Sunday, September 21, 2014

The Counter-Intuitive Rise of the U.S. Dollar

As things get dicier globally, assets in periphery nations typically get dumped as mobile capital flees risk and migrates to lower risk core nations and currencies.


I received many thoughtful comments on Why the Dollar May Remain Strong For Longer Than We Think. Given the many weaknesses of the U.S.--ballooning social-welfare and crony-capitalist liabilities, free money for financiers monetary policies, etc.--a strengthening dollar (USD) strikes many as counter-intuitive.

The dynamic complexities of fiscal and monetary policies, global capital flows and the foreign exchange (FX) market complicate any inquiry, so I try to keep it simple.

In my view, the USD serves both transactional (global trade) markets and the global need for currency reserves (i.e. as a store-of-value). Sorting out the various influences on its relative value in each capacity is complex enough, but there is also the X Factor--the hard-to-quantify components of any currency's relative value.

For the USD, the X Factor is hegemony, which includes financial dominance based on debt issued/denominated in USD and what might be called the real-world assets of the issuing nation: that nation's food, energy and water security (what I call the FEW resources), its proximity to potential enemies, its external environmental costs, its overseas financial assets, the strength of its legal system in protecting private assets,its demographic profile and of course its ability to project power to defend its interests.

By these basic measures, the U.S. scores pretty well. We can get some perspective on this by putting ourselves in the shoes of wealthy people in periphery nations where the risks of capital controls, currency devaluation, etc. are perceived to be high, or in the shoes of corrupt elites in countries where they fear their ill-gotten gains might not survive blowback (hence the almost universal desire of elites to leave China with their loot).

The strength of the USD is attractive to at-risk capital, even if transferring at-risk wealth into dollars requires a significant foreign-exchange haircut. Better to preserve 75% of your wealth in USD than leave it exposed to confiscation, capital control, etc. This is the basic flight-to-safety mechanism.

Ubiquity also counts. The USD is the proxy global currency. A $100 USD bill is recognized as money virtually everywhere. If you're stranded just about anywhere, USD will buy you food, transport, official "assistance" via bribes, etc. No other paper currency is even close to ubiquity/recognition. (Clean, crisp $100 USD bills are recommended--dirty crumpled bills are not highly esteemed.)

It's also critical to look at the relative scale of the money-printing that erodes the value of currencies: -China's credit expansion is much larger as a percentage of its economy and financial system than the Fed's money-printing as a percentage of the U.S. financial system.

Then there's the scramble-for-yield issue: imagine you're managing $10 billion. You need to preserve this wealth but you also need to earn a yield, or you'll be fired at the end of the quarter. Since FX (foreign exchange) is a much larger market than stocks or bonds, you're highly attuned to FX so you don't get blindsided by a shift in FX that wipes out your yield. You might wisely build an "insurance" position in precious metals, but because you need yield then you have exposure to bonds, stocks and as a result, FX.

As things get dicier globally, assets in periphery nations typically get dumped as mobile capital flees risk and migrates to lower risk core nations and currencies.

For money managers, the USD is an FX safe haven--especially since the capital flowing out of the riskier periphery pushes the USD higher. This makes for a secondary yield--as the USD rises, any asset denominated in USD will gain in relative value. So there's a self-reinforcing feedback loop: as the USD value rises, it attracts more of the money fleeing risk.

In a way, the USD acts as a currency equivalent of the English language. There are many languages and many currencies, but at present the indispensable language/currency in the global economy is English/USD.

How can we summarize this discussion?

1. FX is the "master market" of the global financial system.

2. The flow of mobile capital out of the periphery into the core will turn into a flood as global risks rise.

Both of these conditions favor the USD.



Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)
go to Kindle editionAre you like me? Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible.


And like most of you, the way I've moved toward my goal has always hinged not just on having a job but a career.
You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.

Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers.

So I sat down and wrote this book: Get a Job, Build a Real Career and Defy a Bewildering Economy.

