What will happen if the U.S. dollar’s reign as the world reserve currency comes to an end?

[Homey]

So if I'm understanding your logic, a reserve currency would have to be immune to inflation? How is this possible?

[SillyWilly]

So if I'm understanding your logic, a reserve currency would have to be immune to inflation? How is this possible?

Wouldn't that be nice? Of course it would, but "immune against inflation" is asking too much. Major purchasers of US treasuries, like China and Japan, expect the USD to retain at least most of its value for the duration of the bonds' life. And since the official policy of the US Treasury is to maintain a strong dollar (see link: http://www.wtffinance.com/2011/04/treas ... ar-policy/) they're literally lying to their major bond holders when the value of the USD declines because of monetary policy decision making by appointed officials, like Fed Chairman Bernanke and the FOMC. In marketing its called the "bait-and-switch" and constitutes fraudulent behavior.

First, the Treasury "baits" the bond buyer by publicly advocating a strong dollar policy, which implies the government will do everything in its power to keep the value of the dollar stable for their bond holders' sake. Then, after billions of dollars worth of treasuries have been auctioned off, the Fed comes in and creates huge amounts of new money (to finance wars and bailouts), effectively diluting the bond holders' stake. Well China has caught on to this fraud and isn't playing their game anymore. China is diversifying away from the USD. China is now buying massive quantities of gold and huge stakes in gold miners around the globe.(link: http://www.marketoracle.co.uk/Article34217.html)

Why is that?

"The international gold standard provided an automatic market mechanism for checking the inflationary potential of government. " (source:http://mises.org/money/4s1.asp)

How is this possible to get a reserve currency that is immune to inflation? you asked.

By backing it with gold, either fully or partially. A gold-backed reserve currency limits (not eliminate entirely) the government's "money printing madness" leading to a more stable inflationary environment and stable purchasing power because gold CANNOT be created out of thin air, like USD, EURO, Yen, etc.

[headhonchoII]

Gold quantities are too limited to provide a backing to currencies. I don't know why people keep sticking on gold, it doesn't offer a better solution as the price would just inflate into another bubble, smarter governments would use a diverse base of assets to support their currency.
Well thought out and managed fiscal policy is the best way to combat inflation but it is IMPOSSIBLE to prevent inflation when demand increases and supply reduces.

[SillyWilly]

Gold quantities are too limited to provide a backing to currencies. I don't know why people keep sticking on gold, it doesn't offer a better solution as the price would just inflate into another bubble, smarter governments would use a diverse base of assets to support their currency.
Well thought out and managed fiscal policy is the best way to combat inflation but it is IMPOSSIBLE to prevent inflation when demand increases and supply reduces.

At current prices, yes. But at much higher prices of gold there are plenty of gold in the world today to back currencies. It's simple economics. Price solves the problem of "limited" quantities of gold to back currencies.

[Abacus]

Your graph is only valid if people are still earning $5/day (considered generous at the time). I definitely am not. If you want to have a valid argument then plot the value of a dollar vs something meaningful like avg wage. Everybody knows that inflation is real and that is all that your graph shows.

[SillyWilly]

Your graph is only valid if people are still earning $5/day (considered generous at the time). I definitely am not. If you want to have a valid argument then plot the value of a dollar vs something meaningful like avg wage. Everybody knows that inflation is real and that is all that your graph shows.

I'm not disputing that inflation happens. That would be absurd. The point I'm trying to make is that inflation doesn't have to destroy the purchasing power of the world's reserve currency as fast as it has with the US$. The solution is a currency backed by something that can't be created out of thin air, and I'm suggesting gold be that "something" since it can't be created out of thin air like paper money.

[headhonchoII]

It has been seventy years or so and there has been no significant shift, yet, from the US being the preferred reserve currency. That's a pretty good record.
The deutchmark was destroyed twice by inflation and came back to be an investor favorite. On the other hand the Yen has rocketed in value versus other currencies and Japanese companies are pulling out of Japan. You can't look at these statistics in isolation.

