I understand that the USD has become the defacto reserve and trade currency in the world post WW2, and that people put importance in this fact.
Isnt any currency traded therefore establishing values and liquidity, thus it doesnt really matter in what currency trade or reserves are undertaken?
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As the reserve currency, the US government gets some extra benefits such as being able to borrow at low interest rates because it’s seen as a safe investment and being less susceptible to runs on the currency.
As the reserve currency, the US government gets some extra benefits such as being able to borrow at low interest rates because it’s seen as a safe investment and being less susceptible to runs on the currency.
Being the de-facto world reserve currency gives a lot of power to US institutions. It’s easy for the US to borrow money, and much of the worlds trade is conducted in US dollars.
Another big advantage is that it makes it a lot easier for the US to impose sanctions on other countries.
This may be one of the big reasons the BRICS countries are trying to shift the reserve currency to the Chinese Yuan. It makes it that much harder for the US to impose sanctions on them, particularly since political tensions between the US, Russia, and China are very high right now.
As the reserve currency, the US government gets some extra benefits such as being able to borrow at low interest rates because it’s seen as a safe investment and being less susceptible to runs on the currency.
Being the de-facto world reserve currency gives a lot of power to US institutions. It’s easy for the US to borrow money, and much of the worlds trade is conducted in US dollars.
Another big advantage is that it makes it a lot easier for the US to impose sanctions on other countries.
This may be one of the big reasons the BRICS countries are trying to shift the reserve currency to the Chinese Yuan. It makes it that much harder for the US to impose sanctions on them, particularly since political tensions between the US, Russia, and China are very high right now.
Being the de-facto world reserve currency gives a lot of power to US institutions. It’s easy for the US to borrow money, and much of the worlds trade is conducted in US dollars.
Another big advantage is that it makes it a lot easier for the US to impose sanctions on other countries.
This may be one of the big reasons the BRICS countries are trying to shift the reserve currency to the Chinese Yuan. It makes it that much harder for the US to impose sanctions on them, particularly since political tensions between the US, Russia, and China are very high right now.
Well, you are very close to the answer when you say that “any currency is traded therefore establishing values and liquidity”, but it’s kind of counter-intuitive and you have to understand the basic concepts of FIAT money and what a world reserve currency brings to the table.
1. First, if a currency’s value is established by trade, instead of having a constant dictated by the something (like gold) that backs the currency and gives it value, then you have FIAT money, or money worth whatever other traders are willing to pay for it. What international traders would be willing to pay for a currency is influenced by countless factors and in the case of developing/economically weaker nations you sometimes encounter extreme cases like a civil whire during which a currency might become literally worthless (on global markets) for a while beacuse the rebel faction might win and establish a new currency…
2. Getting back to global trade – there are a series of global commodities that every country needs (more or less depending on available resources of each country) like crude oil, natural gas, cereals, etc. These commodities generally have few sellers and a lor of buyers. Now, these sellers will want to be paid in a way that guarantees them at least 2 very important things: 1. The currency they are paid in is relatively stable and 2. The currency poses no risk of suddenly losing its value.
The U.S. Dollar is a very stable currency because of Americas economic weight and is in absolutely no danger of suddenly losing its value beacuse it is de facto backed by the US Military (sudden loss of value could be a result of – governmental collapse, civil war, being conquered by a belligerent neighbour, etc).
A global shift of reserve currency is important because in current circumstances there isn’t any country in the world who could assume the role of world (economic) hegemon like the US did after WW2. Before de USD, the british pound was the de facto world-currency, and before that it was the spanish real at the peak of the Spanish Empire’s extension.
The absence of a new world reserve currency “imposed” by a global economic leader will bring price volatility in all commodities and poor, unstable countries will be punished the most. Like, of course the OPEC will accept Euros or Yen if the USD dissapears, but some poor african nations will have to pay higher prices for the risk that the sellers take by accepting their currency (which might be unstable or could collapse).
There’s also the aspect the establishing trust in the country dictating the monetary policty of the world reserve. The US has proven itself as a reliable actor through the decades. I don’t know how to explain this without an example so here we go: Imagine that from tomorrow on, the chinese Yuan becomes the world reserve currency and a bunch of countries decide to keep Yuan reserves to trade on the global market. If sometime in the future China goes through a bad economic cycle they might choose to devalue their currency to increase exports. This would affect Yuan holders as their money is now worth less…
Well, you are very close to the answer when you say that “any currency is traded therefore establishing values and liquidity”, but it’s kind of counter-intuitive and you have to understand the basic concepts of FIAT money and what a world reserve currency brings to the table.
