A currency that is used worldwide by governments and businesses is called a reserve currency. Governments will hold a large portion of their reserves in this currency. International trade in goods and commodities will be transacted based off this currency. For example, gold is traded in U.S. dollars around the world. The current reserve currency in the world is the U.S. dollar, although that may change over time. China has hopes that its currency, the yuan, will gain reserve status equal to or greater than the U.S. dollar. The U.S. dollar gained reserve currency status over the British pound following World War II.
As everyone is celebrating the market at record highs, another record was just broken and no one appears to be celebrating it.
Of course, I’m talking about the fact that the U.S. government debt total has just exceeded $17.0 trillion.
No one should be really surprised, since we continue running deficits each year. This just means that our government debt will continue to climb, with no end in sight.
Government debt totaling $17.0 trillion is a staggering amount of money. That equates to almost $149,000 per taxpayer. Of course, this doesn’t include unfunded liabilities. When you add in Medicare, Social Security liabilities, and a vast assortment of other levels of government debt, the total is well over $100 trillion.
Again, this may not be much of a surprise to our readers, as most of you are aware of our government debt problem; what may be a surprise to many, however, is the continued global demand for U.S. bonds.
Because we have been able to sell U.S. bonds for so long to investors around the world, this has enabled us to keep spending and to procrastinate when it comes to getting our house in order.
However, I don’t believe this can go on forever. At some point, foreign investors are going to start getting worried that all those trillions of dollars they pumped into U.S. bonds might be worth a whole lot less in the future.
This political circus that we are witnessing in Washington just barely scratches the surface of how much work really needs to get done to solve our government debt problem.
Because the rest of the world … Read More
Whenever I’m asked what I think has the biggest potential impact not only on the stock market, but also on our way of life, I always point to the continued increase in government debt.
Over the short term, the Federal Reserve has attempted to stimulate the economy partially by buying U.S. Treasuries. Under normal monetary policy, the Federal Reserve only directly impacts short-term interest rates. To reduce long-term interest rates, the Fed began buying U.S. Treasuries, pushing up the price and lowering the yield.
Over the short term, we can look around today and notice that the sky is not falling. However, as government debt continues to pile on, approaching $17.0 trillion (which doesn’t include unfunded liabilities), at some point, this will impact not only U.S. Treasuries, but also our entire economy.
Part of the reason that U.S. Treasuries are still in demand worldwide is that the U.S. dollar remains a reserve currency. There are benefits from a logistical standpoint in conducting business using the reserve currency to also use U.S. Treasuries for investment purposes.
However, as I’ve mentioned in other articles, large investors in U.S. Treasuries, such as China, are increasingly calling for a new global financial system that relies less on the U.S. dollar.
That sentiment alone should shock the politicians into action and make them realize that our biggest lenders, the ones buying our U.S. Treasuries, are questioning our ability to manage the rising pile of government debt.
The most recent data from August was that China actually reduced its holdings in U.S. Treasuries to a six-month low, according to the U.S. Department of the Treasury. (Source: … Read More
The U.S. dollar has been the world’s reserve currency for decades, but that position might be under attack. With the rising level of U.S. debt, many countries around the world are questioning the position of the U.S. dollar as the reserve currency.
Cracks are beginning to appear; the latest sign is that China and South Korea have come to an agreement in which banks from either country are able to borrow funds from a swap line that makes loans available to companies for deals in local currencies. (Source: “China, South Korea to Boost use of Local Currencies in Trade,” Bloomberg, December 4, 2012.)
This swap line is currently set at $59.0 billion, and allows firms to settle deals in either the Chinese yuan or the South Korea won instead of the U.S. dollar. On the surface, this might not seem like a direct attack on the U.S. dollar’s status as reserve currency, because reducing transaction costs is inherently advantageous to corporations. However, the willingness by these nations to increasingly avoid the U.S. dollar is a problem.
Shifts in the reserve currency status take many years to develop. We’ve seen rising U.S. debt levels for years, and this is putting increasing pressure on countries to diversify away from the reserve currency nation that is becoming increasingly irresponsible in the way it handles fiscal and monetary policies.
Running up the U.S. debt levels over the short term might be seen as innocuous by American politicians; but over the long term, the sustained inability and ineptitude of politicians to properly manage government spending will lead to a lack of belief in the country … Read More
I’ve penned articles recently on China’s quest to have the next reserve currency of the world be the renminbi, otherwise known as the yuan and China’s official currency.
In unprecedented steps to circumvent the use of the U.S. dollar for the first time since the inception of the U.S. dollar as the reserve currency, China, Russia, Australia, the United Arab Emirates, and India are now transacting business with China denominated in yuan and not U.S. dollars.
The BRICS countries—Brazil, Russia, India, China, and South Africa—have decided they will trade with each other in their respective currencies, circumventing the use of the reserve currency entirely.
Since China has created transactions in yuan with Brazil, Russia, and India, South Africa was the “odd man” out—but not anymore. It is no secret that South Africa has the farmland and natural resources that China needs for its large population. What South Africa is missing is the capital to farm the land and get those resources to market. China has the capital, so South Africa will most certainly listen to China’s terms.
China and South Africa have agreed to use the yuan in their transactions, and more central banks in Africa are including the yuan as part of their foreign reserves.
China was also busy in the month of June signing a trade agreement, with Chile with the aim of doubling their trade in three years. Similar to Africa, China will provide the capital to expand Chile’s agricultural capabilities and enhance more mining exploration. Part of the agreement is to settle all transactions in yuan.
Of course, the yuan cannot be a reserve currency as … Read More