–Much ado about nothing. The end of the dollar as reserve currency

Mitchell’s laws:
●The more budgets are cut and taxes increased, the weaker an economy becomes.
●Austerity is the government’s method for widening the gap between rich and poor,
which leads to civil disorder.
●Until the 99% understand the need for federal deficits, the upper 1% will rule.
●To survive long term, a monetarily non-sovereign government must have a positive balance of payments.
●Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.


People often predict the dollar’s imminent demise as world’s “reserve currency,” and cite this as proof of something or other – i.e. U.S. bankruptcy, hyper-inflation, depression, global warming, the Chicago Cubs or anything else that’s bad in this universe.

The following article is an example:

Radio Free Europe Radio Liberty
China, Others, Urge Move Away From Dollar As Reserve Currency
March 24, 2009

(RFE/RL) — Should the world ditch the dollar as its reserve currency? It’s an idea that seems to be gaining ground.

The latest call came from China’s central bank governor, who said on March 23 there should be a new international reserve currency. And a UN panel this week is to recommend moving away from the dollar and adopting a shared basket of currencies instead.

Zhou Xiaochuan’s message seemed aimed at an international audience. His essay was published on the central bank’s website in English, as well as Chinese.

In it, the governor said the global financial crisis had revealed “vulnerabilities and systemic risks” in the current monetary system.

Instead, he said the world needed something more stable — what he called a “super-sovereign reserve currency.”

Zhou didn’t mention the dollar specifically. But his comments came two weeks after the Chinese Prime Minister Wen Jiabao expressed concern over the safety of China’s estimated $1 trillion worth of U.S. investments.

A “reserve” currency is nothing more than the currency most nations use in international trade. It is just a trading convenience. International trade is easier if nations quote the same currency when pricing goods and services, and nations use the same currency when paying bills. And that’s it: A convenience.

The euro was invented as a European reserve currency, and it functions quite well in that role, though it’s a screwed up mess in its role as a common currency. Any benefit that accrues to the U.S., as a result of the dollar being the reserve currency, is so minuscule as to be unworthy of mention.

Getting back to China’s “concern over the safety of China’s estimated $1 trillion worth of U.S. investments”:

1. China isn’t concerned about the safety of its financial investments.

2. It’s a political concern. China’s aspiration is to be viewed as the big dog of international economics, and ending the dollar as reserve currency is part of that political aspiration.

Let’s assume that a giant meteor selectively destroys the U.S., and the dollar, not just becomes worthless, but disappears from the world. Is this a problem for China and its $1 trillion worth of T-securities? Not a bit. China is Monetarily Sovereign. It can continue to buy goods and services as always, using its unlimited availability of renminbi. China would be no poorer for the loss of all its dollars.

And as for Chinese citizens who owned T-securities: The Chinese government merely could give them renminbi to make up for their losses, and everything would be as before.

The giant meteor might be a problem for the euro nations, because they are monetarily non-sovereign, so can’t create euros — except the EU could do what it should have been doing all along: Provide euros to all euro-using nations. It might be a problem for a tiny island nation that pegs its currency to the dollar (are there any left?), but they simply could peg to some other currency.

The whole reserve-currency brouhaha is silly, which is why government leaders pay attention to it. (Heaven forbid they address real economic issues.)

China Not Alone

The worry is that U.S. efforts to tackle the financial crisis — including printing money — could erode the value of the dollar and of China’s dollar-denominated reserves. Chinese officials are not alone in calling for a move away from the dollar as the world’s chief reserve currency.

Earlier this month, Russia said it would propose a new reserve currency for discussion at the G20 summit set for April 2. And a UN panel of experts is this week recommending a switch away from the dollar as part of an overhaul of the global monetary system.

If anything should send shivers of fear up your spine, it’s the thought that a UN panel of “experts” (experts at what?) has become involved. Are these related to the experts who created the disastrous euro, or the experts who run the International Monetary Fund, those austerity loving buffoons?

And if China is worried about a U.S. inflation that would result from erroneously called “printing money,” where is the inflation? The U.S. has “printed” more than a trillion dollars each year, for the past four years, and we are closer to deflation than inflation.

(In fact, money creation has not caused inflation in the U.S. The reason: The Fed controls inflation by controlling demand for dollars via interest rate changes.)

