It is a wondrous thing to be the global reserve currency. We can run government deficits of any size that we want, and the rest of the world gets to fund us by buying our debt. Thus, when I look at calls for still greater stimulus (through Government spending and borrowing) from men like Bill Gross, Larry Summers, and Bob Shiller, I just groan. When does the rest of the world say “Enough!”, particularly the Persian Gulf States and other oil exporters who don’t have as much of an economic reason to support the US Dollar, because they don’t have to promote exports to the rest of the world. But, perhaps for political reasons, they keep buying US debts.
This will not end well; the only questions are when, and how severe? On this issue, I’m not sure it matters who the next president is, because the US no longer independently controls its own destiny. (Great question for the debates: “Sir, what will you do as President to strengthen the Dolllar’s position as the global reserve currency?” I would expect the intelligent equivalent of a stutter.) The main barrier is that there is no good replacement for the Dollar as the global reserve currency. The Euro could still fail; large-scale monetary unions need to be political unions for them to succeed in the long run. The rest of the currencies are too small, or their banking systems insufficiently liberalized.
But, maybe the world could live without a single reserve currency. Currencies could compete against each other, and gold, and other commodities. This is an age of computers; I’m not sure why there would have to be one standard of value, particularly, when the standard of value varies so much.
I’m still away on vacation, so I may not post a lot until I am back on July 8th. I did do a trade today; I bought some Smithfield Foods (rebalancing buy). I suspect they will export a lot more as time goes on, and perhaps one their new major owners agrees. After all, China’s staple meat is pork, and Smithfield is a high-quality provider. This is just another way that I consider global demand, rather than local demand.
Bringing this piece full circle, perhaps China found a better way to recycle dollars; at least this investment brings home the bacon.
Full disclosure: long SFD