Gyroscopic Investing

Does that really "leave the dollar aside as a reserve currency?"  If China & Brazil just decide to park their US dollars in bonds and trade in RMB does that really change anything for us?  There's still a net $xx out there that are in either China's banks or in Brazil's banks and somehow have to bear interest.  This sustains foreign demand for our debt, as far as I can tell, as equal no matter whether they're parking or trading their US dollars (in fact, if they're parking them, they're probably buying longer-term US debt which gives us better monetization flexibility).

Maybe China's been accumulating dollars on purpose, but if outside the normal inflow of dollars into their country from us, then there's no net change in the demand for the USD... maybe the velocity with which it changes hands, but Brazil and China can throw dollars back and forth all they want, the net demand is still the same, as they haven't gotten rid of them yet.  If $$'s start to sit more on the side-line, you'd probably simply see more demand for longer-term US treasuries, and less short-term/MM treasury funds.

Commodity inflation could simply be a natural result of more demand for a commodity that's shrinking in supply in our world, and that could hit us no matter what.  If a country is wealthy, it will be able to afford commodities easily while others will not.  In the past, this was us, but it's starting to go away as our wages start to come in line for similar tasks with the rest of the world.  If the dollar "sits on the sidelines," we're still going to be adding new ones into the mix (assuming our current balance of trade continues) and if the recipients (be it China, Brazil, or whomever) don't want to net-spend it, they'll want to get some return on it.  This will create even more demand for our bonds, keeping rates low. 

I just don't see how high inflation or high rates are possible without some serious form of economic recovery in the US, short of any natural increase in the price of natural resources that have a limited supply but possibly increasing demand.

moda, imagine a future where exports from the USA are entirely paid for by the USD bond interest paid to foreigners. As you say, all USD out there will be out there until they get paid as US tax. BUT, by the time they are paid as tax they might be worth not a lot. Because of the plummeting value of the USD versus the BRICbasket (or whatever future currency), no foreigners will sell anything for USD. If the USA were to want to import oil it would need to somehow get hold of BRICbaskets. Because of the oil shortage, the USA wants to move to renewable energy with electric railways or whatever but is unable to get the required iron ore etc because that can only be bought with BRICbaskets. The relative purchasing power of US people to Indian people becomes a reversal of what it was in 2000.  The BRICbasket is linked in value to a basket of oil, industrial metals and rice. It also pays 2% interest. Gold has gone from costing two times the extraction cost  down to 30% the extraction cost. The gold price in USD is up 10x but down 5x relative to iron. The Fed might try and fight back by hiking interest rates up to 20% but even that does not quell the slide in the USD. The only people who add to their USD savings are a few eccentrics who have a small allocation to "submerging market debt". 

I'm just saying anything might happen.

So what you're saying is that the size of these foreign economies, when combined in some way, if they used the same currency, could replace the USD as the reserve currency and make us have to compete.

I guess maybe that's an option.

I don't see any single currency even close to forming or already formed that can serve that function at this time.  Is this something you could see happening rather quickly?

moda, I have to stress that I may have  florid opinions but I've got zero knowledge . My guess is that if there is another 2008 type fiasco or worse, then a new system could be set up as fast as the Bretton Woods system was set up after WWII ie just a meeting and then a new world order. In 2009 the Chinese made mutterings but then it was business as usual. I guess for the time being, the Chinese might want to give us more rope to hang ourselves with!

I just saw something about the 2009 Chinese statement:
http://www.e-ir.info/?p=620

One could say the euro was large enough to pose that threat and its inner-workings made it more like a gold standard in that monetizing debt would be made much more difficult... so in a way this monetary experiment has already been tried.

About 10 years in, it's starting to look like there are cracks in the mortar.

If the EU can't do it, I can't imagine some kind of international currency taking hold with any kind of clout... and if it did we'd be able to see it coming from miles away.

I appreciate your input on this... and, like you, I'm full of opinions and theories, but hell if I actually know what I'm talking about 100%.

moda, I think the euro was always a disaster waiting to happen because it had a central bank with no link to the fiscal side of things. The SDR/bancor concept is different in that it is a basket of currencies that each do have a government in control of them from both the fiscal and monetary side. The bancor idea has a peg to a basket of commodity prices. I don't think the euro was ever intended to usurp the USD as a reserve currency.

http://dalje.com/en-economy/new-reserve ... itz/246275

Does any currency become developed to TRY to be the reserve currency?  I figured that would just be a natural result.  Having the whole continent (or most of it) trade in euros was supposed to breed efficiency and uniformity.  Becoming a reserve currency would have simply been a result of a negative European trade balance for decades.... and to be honest probably never would have happened even without the current crisis.

Assuming a gold-standard-esque system is developed of some kind of multi-country alliance currency, you'd still have the same problem of a central bank conducting monetary policy (I doubt any currency will go full, no fractional reserve, manipulation free, gold-standard currency) and a bunch of countries deciding their own fiscal fate.  This hypothetical currency would be no different from the euro as far as I can imagine, even if they tried to link it to some sort of gold standard.

The whole idea of that much political will going towards developing a multi-national currency (that would have a lot of the drawbacks of the euro as far as I can tell) without them first dispelling dollars seems just completely illogical to me.  The amount of collaboration that would have to take place they will need to be motivated by extremely powerful forces... and these forces don't imply, to me, a currency that they continue to collect more of or hold their current reserves.  Countries usually can't agree on anything... for that kind of agreement to take place, I can't imagine they'd still be holding our dollars on the sidelines... a broad disgust will have had to happen in some way... and that means them buying our stuff... I really see no way around it in the real world.

moda, I think the key point with the SDR system Stiglitz suggests is that within each country people use there own currency but for international trade, they use the currency basket. So if India imported more from Brazil than Brazil imported from India, Brazil would accumulate a basket of Rupees,Real,Yuan and Rubles. Indians would have to exchange rupees for the other three currencies and so reduce India's ability to run a trade deficit in future. Brazil, as a net exporter would get a stronger currency and so reduce its competitiveness as an exporter. The currency basket would just be a currency basket. It would not be some Euro-style frankenstein currency.  I guess squabbles would arise as to what weighting would go to each currency. Would it be determined by population size, GDP or what?

Gumby wrote: So... if you take 50% GDX and 50% EDV, starting on Jan 29, 2008, and you rebalance whenever one of the assets becomes twice the value of the other asset....these are the results (including dividends and rebalancing in Nov 2008, May 2009 and Dec 2010):



But...I suspect that during a period of prosperity this portfolio would underperform.

I would also point out that there are more than a few times over the past three years where purchasing this portfolio would have caused you to underperform PRPFX.

I just checked this portfolio today, and I have to say that it's doing very well — up 16% since this August! Keep in mind that the portfolio doesn't hold any cash.

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And today it was actually up slightly (+0.55%). I will also point out that the EDV portion has grown considerably in the past few weeks, so it will probably hit a rebalancing band soon (as described in my previous quote, above).

Of course, it seems like anything that goes up that fast should eventually come down. Makes me wonder what lies ahead in the world.

Clive wrote:Comparing EDV and Gold isn't therefore that different to comparing stocks and gold.

To clarify, GDX isn't gold. GDX is a fund of gold mining stocks.

Clive, I just sent you an email.