It details everything I've verified about employment and the economy, and lays out an action plan to get you employed.

I am proud of this book. It is the culmination of both my practical work experiences and my financial analysis, and it is a useful, practical, and clarifying read.

Test drive the first section and see for yourself.     Kindle, $9.95     print, $20

"I want to thank you for creating your book Get a Job, Build a Real Career and Defy a Bewildering Economy. It is rare to find a person with a mind like yours, who can take a holistic systems view of things without being captured by specific perspectives or agendas. Your contribution to humanity is much appreciated."
Laura Y.

Gordon Long and I discuss The New Nature of Work: Jobs, Occupations & Careers(25 minutes, YouTube) 




NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, John S.P. ($50), for yet another extraordinarily generous contribution to this site-- I am greatly honored by your steadfast support and readership.

Read more...

Saturday, September 20, 2014

Are We Ready for Daily-Life Drones?

This exploration illustrates how ill-prepared we are, legally and socially, for the multitude of issues and conflicts that will inevitably arise as private drones become cheap and ubiquitous.

A recent experience provided grist for a "what-if" exploration of how drones may start impacting daily life. And I don't mean delivery of packages and pizzas.

On the return drive of a trip north in summer, we were stopped for over an hour on Highway 101 by a helicopter that had landed in the middle of the four-lane highway to airlift people injured in an accident.

Since the line of stopped cars extended over a bridge and around a curve for at least a quarter-mile, we couldn't see the cause of the blockage. 

As a result, I walked all the way to the front of the line to see what was going on. Another passenger from one of the hundreds of waiting vehicles joined me and we questioned people close to the front to learn what had happened.

Apparently a car had swerved off the highway and careened down a steep, forested embankment. Several tow trucks were attempting to pull the vehicle up to the roadway with little evident success while local rescue personnel were attempting to get the injured people up to the helicopter on stretchers.

Our return to our cars was leisurely, as we stopped to brief people waiting in vehicles who had not walked to the scene. One local driver told me there was a bypass road, but he suspected it too had been blocked by the California Highway Patrol (CHP).

A radio station news employee happened to be stuck behind us, and in chatting with her we discovered her contact in the news department had been unable to get any information out of the CHP.

When the helicopter finally lifted off and traffic crawled forward, our brother-in-law Fred R. speculated how this scene would be changed by the ubiquity of personal drones.

For those who haven't seen such drones in action yet--they are small enough to fit in the trunk of a car and generally have three rotors, which enable them to move freely in all directions and hover for extended periods.

Here are some of the scenarios we foresaw playing out once having a drone in one's vehicle becomes common:

1. An attorney with a super-fast drone could race ahead of other drones, reach the scene of the accident first, record the rescue operation with an onboard camera and assess the liability issues in real time; if a legal opportunity was present, the attorney could upload the recording to associates and be "firstest with the mostest" in a legal claim.

2. A free-lance stringer with a connection to a news organization would navigate his/her drone to the accident site and record close-ups of the victims, rescue personnel at work, etc., and then upload the recording to a news bureau that would have an exclusive ("if it bleeds, it leads").

3. A techie with a drone equipped with a powerful wi-fi router could hover the drone above the scene and send the video to anyone with a wi-fi-enabled device, eliminating the need for dozens of drones to compete for airspace.

4. The CHP could ban drones from hovering over or near accident sites, except for officially sanctioned drones from government agencies and vetted news agencies.

5. Someone stuck in the traffic blockage could send their drone high enough to scope out alternative routes and zoom in to see if they were blocked, jammed or free of vehicles.

6. One of the mass of circling private drones malfunctions and crashes into another drone, causing it to crash on a rescuer, inflicting injuries. The liability thread runs in various directions: can the manufacturer of the malfunctioning drone be sued, along with its operator?

7. Frustrated by the delay and the lack of official drones/sources of information, someone breaks the law by flying their drone over the accident scene. the CHP wants to issue a citation, but how can they trace the drone to the owner if the operator is clever enough not to return the drone to his vehicle straightaway?

