Andylusion
Platinum Member
No, that money does come back. You don't seem to understand how reserve currency works.
Reserve currency, doesn't mean they have a big huge vault somewhere where scrooge McDuck swims through piles of $100 dollar bills.
Not how it works. Most of the reserve currency is in assets that are dollar dominated. Primarily Treasury securities.
It's the money the US government borrowed. By the way, you want to reduce how much reserve currency China holds? Just balance the budget, and start running a surplus, and China's dollar reserves will dwindle.
Now if you doubt that, all you have to do is look up how much US Dollar reserve currency the central bank of China has, and see they list roughly $2 Trillion in US dollar reserves.
Well we know from the fed, that there is only $1.4 Trillion in hard currency. So what the World Bank reports that China has, is a greater amount of US dollars, than what actually exists on the planet.
Moreover, if China had even half that much hard cash in Reserve, then finding a dollar in the US, should be like finding a Unicorn. We should be experiencing so much deflation from the reduced supply of dollars, that a new car should only be $100 by now.
All the money, even the USD reserves, all of it comes back to the US. All of it does.
All the money, even the USD reserves, all of it comes back to the US. All of it does.
Many countries with untrustworthy currencies will circulate FRNs as a parallel currency.
Hundreds of billions in physical currency that will never return.
Yes and no. If the situation remains, then yes it will stay as an unofficial parallel currency.
Currently the only non-US countries using USD, are Ecuador, East Timor, El Salvador, Marshall Islands, Micronesia, Palau, Turks and Caicos, British Virgin Islands, Zimbabwe.
The one thing you notice about nearly all of them, is that they are small, and poor. I highly doubt there are hundreds of billions, circulating in these countries.
Even so, in cases like Zimbabwe, or Ecuador, if the country ever recovers to the point they can implement their own currency, they will, and those dollars will return.
But let's even suggest for a moment that they don't. This is actually a good thing. We want more people to use dollars. The more countries that use our dollars, the more we have economic growth and influence. It's far easier for me to buy, or sell, to a country that already has actual US Dollars. That's a benefit to us. And it makes the dollar itself more valuable.
The value of Fiat Currency, is only in our ability to exchange our dollars, for goods and services. The more goods and services we can exchange dollars for, the more value the dollar has.
This is good thing. It really is.
You left out Panama.
I highly doubt there are hundreds of billions, circulating in these countries.
Countries like Russia, Venezuela and Cuba will always use dollars.
The most direct measurement, commercial bank shipments, the solid black line, suggests that
$200 billion has moved abroad since 1990, which would put the total at between $200 billion
and $400 billion, depending on the assumed initial value. The shipments proxy, the solid gray
line, suggests that about $350 billion moved abroad over the period, putting the total at $350 billion to $550 billion.25 Finally, the adjusted shipments and proxy figures, the dashed black and
gray lines respectively, suggest that about $550 billion moved abroad over the period, putting the
total at $550 billion to $750 billion. These ranges are, of course, large, though the simple
method proposed above in Section III.A.2 produces an estimate very close to the center of the
range.
http://www.federalreserve.gov/pubs/ifdp/2012/1058/ifdp1058.pdf
Interestingly, the first page, suggested exactly what I just said.
Second, economic stabilization and modernization appear to result in reversal of these inflows. Specifically, demand for U.S. currency was extremely strong through the 1990s, a period of turmoil for the former Soviet Union and for Argentina, two of the largest overseas users ofSo during a period of crisis, demand for US dollars goes up. That's exactly what you said before. Zimbabwe destroys their currency, and suddenly they are using Euros and Dollars.
U.S. currency. Demand eased in the early 2000s as conditions gradually stabilized
and as financial in stitutions developed. However, this trend reversed sharply with the onset of the financial crisis in late 2008 and has continued since then.
Then as the economy stabilizes, and modernization happens, the flows reverse. Dollars start flowing back to the US, as the local currency gains credibility and acceptance.
If another crisis hits, then the flows reverse again, as people go back to what is considered stable and safe.