1. First, if a currency’s value is established by trade, instead of having a constant dictated by the something (like gold) that backs the currency and gives it value, then you have FIAT money, or money worth whatever other traders are willing to pay for it. What international traders would be willing to pay for a currency is influenced by countless factors and in the case of developing/economically weaker nations you sometimes encounter extreme cases like a civil whire during which a currency might become literally worthless (on global markets) for a while beacuse the rebel faction might win and establish a new currency…
2. Getting back to global trade – there are a series of global commodities that every country needs (more or less depending on available resources of each country) like crude oil, natural gas, cereals, etc. These commodities generally have few sellers and a lor of buyers. Now, these sellers will want to be paid in a way that guarantees them at least 2 very important things: 1. The currency they are paid in is relatively stable and 2. The currency poses no risk of suddenly losing its value.
The U.S. Dollar is a very stable currency because of Americas economic weight and is in absolutely no danger of suddenly losing its value beacuse it is de facto backed by the US Military (sudden loss of value could be a result of – governmental collapse, civil war, being conquered by a belligerent neighbour, etc).
A global shift of reserve currency is important because in current circumstances there isn’t any country in the world who could assume the role of world (economic) hegemon like the US did after WW2. Before de USD, the british pound was the de facto world-currency, and before that it was the spanish real at the peak of the Spanish Empire’s extension.
The absence of a new world reserve currency “imposed” by a global economic leader will bring price volatility in all commodities and poor, unstable countries will be punished the most. Like, of course the OPEC will accept Euros or Yen if the USD dissapears, but some poor african nations will have to pay higher prices for the risk that the sellers take by accepting their currency (which might be unstable or could collapse).
There’s also the aspect the establishing trust in the country dictating the monetary policty of the world reserve. The US has proven itself as a reliable actor through the decades. I don’t know how to explain this without an example so here we go: Imagine that from tomorrow on, the chinese Yuan becomes the world reserve currency and a bunch of countries decide to keep Yuan reserves to trade on the global market. If sometime in the future China goes through a bad economic cycle they might choose to devalue their currency to increase exports. This would affect Yuan holders as their money is now worth less…
Well, you are very close to the answer when you say that “any currency is traded therefore establishing values and liquidity”, but it’s kind of counter-intuitive and you have to understand the basic concepts of FIAT money and what a world reserve currency brings to the table.
1. First, if a currency’s value is established by trade, instead of having a constant dictated by the something (like gold) that backs the currency and gives it value, then you have FIAT money, or money worth whatever other traders are willing to pay for it. What international traders would be willing to pay for a currency is influenced by countless factors and in the case of developing/economically weaker nations you sometimes encounter extreme cases like a civil whire during which a currency might become literally worthless (on global markets) for a while beacuse the rebel faction might win and establish a new currency…
2. Getting back to global trade – there are a series of global commodities that every country needs (more or less depending on available resources of each country) like crude oil, natural gas, cereals, etc. These commodities generally have few sellers and a lor of buyers. Now, these sellers will want to be paid in a way that guarantees them at least 2 very important things: 1. The currency they are paid in is relatively stable and 2. The currency poses no risk of suddenly losing its value.
The U.S. Dollar is a very stable currency because of Americas economic weight and is in absolutely no danger of suddenly losing its value beacuse it is de facto backed by the US Military (sudden loss of value could be a result of – governmental collapse, civil war, being conquered by a belligerent neighbour, etc).
A global shift of reserve currency is important because in current circumstances there isn’t any country in the world who could assume the role of world (economic) hegemon like the US did after WW2. Before de USD, the british pound was the de facto world-currency, and before that it was the spanish real at the peak of the Spanish Empire’s extension.
The absence of a new world reserve currency “imposed” by a global economic leader will bring price volatility in all commodities and poor, unstable countries will be punished the most. Like, of course the OPEC will accept Euros or Yen if the USD dissapears, but some poor african nations will have to pay higher prices for the risk that the sellers take by accepting their currency (which might be unstable or could collapse).
There’s also the aspect the establishing trust in the country dictating the monetary policty of the world reserve. The US has proven itself as a reliable actor through the decades. I don’t know how to explain this without an example so here we go: Imagine that from tomorrow on, the chinese Yuan becomes the world reserve currency and a bunch of countries decide to keep Yuan reserves to trade on the global market. If sometime in the future China goes through a bad economic cycle they might choose to devalue their currency to increase exports. This would affect Yuan holders as their money is now worth less…
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