8. A badly injured victim of the wreck finds that graphic close-up recordings of their injuries have been shown on TV, and sues the station and stringer for invasion of privacy. Are there any limits on what private drones can record in public spaces?

This brief list shows how ill-prepared we are, legally and socially, for the multitude of issues and potential conflicts that will inevitably arise as private drones become cheap and ubiquitous.

For example: If ownership of a drone can be obscured, then how can liability be traced back to the owner/operator? Will drones be required to send the equivalent of a mobile-phone ID code or IP address? What if the owner switches this signal off? Will downing a drone invading one's privacy create liability? If so, does this trump the liability for violating privacy? How can regulations about drones possibly be enforced, much less monitored?


This essay was drawn from Musings Report 28. The weekly Musings Reports are emailed exclusively to subscribers and major contributors. 



Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)
go to Kindle edition
Are you like me? Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible.


And like most of you, the way I've moved toward my goal has always hinged not just on having a job but a career.
You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.

Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers.

So I sat down and wrote this book: Get a Job, Build a Real Career and Defy a Bewildering Economy.

It details everything I've verified about employment and the economy, and lays out an action plan to get you employed.

I am proud of this book. It is the culmination of both my practical work experiences and my financial analysis, and it is a useful, practical, and clarifying read.

Test drive the first section and see for yourself.     Kindle, $9.95     print, $20

"I want to thank you for creating your book Get a Job, Build a Real Career and Defy a Bewildering Economy. It is rare to find a person with a mind like yours, who can take a holistic systems view of things without being captured by specific perspectives or agendas. Your contribution to humanity is much appreciated."
Laura Y.


Gordon Long and I discuss The New Nature of Work: Jobs, Occupations & Careers(25 minutes, YouTube) 


NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, G. Wayne A. ($20), for yet another exceedingly generous contribution to this site-- I am greatly honored by your steadfast support and readership.

Read more...

Thursday, September 18, 2014

My Sexploitation Foray: Bare Naked Breasts Galore!

It's widely assumed that sex sells. Let's test that received wisdom.


Let's stipulate that there's nothing prurient about clicking on links that display the bare breasts of celebrities. It's practically necessary to view the celebrity breasts, just so you're informed enough not to feel left out of water cooler chatter on the topic.

Let's also stipulate that there's nothing prurient about clicking on links that display the bare breasts of non-celebrities. It's a perfectly natural curiosity, after all, that leads us to click on links announcing Bare Naked Breasts Galore! Furthermore, a lively interest in sex is a sign of a healthy libido.

And besides--we're all consenting adults--(or teens who clicked "I verify that I'm 18 years of age or older"). What we choose to look at in our spare time is our business, and only our business.

Why should we feel guilty about the pleasures of Bare Naked Breasts Galore? Why everyone in the U.S. makes such a big deal about bare breasts is altogether peculiar, given that TV adverts in many European countries sport youthful, vivacious females sans blouses.

And while we're on the subject--if you don't want anyone to see your bare breasts, perhaps you shouldn't take a selfie of your bared breasts and post it on the cloud or a server that's just begging to be hacked.

In other words, if you take a selfie of your bare naked breasts, than aren't you implicitly asking everyone to view your physical endowments?

There's something a wee bit hypocritical about taking risque selfies of your bared breasts, posting them somewhere on the cloud or Web and then feigning outrage that somebody poking around the cloud or web happens upon your photos that beg please post me publicly.

Of course the editorial board here at Of Two Minds has high artistic and cultural values. We wouldn't lower ourselves to post just any Bare Naked Breasts Galore. We have selected a very tasteful set of Bare Naked Breasts Galore for your refined, artistic enjoyment of the human body's delightful curves and nuances.

Did I hear just show us the bare breasts already?. OK, I promised you Bare Naked Breasts Galore, and here they are:

Cue the cool jazz...