Now all that said..... your publication brings up a fascinating aspect I didn't realize before...
Many people, including myself, have been trying to figure out why the increase in the M2 base, has not resulted in the type of inflation we would expect. Up till now, I had always just guessed that the reason must be that the US economy is so large, that changes in the monetary base take longer to take effect.
But what if, as the link you provided suggest, there is a different aspect going on here. As with all things, the value is determined by supply and demand. The supply is the amount of money created by the government, and the demand is the public. We assume the public is static (increasing only with the birth rate and immigration), and drastically increasing supply, would cause inflation, where the value falls.
What I have not heard anyone suggest is, what if the problems in the EU, and in Latin America, and Russia and its trading partners.... is creating additional demand base. If dollars are being circulated more and more under the radar, then this would create additional demand, that would directly offset the increase in the M2 monetary base.
Now if that is true.... and I'm just connecting some dots that may or may not have anything in common.... that would seem to place us in a very dangerous position.
Because just as I quoted above, when these economies stabilize, they tend to reverse the trend. Dollars flow back to the US, as local currency takes over. The problem is, if too much currency flows back, then I would expect to see the inflation that we been waiting for.
If the economies in Russia, and Venezuela, and Argentina, were to stabilize, and go back to using local currency, the demand base for USD, would shrink. Unless the Federal Reserve has a plan to remove dollars from the monetary base.... The supply stays the same, but the demand base drastically falls.
That's going to cause problems, because everyone else still using dollars, the moment they see a spike in inflation, they are going to ditch those dollars, which will cause even faster inflows, which will cause more inflation, and the cycle will continue until there is a melt down.
Of course this is all speculation. But it all makes sense if there is a massive amount of USD, used by say Russia to by-pass sanctions, and Argentina to avoid their locked up import-export restrictions.... then that's a ton of non-reserve currency being used as normal tender. That demand would off set the increase in the money base. It all fits.... which is a little scary.
Then as the economy stabilizes, and modernization happens, the flows reverse. Dollars start flowing back to the US, as the local currency gains credibility and acceptance.
In many of those crappy countries, the local currency will never displace the dollar.
Many people, including myself, have been trying to figure out why the increase in the M2 base, has not resulted in the type of inflation we would expect.
Many people think there is a fixed relationship between Fed balance sheet growth and inflation. They look at supply and ignore changes in demand. During and after the crisis, demand for cash took off, that's why inflation hasn't.
Because just as I quoted above, when these economies stabilize, they tend to reverse the trend.
It said demand slowed, it didn't reverse.
That's going to cause problems, because everyone else still using dollars, the moment they see a spike in inflation, they are going to ditch those dollars
I don't think US inflation will impact foreign holdings of FRNs, especially because their domestic inflation is so much higher.
The US went from being a double digit inflation rate , to being 4% or under inflation rate, in just 3 years. Now if you read my comment completely, I said if they stabilize their economy and currency. That implies that their inflation rate would be...... stable. Not super high.
Second, it did not say slowed, it said reversed, and if you need more evidence, flip down to page 40, graph 7, 8, 9 or 10, all show very clearly a negative flow. That would mean money was flowing back into the US from foreign sources.
Lastly, it's not wise to make broad assumptions about countries. Yes, in the short term, they are not likely to turn everything around. But to say that they will never become strong economically with their own currency? I would not assume that.
After all, who in the 1990s, thought the Yuan would be a an international reserve currency? Who thought that the IMF would give the Yuan a 10% stake, while the Yen and the Pound dropped to 8% each.
And now China is pushing to replace the dollar as the international standard, and people are taking it seriously. You realize that even just in 2010, China only had about $200 billion in cross boarder transactions, and almost none were in Yuan. Now, we're looking at China doing $600 Billion on transactions, and $200 billion of it in Yuan, and this happened in just 5 years.
So while you may be right, I just wouldn't assume that. Capitalism works every time it's tried, and if they try it in Argentina, or elsewhere, it will work. It will work just as well as it has here. They may not try it........ but then we never thought China would be a center of Capitalism, did we?