The international currency madness strikes again

The dollar is about to become “toilet paper,” he says Robert Kyosaki, Author of “Rich Dad Poor Dad”.

“Get rid of your US dollars now,” says the investor and economic commentator Peter Schiff.

They are not the only ones:

I’ve been seeing a lot of stuff like this in my inbox lately.

Now, some of them come from “weimarists”“, folks who always expect hyperinflation.

Schiff, for example, insisted in 2009 that the Obama administration’s policies would cause runaway inflation.

(For the record, they didn’t.)

However, as indicated in the investment prospectuses, past performance is no guarantee of future results:

People who have always been wrong in the past They may be rightn in the future.

And today’s Weimaraners have a new argument.

Recently, a number of countries, alarmed or perhaps simply appalled by what they perceive as the weapon against the dollar Vladimir Putinthey have taken measures, at least symbolic, to reduce the role of the dollar in the global economy.

For example, China asked oil producers to accept payments in yuan instead of dollars.

This has even led to relatively sober commentators like done zakaria to warn that the dollar’s status as the world’s reserve currency is in jeopardy.

and lose status reserve currencymany imagine, it would be an economic catastrophe for the United States.

Let’s put aside for the moment the question of whether the dominance of the dollar is really in danger.

(Ask instead if losing reserve currency status would really be a disaster.

I’ll start with what should be obvious:

Most of the world’s currencies are not used outside the issuing countries.

However, many of these non-international currencies work well in their home countries and continue to perform the traditional functions of money:

medium of exchange, store of value, unit of account.

For example, the Canadian dollar, the Australian dollar, the New Zealand dollar and the Swedish krona have never been reserve currencies.

A few decades ago, the Japanese authorities wanted to convert the It’s inside into a world currency, but that never went anywhere.

Yet Australians, Swedes and Japanese continue to do domestic business in their own currencies, with not a single hyperinflation in sight.

THE pound sterling is an even more interesting example, because it was once an international currency, as dominant as the dollar.

When Phileas Fogg he set out on ‘Around the World in Eighty Days’, traveled with a bag full of sterling banknotes, because he knew that British currency would be accepted everywhere.

But the international role of sterling declined rapidly after World War II, virtually disappearing by 1970.

Strange as it may seem, the British economy still runs on pounds.

The disappearance of the pound as an international currency has not prevented London from strengthening its role as aor world financial center.

The great economist and historian Charles Kindleberger once wrote an insightful essay comparing the international role of currencies with the international role of languages.

Today, English is the world language of commerce, science, and much of popular culture:

Everyone who does global things speaks English, because everyone speaks English, just like everyone uses dollars because everyone uses dollars.

However, one can imagine that this is changing: maybe one day people who do global things will have to speak up Mandarin Instead.

(Actually, it’s a little easier than imagining the yuan instead of the dollar; I’ll get to that.)

But we would still speak English at home, just like Swedes still speak Swedish, French still speak French, and so on.

Actually, French has experienced something like the linguistic equivalent of international decline of the British pound.

It used to be the primary language of diplomacy and much of international culture.

Now all this is gone, which, admittedly, hurt national pride.

But France still speaks French.

However, how would the transition work?

Foreigners likely own more than $1 trillion in US currency, mostly in the form of $100 bills.

What if all foreign holders try to redeem all that money?

The answer is that the Federal Reserve would pay for them by taking the currency out of circulation, which it could easily afford by selling some of its $5 trillion of Treasury debt or $2.5 trillion of mortgage-backed securities.

If you imagine that the huge foreign holdingss dollars are the only thing that sustains our currency, let alone our economy, is that they have not done the calculations.

In short, there is no reason to fear the consequences of the dollar losing its special international status.

But having said that, this is very unlikely to happen.

It is true that with the rise of China there are now two bona fide economic superpowers.

(There would be three if the eurozone were less fragmented.)

So it may seem plausible that the yuan could challenge the dollar.

But the dollar has three big advantages.

One is the task:

Since everyone already uses dollars, it would take exceptional circumstances to switch.

The second is that US financial markets are open:

Unlike China, we don’t impose controls on people trying to move money in or out of the country.

The third is the rule of law.

Unless you’re a dictator planning to commit serious war crimes, you needn’t fear the US government confiscating your assets;

In China, your assets could be in jeopardy if you say something the strongman on duty doesn’t like.

Why, then, all the panic about the dollar?

Well I studied with charles kindlebergand one of the things he told his students was that “anyone who spends too much time thinking about international money tends to go crazy.”

The global role of the dollar seems important and seems mysterious;

This makes it a natural subject for conspiracy theories and catastrophic thinking.

In reality, however, the dollar’s role seems fairly secure, with one major caveat.

I have no idea what will happen if, as seems very likely, we end up defaulting on debt because a Republican House refuses to raise the debt ceiling.

But it’s not likely to go well.

Who will trust the currency of a nation that seems to have lost its political mind?

But if that happens, the threat to the dollar’s reserve currency status will be the least of our problems.

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