“Now is the moment to think seriously about a new reserve currency, a shared reserve currency,” panel member Avinash Persaud told Reuters. “When part of the world wants to save more than it did before, this won’t lead to a concentration of assets in one place, but more spread around the world. It’s good for those people who’ve got the savings, [because] their assets are diversified, and it’s good for those people where the money is flowing.”

A beautiful example of gibberish. A reserve currency has nothing to do with a “concentration of assets” or “where money is flowing.”

Zhou, the Kremlin, and to a lesser degree the UN panel — all are advocating an expanded role for the SDR, or “special drawing right.” That’s a kind of artificial currency created by the International Monetary Fund 40 years ago. Its value is based on a basket of “real” currencies — the dollar, the euro, and others.

And this is where it really gets squirrelly. A basket of currencies has a value based on the cumulative values of all the currencies in the basket. But that leaves the problem of weighting. Say you have a basket consisting of dollars, yen, euros, renminbi, zlotys, pounds and a few other currencies. How many of each will be in the basket? How will that be determined, and will that allocation always remain the same?

All forms of money are forms of debt, and all debt requires collateral. The collateral for the U.S. dollar is the full faith and credit of the U.S. government. What would be the collateral for a basket of currencies?

The basket of currencies is a complex, cockamamie solution to a non-problem — in short, a perfect “panel of experts” solution.

Zhou says the SDR could become a “widely accepted” means of payment in international trade and financial transactions. He also advocates creating financial assets denominated in SDRs. Such a move would, the argument goes, reduce the kind of “global imbalances” that contributed to the current economic crisis.

Chief among them are America’s huge current-account deficits and China’s equally huge surplus. China invested its surplus in massive purchases of U.S. treasuries, a factor blamed for contributing to low borrowing costs in America that fueled its housing bubble.

More gibberish. America’s current-account deficit merely means the U.S. imports more than it exports. Does the world really want America to import less? And China’s “massive purchases of U.S. treasuries” did not create low borrowing costs. It is the Fed, not the treasury market, that determines borrowing costs.

So the United States might even take a favorable view, says Vanessa Rossi, a senior research fellow in international economics at the Chatham House think tank in London. “Since they’ve complained so much about these problems about imbalances, and the flows of money associate with it, they might welcome some of the strain being taken off the dollar and the dollar markets in the future. Very immediately they might think that,” Rossi says.

“Imbalances,” “flows,” “strain,” blah, blah, blah. It’s all meaningless spouting, with no basis in reality. But I will allow that U.S. politicians might favor something ridiculous. They are good at that.

But Rossi says a new reserve currency would pose major challenges, and any move would be over the longer term. That’s because even if the idea picked up more steam, it’s likely to face huge technical, logistical, and political obstacles.

And it would clearly have negative implications for the dollar. Even those taking aim at the dollar wouldn’t welcome a sudden move, as this could trigger a sell-off of the dollar and erode the value of their holdings.

Perhaps explaining why Zhou said the establishment of a new reserve currency “may take a long time.”

Sergei Seninski of RFE/RL’s Russian Service contributed to this report

Yep — “huge technical, logistical and political obsticals — in addition to being foolish. Which probably is why it will remain a topic of discussion.

Bottom line: A reserve currency is just a convenience. It needn’t be an “official” reserve. The market naturally seeks a reserve just to make trading easier. In our ever-more computerized world, there very well may emerge a non-political currency — a currency of no specific nation.

But whatever emerges, let’s not give it more significance that it deserves. It’s just a convenience.

Rodger Malcolm Mitchell
Monetary Sovereignty


Nine Steps to Prosperity:
1. Eliminate FICA (Click here)
2. Medicare — parts A, B & D — for everyone
3. Send every American citizen an annual check for $5,000 or give every state $5,000 per capita (Click here)
4. Long-term nursing care for everyone
5. Free education (including post-grad) for everyone
6. Salary for attending school (Click here)
7. Eliminate corporate taxes
8. Increase the standard income tax deduction annually
9. Increase federal spending on the myriad initiatives that benefit America’s 99%

No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption – Net Imports


15 thoughts on “–Much ado about nothing. The end of the dollar as reserve currency

  1. Rodger,

    What about the term “petrodollar”? Meaning forcing some oil producers to accept USD and hold USD at gun point (U.S. military).

    If true then the “petrodollar” would help the U.S. Economy.

