What would the impact of the dollar losing reserve status be?

[c1ue]

Some food for thought - another angle into the iTulip concept of there already being enough dollars abroad:

1) US part of world trade is under 20%: 12.3% export and 18.9% import in 2002

2) US dollars comprise 68% of world CB reserves

http://www.atimes.com/global-econ/DD11Dj01.html

Of which these reserves totaled $1.5T in 2002 and $3.75T in 2008

http://ustreas.gov/offices/international-affairs/economic-exchange-rates/pdf/Appendix%201.pdf

Total world trade in 2006: $14.47T of which $11.76T is in merchandise

http://www.wto.org/english/news_e/pres07_e/pr472_e.htm

So there's $12T in trade, $3.5T in world dollar reserves, and somewhere around $1.5T to $2T in US trade.

The extra has been the free ride America has enjoyed - and continues to enjoy.

Should the trade amount in dollar change - i.e. if 3/4s of world trade is in dollars and this number goes to 20% - then something like $6T would have to find a home.

Should the CB reserves decline in relation to trade, similarly $2T or more would have to find a home.

What does this mean?

http://www.federalreserve.gov/releases/h6/current/

M1 presently is $1.6T.

M2 presently is $8.2T.

Even without the actual hundreds of billions/trillions which has been printed already, there are more than enough dollars available from shifts in world trade and/or currency reserves to double dollars in effective circulation in the US itself.

Comments?

[jk]

I don’t see the dollar suddenly ceasing to be a reserve currency. There will instead be a period of currency chaos and bilateral and regional agreements. China’s recent agreement with brazil to allow trade in yuan and reals is a harbinger.

Meanwhile, we have to remember that a severe dollar devaluation is likely to be part of the process by which the dollar is dethroned.

Suppose the value of the dollar is cut in half overnight.

Then world trade would total $24T [nominally] while dollar reserves would still be only $3.75T. instead of being 68% of the value of total reserves, it would be [(68/2)/(34+32)]= 51.5% of reserves. Interesting that dollars would still be such a large percentage, but of course the value of total reserves has dropped sharply [34%] under this assumption.

u.s. imports would drop while exports rose, perhaps even creating a surplus. For argument’s sake, let’s say that from its current value of $1.5-2T, the halving of the dollar would raise exports and lower imports to a nominal $3.5T, i.e. we’ve dropped imports to match the level of exports, with a bit of growth for exports.

Although an increasing share of trade would be done in other currencies, I suspect that even under these assumptions the dollar would survive as the unit of exchange. The only alternative I see right now is a commodity basket based accounting.

[FRED]

Even without the actual hundreds of billions/trillions which has been printed already, there are more than enough dollars available from shifts in world trade and/or currency reserves to double dollars in effective circulation in the US itself.

Comments?

That is the essence of Ka-Poom Theory (http://www.itulip.com/kapoomtheory.htm).

Question? The trigger:
A) Post credit bubble debt monetization?
B) Peak Cheap Oil?
C) War?
D) All of the above.

[jk]

That is the essence of Ka-Poom Theory (http://www.itulip.com/kapoomtheory.htm).

Question? The trigger:A) Post credit bubble debt monetization?
B) Peak Cheap Oil?
C) War?
D) All of the above.

america's bankers will follow the 2 maxims of bankers everywhere:

1. don't panic
2. if you're going to panic, be the first to panic.

some holder of u.s. dollar assets will defect from the prisoners' dilemma of economic mutual assured destruction.

there are two mechanisms by which a dollar devaluation affects an exporting dollar-accumulator. one is by reducing its exports, the other by devaluing its capital account. currency manipulators have made clear that the former - implicitly their economic development- is the more important consideration. as american imports lag, this consideration ceases to matter.

then you have a classic prisoners' dilemma, as dollar holders agree to make believe their dollars are still valuable, until one of them - quietly- doesn't.

meanwhile china is quietly shopping for natural resources all around the globe, and oil is above $60. we don't know which country will try to quietly dispose of its treasuries first, but it will happen.

[cjppjc]

america's bankers will follow the 2 maxims of bankers everywhere:

1. don't panic
2. if you're going to panic, be the first to panic.



Funny stuff. Thanks for that.:)

[c1ue]

JK,

I think you are missing the point a little bit.

What I was trying to illustrate was that a significant part of world trade is denominated in dollars, but does not involve the US.

Should the amount of dollars denominating world trade fall to the actual amount of US related trade, there would be a massive oversupply of unused dollars.

While I absolutely agree that such changes tend not to be rapid - on the other hand any trade which does not involve the US has zero reason to remain in US dollars. The only reason it is in US$ to begin with is due to past US$ stability; by inference the main reason these trades will switch is due to US$ instability. And we're seeing lots of that recently.

The slight twist on the iTulip thesis - correct me if I am wrong - is that the dollars I refer to here are the ones being used in trade as opposed to held by CBs. Certainly there is a relationship between the two, but equally similarly they are not the same.

As an example I refer to Russia in the past 6 months.

Starting in October, there was a massive capital flight from Russia as part of the world deleveraging phase 1. Approximately $400B fled the nation - a big chunk of circulating currency. This caused a 50% fall in the ruble vs. dollar even with the CBR spending $100B+ fighting it.

The China-Brazil/Malaysia/Argentina/South Korea swaps are slightly different: in this case China is providing both a temporary backstop for switchoff from the dollar but more importantly is providing dollars to the partner nation for that nations own needs, as well as dumping off some of China's hoard.

The point being - China is in some sense disintermediating the US from its own currency in the trade realm.

This is possibly completely irrelevant but it is interesting to note that China could be a better source of hard dollars than the US.

[jk]

c1ue, i agree with your observation that china's bilateral agreements disintermediate the dollar. i think this kind of incremental change will become increasingly common. in this way foreign cb's will diversify their holdings. e.g. the cb of brazil will end up holding some yuan. but that doesn't constitute the dollar losing its reserve status. the dollar will still be held, but gradually diminish in its importance. the thing that would hasten the dollar's loss of status is the kind of currency event i described above- a defection by a major dollar holder followed by a rush for the exits.

the gradual disintermediation, otoh, will indeed free up some dollar reserves around the world, as you say. and that will hasten the dollar's inflationary loss of value.