At last--yes--bare--naked--breasts--galore--


OK, so these are 60-year old male breasts, but they are bare and naked, so you got precisely what was advertised. Here are the vital statistics of our model:

Name: Charles Hugh Smth
age: 60
weight: 170 pounds (77 kilos)
BMI (body mass index): 21.8
waist: 32 inches

So why not toss the model a few bucks to support his writing? He's clearly at the top of his game.



Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)
go to Kindle editionAre you like me? Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible.


And like most of you, the way I've moved toward my goal has always hinged not just on having a job but a career.

You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.

Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers.

So I sat down and wrote this book: Get a Job, Build a Real Career and Defy a Bewildering Economy.

It details everything I've verified about employment and the economy, and lays out an action plan to get you employed.

I am proud of this book. It is the culmination of both my practical work experiences and my financial analysis, and it is a useful, practical, and clarifying read.

Test drive the first section and see for yourself.     Kindle, $9.95     print, $20

"I want to thank you for creating your book Get a Job, Build a Real Career and Defy a Bewildering Economy. It is rare to find a person with a mind like yours, who can take a holistic systems view of things without being captured by specific perspectives or agendas. Your contribution to humanity is much appreciated."
Laura Y.

Gordon Long and I discuss The New Nature of Work: Jobs, Occupations & Careers(25 minutes, YouTube) 




NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, Karl L. ($100), for yet another outrageously generous contribution to this site-- I am greatly honored by your steadfast support and readership.

Read more...

Wednesday, September 17, 2014

Which Global Hegemon Is on Shifting Sands?

Given that all the leading candidates for Global Hegemon are hastening down paths of self-destruction, perhaps there will be no global hegemon dominating the 21st century.


Which nation with aspirations of global dominance (i.e. hegemony) has these attributes?

1. The nation's recent prosperity is based on a vast expansion of credit.

2. The nation has 100+ million obese/diabetic citizens.

3. The citizens have little say over central government policies that favor cronies.

4. The nation faces demographic headwinds as the number of people in the workforce declines and the number of retirees balloons.

5. Large regions of the nation suffer from chronic water shortages.

Hmm, sounds like the U.S. is a match so far.... Let's add a few more attributes:

6. The nation's credit expansion has relied on a largely unregulated shadow banking system.
7. The nation is in the midst of an unprecedented housing bubble.

This could still be the U.S., but America's unprecedented housing bubble popped in 2006--the current bubble is a mere echo bubble. Let's add a few more attributes:

8. The nation is beset with unprecedented "external" environmental costs as a result of rapid and largely unregulated industrialization.

9. The nation suffers from large-scale desertification.

10. Over half the nation's monied Elites have either left the nation or plan to leave and transfer their financial wealth overseas.

The only nation with aspirations of global hegemony that fits all these attributes is China. The conventional China Story holds that the 21st century will be China's century, much like the 20th century was America's.

But this story overlooks the vast demographic, health, environmental and financial problems built into China's land, people, and Central-Planning systems of finance and governance.

Consider two charts drawn from John Hampson's recent overview of Problems in China:
China's shadow banking system, which provided the majority of the credit that fueled the current expansion, is imploding:


Not coincidentally, China's unprecedented housing bubble is also imploding:


China's system allows only a limited number of options for savings and investment; other than bank accounts that have lost money when real inflation is accounted for, the primary option available to households is real estate. As a consequence, an enormous percentage of the nation's household wealth has been sunk into empty apartments which act as "savings."

But a physical flat in a high-rise building is not a financial asset like a savings account: it is a physical object that degrades with time and whose value is set by supply, demand and thr availability and cost of credit.

If the building is not maintained properly, elevators break down, pipes start leaking and fixtures corrode, and the value of an unmaintained building drops to zero in terms of habitability within a decade or so.

100 million apartments become an enormous mal-investment of one-time wealth as they slowly become uninhabitable due to poor construction and/or maintenance.

China has been building infrastructure at a break-neck pace for 30 years, and this has created the mindset that almost every structure will be torn down and replaced with something grander every 20 years or so.

