National central banks hold foreign currency as reserve currency with which they can purchase their own currency to stabilize its exchange rate if need be and to increase trust in the national currency. The US dollar has been the dominant reserve currency for a very long time. Large US federal, state and local budget deficits have raised concern over the chance of the Fed having to prop up the federal government in particular by keeping monetary policy excessively loose and thus inflating the dollar. The European Central Bank is already directly purchasing the sovereign debt of certain euro countries. Should the US get into such trouble with its debt that the Fed have to directly purchase its debt, the situation would be far worse than in the euro zone where the near insolvent national governments are so small that they pose little acute systemic risk.
Central banks around the world have been looking into diversifying their basket of reserve currency for some time. But many central banks and national currencies are in similar trouble. It seems that, in the long run, governments just can't resist overspending and having to turn to the lender of last resort, the central bank, for help in maintaining liquidity and preventing total collapse. That poses a substantial risk for other central banks who hold foreign currency as reserve.
Perhaps it is time to consider a new cryptocurrency to replace national currencies as reserve currency. Such a multi-national decentralized currency should be price-stable by design. Its rates of issuance and de-issuance should be regulated at the protocol level. The regulation should be performed by a decentralized AI system designed to take into account very large amounts of price and other economic data with the goal of stabilizing its exchange rate in terms of, for example, a very wide array of globally traded commodities and other assets.
How a global cryptocurrency with its value pegged to an array of real world assets would be implemented is another question to think about.
I was also thinking about one price-stable decentralized currency. But it's not fun when you can't x50 with it. But very handy and you can chill because it will stay the same all the time like Tether.
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It would be very far removed from fun if the value of the foreign currency reserves of a central bank went up and down x50 in a short period of time. :D
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Extreme day trading my dudes.
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I believe the change is coming and I wonder what will happen to the US when their currency is no longer a global reserve. That will bring even more inflation to the country.
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There will be more inflation in the US. That'll force the Fed to hike interest rates. Bad for business and consumers.
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You are so smart Markku. Do you think it will turn into a Zimbabwe situation at some point where they have a lot of money in circulation that basic everday things are priced in hundred of thousands to millions?
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It's hard to say. The alternative to runaway inflation is adequate spending cuts. I think it will be a combination of both. What happens now with the annual federal government shutdowns and all is kicking the can down the road.
History is rife with fiat money failures. Here's a list:
http://www.rapidtrends.com/history-of-fiat-and-paper-money-failures/
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This question is very reasonable. because always the countries with a strong currency will continue to reign for having good assets.
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Or strong, large economies. I don't think, however, that the position of the US Dollar will be justified for many future decades because the rest of the world is growing much faster.
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Yes. Of course they are growing a lot, but, they are not all the economies of the world. Latin American example, here although we are close to the United States, economic growth is not very large compared to europar. and that lies in their bad economic policies and corruption. and they use the US dollar as a backing, in fact it is that currency that marks their economy
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Very good analysis @markkujantunen.
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such a tough time around for the global currencies to remain their values intact
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