    Your thoughts on “petrodollar”?

    Mansoor H. Khan


    1. Don’t know much about it. As far as I knew, a petrodollar is just a dollar paid for oil to oil producing countries. Because oil is priced internationally in dollars, some oil producing countries prefer to be paid in dollars rather than in their own sovereign currency.


    2. Petrodollars are a myth.

      Oil is priced in dollars. As Mr states, it’s mere convinience in terms of pricing.

      Irrespective of that, tell me one country, one, that wants to have a reserve currency. Doesnt everyone want to devalue, MMTers love this, their currency to boost exports. Nobody wants it.


  2. But i thought the Fed dropped rates?

    How is that ‘controlling’ inflation?

    Fact is the credit market is so large the fed is a tiny ant waiving it’s arm around asking for attention.

    How about all the bad loans that were written off and the collapse in home prices removing access to credit and making previous ‘rich’ feel poor… could that be why we didnt have hyperinflation.

    There has been high inflation in food and gas anyway thanks to the fed attempting to control what he cant.


    1. The article is wrong from so many aspects, it’s hard to know where to begin — wrong from the standpoint of inflation, wrong from the standpoint of money creation, wrong from the standpoint of the deficit and debt. His “four solutions” are ludicrous, and his lending scenario is hilarious.

      He doesn’t have the vaguest concept of Monetary Sovereignty, and he thinks dollars are made of paper. Yikes!


      1. Rodger,

        Thank you for your comment.

        Yes. I agree the article is wrong on many aspects. But what about the main idea in the article which is that mid-east countries have agreed to buy u.s. debt securities in return for military protection from USA.

        Which in turn increases the demand for dollars (very significantly according to the author anyway).



  3. Rodger how do you explain what China is doing with Russia and the sale of oil? And what about how Iran is circumventing the embargo’s by the US by selling its oil to China since China is creating its own reserve currency?


  4. CJ,

    I don’t know enough about the internal, political workings of China, Russia and Iran. However, in general, countries act to benefit their richest, most powerful citizens.

    A Monetarily Sovereign nation benefits most when it imports, i.e. exchanges currency it creates freely, at no cost to itself, for valuable goods and services. So when, for instance, we import from China, we give them free dollars we create from thin air, and they give us valuable products.

    Who has the better of the deal? In essence, China is our slave, working and sweating to give us goods and services in exchange for nothing. Being, Monetarily Sovereign, China can create all the currency they need, and exchange it for all the dollars they want. They don’t have to export to us.

    They must understand this. So they must see the process as benefiting their richest, most powerful citizens, either financially or politically.

    Rodger Malcolm Mitchell


  5. Mitchel, I find your notion on “printing money won’t cause inflation” very misleading for unaware readers. Of course printing money will cause inflation, just look at Germany post-WWI. What doesn’t make inflation is the countermeasure alongside it, but when government is forced to tighten the money supply by restrictive monetary policy, the inflation is already there (on the policy-maker level), even tho it may or may not spread to the society. Let’s say if I print 200 USD and give it to a small economy that has only 200 USD, I will make inflation, unless I roundup all the 200 USD of old bills and burn them.

    Another idea I find flawed is your giant meteor analogy. If US were to disappear then China is also f#ed. The USD reserve as well as foreign debts of US held in Chinese hands could be exchanged for products and service from within US, that’s why it’s a debt: we have to give them valuable products in future for papers we printed out of thin air and received their valuable products for. China cannot make up for lost future service from outside China’s economy simply by printing more RMB without messing up their own economy.

    And finally an answer to you: “The collateral for the U.S. dollar is the full faith and credit of the U.S. government. What would be the collateral for a basket of currencies?”

    Now that is an extreme American-centric and from a worldly-perspective, uninformed comment. The reason why alternative reserve currency is being discussed in the first place is exactly because the low faith and questionable credit of the US government from folks living outside US. Conversely the collateral for a basket of currencies is simply the faith and credit of the combined governments whose currencies are in this basket, hoping they wont commit financial seppuku all at once and the collective rise and fall of those currencies would buffer against drastic changes. That’s why in this basket you won’t see much zloty but more EUR, CNY or CHF. Having said that, weighting is also not super-complicated since you weigh against the collateral of each currency.