As a result of this mindset, very few structures are maintained. Why bother if it will be torn down and replaced a few years down the road?

But tens of millions of apartments cannot replaced every decade or two.

In effect, China has squandered its one-time wealth generated by rapid industrialization, and absorbed the still-uncounted environmental and health costs of this industrialization that must be paid in shortened lives, higher healthcare costs and environmental cleanups for decades to come.

Few promoters of the China Hegemony-in-the-21st-century Story mention the estimated 114 million people in China with diabetes--over one third the population of the U.S.-- or the roughly 500 million people in China with elevated blood-sugar levels that put them at risk of developing diabetes or related lifestyle diseases. China ‘Catastrophe’ Hits 114 Million as Diabetes Spreads.

How much of the nation's surplus wealth will be devoted to fixing the environmental and health costs that are already visible? How much of the wealth is actually phantom wealththat will vanish as the housing bubble based on an unprecedented credit bubble pops?

The China Story based on demographics, health, environmental damage and financial Central Planning is a quite different one from the China will be the global hegemon in the 21st century story. Given that all the leading candidates for Global Hegemon are hastening down paths of self-destruction, perhaps there will be no global hegemon dominating the 21st century.



Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)
go to Kindle editionAre you like me? Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible.


And like most of you, the way I've moved toward my goal has always hinged not just on having a job but a career.


You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.


Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers.


So I sat down and wrote this book: Get a Job, Build a Real Career and Defy a Bewildering Economy.


It details everything I've verified about employment and the economy, and lays out an action plan to get you employed.


I am proud of this book. It is the culmination of both my practical work experiences and my financial analysis, and it is a useful, practical, and clarifying read.


Test drive the first section and see for yourself.     Kindle, $9.95     print, $20


"I want to thank you for creating your book Get a Job, Build a Real Career and Defy a Bewildering Economy. It is rare to find a person with a mind like yours, who can take a holistic systems view of things without being captured by specific perspectives or agendas. Your contribution to humanity is much appreciated."
Laura Y.

Gordon Long and I discuss The New Nature of Work: Jobs, Occupations & Careers(25 minutes, YouTube) 




NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, Alexis V. ($10), for your fantastically generous re-subscription to this site-- I am greatly honored by your steadfast support and readership.

Read more...

Tuesday, September 16, 2014

Why the Dollar May Remain Strong For Longer Than We Think

For those understandably disgusted by the reckless expansion of the US money supply over the past six years, it's vitally important to remember that the road to our monetary endgame is not a straight line, nor necessarily intuitive.


I have long been a dollar bull, not for any over-arching reasons based on inflation, deflation, rising geopolitical multi-polarity or any of the other issues that touch on the dollar’s valuation vis-à-vis other currencies. My analysis focuses on a few basics:  the dollar’s status as the global reserve currency, Triffin’s Paradox (a.k.a. Triffin’s Dilemma) and global capital flows into the dollar and dollar-denominated assets such as U.S. Treasury bonds.

Reserve Currencies vs. Trading Currencies

When we say the U.S. dollar is the global reserve currency, what does that mean?  There is often some confusion about the difference between a trading currencyand a reserve currency.  Let’s use an example to explain the difference.

Country A trades $10 billion of goods and services with Country B, which does $10.01 billion of trade with Country A.  The two nations agree to a trade pact that enables the two nations to trade currencies directly, that is, without converting the payments for trade into a third currency such as the dollar.

Once the bilateral trade is settled, a modest $10 million remains as a surplus/trade deficit.  The owner of the surplus (Country B, in this example) can trade that excess currency on the global foreign exchange (FX) market, use it to buy goods or services, or hold it. The modest $10 million is a tiny slice of the two trading nations’ money stock and gross domestic products (GDP), and it has little effect on either global or domestic finance. The $10 million is a small claim against the currency of the nation running the trade deficit (Country A, in this case).

The main takeaway is that billions of dollars of trade transactions may yield very little surplus/deficit.

