Comment by jmyeet
7 days ago
A lot of people fundamentally misunderstand why trade happens in USD and what creates demand for USD.
For example, you hear people say that the US invaded Iraq because Iraq was threatening to denominate oil sales in the euro. This particular conspiracy theory used to be more popular ~20 years ago for obvious reasons. Even if true, it's absolutely no threat to the petrodollar. You could sell oil in euros and what would most sellers then do? Immediately convert those euros into USD.
Trade occurs in USD because there's demand for USD not the other way around.
What really underpins the USD is the US military and the US still being the largest economy. So the USD will remain the global reserve currency up until the US collapses and/or another power rises to displace it, which really means the same thing at this point. That might ultimately be China but it's not yet and the Chinese yuan is wholly unsuitable to be a global reserve currency currently.
> until the US collapses and/or another power rises to displace it, which really means the same thing at this point. That might ultimately be China but it's not yet
I imagine the Euro is a contender also even though the EU it's not one homogenous power.
> and the Chinese yuan is wholly unsuitable to be a global reserve currency currently.
Curious why you say this? I was considering holding some EUR and CNY in the event that one of those becomes a replacement for USD
The euro isn't a contender for two main reasons:
1. Europe is still dependent upon the US military and, as a consequence, is beholden to US foreign policy; and
2. No unified fiscal policy.
As for the unsuitability of the yuan, there are several reasons:
1. The yuan was once pegged to the US dollar. It's now pegged to a basket of currencies instead. This, by definition, makes China a currency manipulator because you wouldn't need to peg the currency otherwise;
2. The yuan is undervalued by this manipulation. It should really be more expensive, making China's exports more expensive. China does this to maintain their export competitiveness. If anything, increased demand for the yuan would be unwelcome as it would increase the pressure to appreciate the yuan;
3. China runs a trade surplus. It's basically inevitable that the country with the reserve currency will run a deficit;
4. The US running a government deficit is actually kind of a good thing for maintaining a reserve currency. China, for example, holds trillions in US government bonds. Do you really think they want to upset that apple cart?