Let's ask the question, why don't the Saudis insist on getting paid in gold for their oil? Why don't the Chinese do the same thing? Because , for their own reasons, it suits them to get paid in USD or other currencies.

China wants a relatively weak currency to encourage exports and the Saudis presumably want the US as an ally among other financial reasons.

[SillyWilly]

It has been seventy years or so and there has been no significant shift, yet, from the US being the preferred reserve currency. That's a pretty good record.
The deutchmark was destroyed twice by inflation and came back to be an investor favorite. On the other hand the Yen has rocketed in value versus other currencies and Japanese companies are pulling out of Japan. You can't look at these statistics in isolation.

Let's ask the question, why don't the Saudis insist on getting paid in gold for their oil? Why don't the Chinese do the same thing? Because , for their own reasons, it suits them to get paid in USD or other currencies.

China wants a relatively weak currency to encourage exports and the Saudis presumably want the US as an ally among other financial reasons.

I agree. The USD has had a stellar record, but there is evidence that perceptions about the "safety" of the USD is changing. More and more bilateral trade between major trading partners such as Japan and China, China and Russia, Saudi Arabia and China, are currently bypassing the USD completely in favor of their own currencies. The UN and IMF have openly called for a new world reserve currency to replace the USD. Getting paid in gold is not a easy payment method. Sending massive shipments of bullion around the world to purchase oil doesn't make sense. But it will get easier when new gold payment systems or gold-backed currencies arrive. So for now it "suits them to get paid in USD." How long it will suit them, remains to be seen. My guess is, not much longer. The USD probably has at most a decade left as the world reserve currency based on the increasing evidence.

These and similar future actions will result in a massive decline in demand for the USD, resulting in an over supply of USDs that will in turn push the value of the USD further down. Everyone in world finance is watching the 71 level on the USD Index. When that breaks, the exodus out of the USD will commence in earnest since there is no support under that level.

These are warning signs that a paradigm shift away from the USD is coming soon.

[Abacus]

Your graph is only valid if people are still earning $5/day (considered generous at the time). I definitely am not. If you want to have a valid argument then plot the value of a dollar vs something meaningful like avg wage. Everybody knows that inflation is real and that is all that your graph shows.

I'm not disputing that inflation happens. That would be absurd. The point I'm trying to make is that inflation doesn't have to destroy the purchasing power of the world's reserve currency as fast as it has with the US$. The solution is a currency backed by something that can't be created out of thin air, and I'm suggesting gold be that "something" since it can't be created out of thin air like paper money.

Your graph does not show that inflation destroyed the US dollar. It shows that inflation happens. Post a shitty graph and you're going to get called on it.

I'm not disputing that there isn't trouble brewing.

[Homey]

Even if the dollars falls, this doesn't change a thing. There is no correlation or causation between the US dollar's value and it's role as a reserve currency. In fact Bernanke would absolutely love for the dollar to fall.

We are living in the age of currency wars. A lower dollar means more exports and a shift to a more sustainable producer economy.

Open a futures and forex account and start watching and noting the correlations. It's quite obvious that the dollar is a strong reserve currency and isn't losing any ground in this respect. When risk appetite is strong, the dollars falls, when risk appetite is weak, the dollar rally's. You can also check out the offical IMF cofer data and see for yourself how the dollar is standing as a reserve currency. http://www.imf.org/external/np/sta/cofer/eng/index.htm I recommend right clicking on the PDF file, downloading it, and viewing from your own pc instead of the browser.

Your "chart" there is highly inaccurate (especially during the peak of the crisis) and fails to show the recent rally to 82.045. The price action following the peak of the financial crisis tells the whole story. Throughout all this mess, the dx hasn't even come close to taking out the low on 4-21-08, in fact it has printed higher lows. Historically these triangles on the 6e and dx will break out on the fifth or sixth swing. The fifth swing failed to find a new low, in fact it was a higher low, which is bullish. So if it isn't going into a long consolidation period or chop, then chances are this sixth swing will break out of the triangle. We will see. Regardless, none of this has any bearing on the dollar as a reserve currency.

If you feel the dollar will fall, then short it, but even if it does it will still be a reserve currency.