Trading currencies are examples of the transactional nature of money: money enables transactions.

reserve currency, on the other hand, is an example of money as a store of value: nations hold reserve currencies as stores of value that can be sold to support their own currency if the need arises.

A reserve currency is quite different from a trading currency an it must meet these minimum requirements to function as a reserve currency:

1. It must be liquid - that is, it can be readily bought and sold on the global foreign exchange market in size, i.e. large quantities, without affecting the value of the currency;

2.  Its value must be relatively stable - that is, it trades in a narrow range with other currencies, and

3.  Its value is set by supply and demand - i.e. capital flows and market forces, rather than an arbitrary peg.

Many observers greet the announcement of recent bilateral or multi-lateral currency agreements as evidence the U.S. dollar is weakening.  But this is mixing apples and oranges: the U.S. doesn't gain much by issuing a currency that serves transactional needs — it offers no profit to the U.S. if trade between other nations is conducted in yen, renminbi, euros or quatloos.

The demand for transactional currency is temporary. Transact the trade, and then the cash moves on to the next transaction.

The demand for reserve currency is not transactional. A nation that wants to build reserves must acquire the reserve currency and hold it.

Nations that issue reserve currencies must issue enough of their currency to satisfy the global demand for reserves, and the only way to do this is run substantial *and* permanent trade deficits.

Triffin’s Paradox/Dilemma

This brings us to Triffin’s Paradox, which has two basic parts:

1.  Any nation that issues the reserve currency must run a trade deficit to supply the world with surplus currency to hold in reserve and as a result,

2.  The issuing nation faces the paradox that the needs of global trading community are generally different from the needs of domestic policy makers.

The global trading community requires that the issuer of the reserve currency run trade deficits large enough to satisfy the demand for reserves, while domestic audiences want a strong export sector, i.e. a trade surplus.

You can’t have it both ways: if you want to issue a reserve currency, you have to run a trade deficit that is commensurate in size with the global demand for your currency.

Since supply and demand set price, this push-pull affects the value of the U.S. dollar: U.S. exporters want a weak dollar to spur foreign demand for their products, while foreign holders of the USD want a strong dollar that holds its value/purchasing power.

It is impossible for any nation to maintain the reserve currency and run trade surpluses. If you run trade surpluses, you cannot supply the global economy with the currency it needs for reserves, payment of debt denominated in the reserve currency and domestic credit expansion.

Why Hold Reserves?

Why do countries need reserves in the first place?  The answer can get complicated, but the basic dynamic is supply and demand: if Nation A prints vast quantities of its own currency (let’s call it the quatloo) and uses the cash to buy goods and services without creating an equivalent amount of goods and services to sell to other nations, it will run a large trade deficit.

The supply of quatloos will soon exceed the demand: everybody who accepted freshly printed quatloos for their exports wants to trade them for goods or unload them as soon as possible. As a result, the value of quatloos on the global FX market falls, and Nation A is in danger of plunging into a currency crisis: as the value of the quatloo declines, the price of imports rises within Nation A, and soon people can no longer afford imports from other nations—for example, grain and oil.

One way Nation A can support the value of its quatloos is to sell its reserve currency and use the cash to buy quatloos, soaking up the excess supply that is depressing the quatloo’s value. So currency reserves act as a stabilizing anchor for the nation’s own currency.

There is another often-overlooked role for currency reserves: they act as the asset base for the expansion of credit within the domestic economy. A central bank with substantial reserves can issue credit in the domestic currency commensurate with its holdings of assets such as gold or currency reserves.

The Supply and Demand for Dollars

There are number of reasons why nations might choose to buy or sell U.S. dollars, or assets denominated in dollars such as Treasury bonds. Let’s start by noting that the dollar is not the only reserve currency; the USD is roughly 62% of global currency reserves, the euro is about 25% and other currencies make up the balance.