    1. My prayer in life is that one day, people who know nothing about the Weimar hyperinflation, will stop using that event from more than 90 years ago, to “prove” deficit spending causes inflation.

      Perhaps they will move forward to the year 2009 and thereafter, when deficit spending cured the worst recession since the Great Depression — and did not cause inflation — at least not an inflation that exceeded federal goals.

      Now, after trillions of dollars in that deficit spending, inflation is close to zero. Not exactly Weimar, is it?

      I won’t go into all the details about why Weimar had no similarity to the U.S. other than to give you one hint: Weimar’s debt was in gold. The U.S. debt is in dollars. They ran out of gold. The U.S. cannot run out of dollars.

      You can do the rest of the research yourself.

      The formula for inflation is:
      Inflation = Demand / Supply.

      You apparently think the formula is: Inflation = Supply

      When you speak of U.S.’s “questionable credit,” is it your belief that the U.S. will not be able to pay its bills? Since that never has happened in our history, through wars, recessions, depressions and stagflations, what data do you have that it is about to happen now?

      The collateral for a basket of currencies is the credit of each nation, whose currency is in that basket. So, if any one of those nations is unable to pay its bills, the value of the basket goes down.

      I, for one, would prefer to rely on the U.S. government’s ability to pay its bills, than to rely on the credit of the EU and other nations.

      But really, what does it all matter. Do you really believe other nations are about to stop selling to America? It is functionally impossible for the U.S. to go bankrupt, so what is the problem?


      1. So out of the 3 points I brought up we got 2 disagreements here. ASAIK the general consensus of inflation is “long sustained period of inflation is caused by money supply growing faster than the rate of economic growth” according to Ben Bernanke’s textbooks. Printing money is definitely a way to increase money supply even tho there are other factors at hand to counter. Of course printing money will NOT ALWAYS lead to inflation, such as in recession where economy has much unused spare capacity. But your idea comes off to many readers as “printing money NEVER leads to inflation”, which definitely isn’t true.

        If you tried to hint a fiat currency in a monetary sovereign nation can be printed without worry of inflation then there are historical counterexamples. One is Song dynasty in Imperial China where paper money (fiat currency) was used. During Mongol Yuan dynasty more was printed to finance wars and resulted in massive inflation, so bad it led to a revolution that overthrew the Mongols. Furthermore the worst inflation in history was not in Weimar Germany but Hungary post WW2. Since production fell during the war and there was no tax base to rely upon, Hungarian government flooded the society with printed money while the nations output lagged behind. The result was worst hyperinflation ever recorded.

        Do you think “questionable credit” means government not paying bills at all or not paying bills on time? If it’s the latter case then we both know how close our US govt has been there. If a collective basket exists then USD will definitely be among them. It works also under the notion that even if one suddenly decrease significantly other currencies might have gone up to balance that. It’s the same logic for stockbrokers who make multiple investments than just one. Again it’s nothing about “stop selling” to America, but rather how many baskets you wanna have your eggs in. As we know credit is all about perception, the fact is the world is moving towards a multi-polar power structure where we Americans can no longer ignore the other powers as we did. If someone is very American-centric in the mind then it’s impossible to imagine why citizens of other countries are thinking otherwise. This is something we may agree to disagree.


  6. Max, as always, I have no idea what your point is.

    The words, “NEVER leads to inflation,” are your misunderstanding.

    As stated many, many, MANY times on this blog: “The only limit to federal deficit spending is an inflation that can’t be cured with interest rate control.” So far, the U.S. never has had such an inflation.

    Now that I have shown you how the Weimar situation is not similar to America’s, you turn to the Song dynasty (the Song dynasty???) and Hungary. What next? Zimbabwe and Argentina?

    I don’t know about Song, but Hungary had no real government, and that combined with the wartime destruction of its infrastructure, gave it no powers to control inflation, nor to purchase its needs.

    Does that sound like the United States?

    Merely reciting a list of nations that have had hyper-inflations proves nothing about the U.S. Each hyperinflation had very specific causes, and none of them were money “printing.” Money creation was only a symptom of a deeper, underlying cause.

    Saying that money creation causes hyper-inflation is like saying that a temperature causes the flu.

    As for your last paragraph, the post already dismisses the notion that losing the world’s reserve currency is some great tragedy. Every nation on earth, but the U.S., does not have the world’s reserve currency. So what? Are they all suffering for it?


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