be sui generis, and better for it. Let gold will take its place as a third reserve currency, one that cannot be devalued, and one that holds the others to account, but not so dominant that it hitches our collective destinies to the inflationary ups (yes, gold was highly inflationary after the Conquista) and the deflationary downs of global mine supply. That would indeed be a return to a barbarous relic.

Hopefully, it will be nothing like the interwar system. That was a dollar peg that transmitted US deflation to the whole world when the Fed tightened too hard in 1928 and went berserk in 1930.

The Telegraph (UK)
A new Gold Standard is being born
Ambrose Evans-Pritchard
(h/t John Zelnicker via email)

Looks like a new global depression may be in the making. Not to mention that the global economy becomes all about "competitiveness" in accumulating gold reserves, aka mercantilism, which historically has led to war.

Paul Volcker — Is Global Financial Reform Possible?

Addresses floating rates and recommends more international coordination.

Read it at Project Syndicate

Is Global Financial Reform Possible?

by Paul Volcker

Pettis — "An Exorbitant Burden"

Why keeping the dollar as the world's reserve currency is a massive drag on the struggling U.S. economy.

Michael Pettis has a new piece in Foreign Policy, An Exorbitant Burden