Nations might sell dollars and buy another reserve currency to diversify their holdings, hedge against a decline in the dollar relative to other reserve currencies, or perhaps as a form of geopolitical weapon or protest against American hegemony or specific policies.

Much has been made of global capital leaving U.S. Treasury bonds. Yet if we glance at a chart of foreign holdings of Treasuries, we note that foreign owners have steadily increased their holdings of Treasuries, other than a shallow dip in 2013:

For years, observers have seen the massive Treasury holdings of China as a potential financial weapon: if China were to dump a trillion dollars of Treasuries, that sale would disrupt the global market for U.S. bonds. (I have always held the Fed could issue a fresh $1 trillion and buy the lot in one fell swoop.)

But interestingly, we find instead that China’s holdings of Treasuries have been relatively stable recently, at around 20% of total foreign-owned Treasury bonds:

The discussion of major foreign holders of Treasury Securities, i.e. foreign states and central banks, often overlooks one key driver of this trade: states seeking to weaken their own currency to boost their exports sell their own currency and buy U.S. dollars (or dollar-denominated assets such as Treasuries). This increases the supply of their own currency, pushing the value lower, while the increased demand for dollars pushes the value of USD higher.

In terms of foreign trade, this weakens the currency of the buyer of Treasuries in relation to the dollar.

In other words, major holders of U.S. Treasuries such as China and Japan have an over-riding incentive to keep buying Treasuries: buying dollars stabilizes or weakens their currency vis-a-vis the U.S. dollar, making their goods and services cheaper in the U.S. and thereby boosting their exports.

There are two other reasons nations might buy dollars: the dollar is available in size, unlike smaller currencies such as the Swiss franc, and it is widely viewed as a proxy of U.S. economic, military and diplomatic stability: in other words, in periods of crisis, the dollar is widely viewed as a safe haven currency.

Conclusion

We now have a basic understanding of the forces of supply and demand for the dollar as a reserve currency: nations buy dollars as reserves, and also to weaken or stabilize the value of their own currency against the dollar, a strategy designed to boost their exports to the U.S.

On the supply side, the U.S. issues a surplus of dollars for others to use as reserves by running a trade deficit. Should that deficit shrink, the supply of dollars will also shrink.

In Part 2: Why The US Dollar Could Strengthen - A Lot From Here we analyze the surprisingly likely drivers that may keep the US dollar strengthening over the next few years, especially if another economic/financial crisis arrives. While there are many reasons to fear for the longer term viability of the US dollar given America's current misguided monetary policy and exponentially increasing debt & liabilities, the next few years could well see it appreciate further by 50-100% relative to the world's other major fiat currencies.

For those understandably disgusted by the reckless expansion of the US money supply over the past six years, it's vitally important to remember that the road to our monetary endgame is not a straight line, nor necessarily intuitive. To have the best chance of remaining solvent, understanding the likeliest pathways the route will take is often nearly as important as correctly predicting the final destination. 

Click here to read Part 2 of this report (free executive summary, enrollment required for full access)




Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)
go to Kindle editionAre you like me? Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible.


And like most of you, the way I've moved toward my goal has always hinged not just on having a job but a career.

You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.

Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers.

It details everything I've verified about employment and the economy, and lays out an action plan to get you employed.

I am proud of this book. It is the culmination of both my practical work experiences and my financial analysis, and it is a useful, practical, and clarifying read.

"I want to thank you for creating your book Get a Job, Build a Real Career and Defy a Bewildering Economy. It is rare to find a person with a mind like yours, who can take a holistic systems view of things without being captured by specific perspectives or agendas. Your contribution to humanity is much appreciated."
Laura Y.

Gordon Long and I discuss The New Nature of Work: Jobs, Occupations & Careers(25 minutes, YouTube) 




NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
Thank you, Jeffrey W. ($200), for your beyond-outrageously generous contribution to this site -- I am greatly honored by your steadfast support and readership.Thank you, Daniel E. ($4), for yet another most generous contribution to this site -- I am greatly honored by your steadfast support and readership.

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