32 Comments

i would think that as reserves are held for many reasons one of which is to protect the ability to import required commodities, part of reserve reallocation will go into commodity accumulation. so i would expect that over the next decade reserve managers will start maintaining commodty pools domestically which are not subject to being compromised by other governments.

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Exactly right. Maybe no other currency will replace king dollar, but we will see a flight away from currency in general as the temptation to stockpile more physical commodities grows. Russia’s energy supply has been far more valuable politically and practically than years of preparatory accumulation of USD reserves.

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Considering that renewable energies are on the rise, this will certainly be even more true than your comment makes it out to be. Producing energy domestically without needing a hole lot of resources imported from abroad to keep everything running the next day, will change a lot of power dynamics. If fusion becomes viable, this could mean another such change. It will be interesting to see what happens to all those economies build on oil in the coming decade.

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The LME's repeated failures show us all how well commodity reserves might work.

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Apr 3, 2022·edited Apr 3, 2022

Well I would argue that being long, I.e. owning those commodities and taking delivery is a different risk profile than owning futures or forward contracts on an exchange. Actually storing the commodities would seem to make them a reserve asset in times of need. Just look at the US now using its oil strategic reserve. I am a bit surprised that we do not have a uranium strategic reserve yet to be honest, or rare earth metals etc….

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SDRs, Special Drawing Rights, are Keynes' Bancor reincarnated: a synthetic currency whose value is derived from a basket of trading currencies and commodities as publicly traded on a daily basis.

Extremely stable. Politically neutral. Hard to influence. Every participating central bank will get a board seat at the table and a vote.

China made perfectly clear what it wanted in 2009, after the Global Financial Crisis, when Zhou Xiaochuan, Governor of the Peoples Bank of China, PBOC, announced,

The world needs an international reserve currency that is disconnected from individual nations and able to remain stable in the long run, removing the inherent deficiencies caused by using credit-based national currencies.”

Zhou proposed Special Drawing Rights, SDRs valued against a basket of trading currencies, and Nobelists C. Fred Bergsten, Robert Mundell, and Joseph Stieglitz agreed, “The creation of a global currency would restore a needed coherence to the international monetary system, give the IMF a function that would help it to promote stability and be a catalyst for international harmony".

What happened next:

2009: PBOC says, "We want SDRs"

2012: Beijing values the RMB in SDRs

2014: IMF makes its first SDR loan.

2016: World Bank makes its first SDR bond

2017: StanChart Bank issues its first commercial SDR note

2019: All central banks restate their reserves in SDRs

2022: Russia, the EUEU, and China will announce the new reserve currency Apr 1.

Expect a synthetic currency whose value derives from a global, publicly traded basket of currencies and commodities.

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Assuming you have that. How would if had helped Russia in the current scenario? Sanctions are sanctions. Holding reserves in SDR might have eased financial transactions due to no currency conversion being required. But what are those good for if no actual goods are allowed to be traded and no services are allowed to be provided anymore? For secondary sanctions to be created it wouldn't matter which currency the trading was made in either.

And if accounts are frozen, the currency again doesn't matter. Sure: with SDR there would be a lot less need to have accounts in certain currencies. But accounts aren't only held in certain regions of the world for the currency itself. A Russian oligarch could get a dollar based bank account in Russia as well. What the oligarch actually wants is for Putin to not be able to get to his money. He can't get that in Russia, regardless of the currency.

I'm an IT guy. Trading with Russia without Swift isn't a technical issue. It's only a political one. Any technical issue could be resolved within one or two weeks, if really necessary.

So, what am I missing here? I'm certain I'm missing something. But I can't figure out what it is.

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What you're missing here is that the US, inferior to Russia militarily, and to China both militarily and financially, has no way to block SDR transactions, nor the resulting flow of goods.

Let's wait and see how they've designed the SDR system before we get

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How can you possibly conclude that the US military is inferior to the Russian military? Because of hypersonics? That might be the only technology that is superior and that is if you truly believe the US doesn't have that capability if they needed to deploy it which i highly doubt. The slow publicly reported progress is a funding ploy. The chinese economy is just as debt ridden as the US and yet their consumer wealth is largely tied up in domestic wealth projects that are highly correlated. To say that China is superior to the US financially is flawed thinking.

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Zack,

Godfree is a China fanboi from a long time back, in his eyes China can do no wrong. If you can get access to archived Pearls & Irritations commentary prior to it going to FB only, you'd see his history in this.

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There's nothing like ad hominem to clarify matters of fact. I'm guessing you don't like China while simultaneously knowing nothing about the country and unable to disprove my claims for it. Why not use data and publicly accessible information and refute my claims with contrary evidence?

Or are you a Western troll, struggling to maintain your cognitive dissonance by lashing out at anyone who suggests that things might be different than TV and mass media have portrayed them?

Generally, people like you use ad hominem attacks for one of four reasons:

1. You believe that an argument is a simple competition in which winning or dominating is the goal.

2. You believe that the absolutely correct position is known to you but do not wish to reveal it.

3. You believe that argument is entirely about social positioning: that the only meaningful outcome concerns which person looks best in the eyes of onlookers.

4. You mistakenly assess your cognitive ability as greater than it is and, by inference, greater than mine (the Dunning–Kruger effect).

Which fits you best?

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Godfree,

It's a simple fact. Your history at P&Is shows that, you are completely one eyed on China. I have never read ANYTHING from you where you give ground on China and where you are positive on the US. Every piece you do is China supportive and US negative (west in general), you can see no wrong or see no negative in China. It's bloody surprising that you seem to be completely blind to this.

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Well, for one thing, the US military has never won a war. And that's a dead giveaway.

The second thing is that the only time it faced an undefeated army in the field–in Korea in 1951–it threw down its arms and fled.

China's debt burden is negligible: 90% self-liquidating loans backed by productive assets, all denominated in local currency and all owed to banks owned by the Chinese people.

China's economy is far broader (it covers all UN Industrial Categories) and technically deeper than America's and always grows 100% faster every year.

So there's that.

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How's that military superiority stuff goin' for you, Godfree?

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'To win one hundred victories in one hundred battles is not the acme of skill. To subdue the enemy without fighting is the acme of skill. Invincibility lies in the defence; the possibility of victory in the attack'. Sun Tzu.

"Our forces are absolutely strong enough to defend our country and protect our citizens from attack anywhere in the world. Outside of the Taiwan Straits region, we dwarf China’s Navy and Air Force, because their ability to project power is minuscule compared to ours. The only way the PLA could defeat an American military force is if we foolishly impale ourselves into the spikes of China’s A2/AD defenses where they have the tactical advantage. God help us if we try”. Lt. Col. Daniel L. Davis, Senior Fellow for Defense Priorities.

Thanks to a harmless fundraising visit by a batty old American politician, China now patrols Taiwan's skies and oceans–unthinkable a month ago–without firing a shot or raising an objection.

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Is it renminbi or "the" renminbi, as in sterling vs "the" sterling (which is not correct)?

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IMF Q4 COFER Data just released. Key highlights:

1) USD holdings fall to 58.81% despite the Q4 rally in USD;

2) CNY holdings rise again to 2.79%

3) BIG rise in CAD holdings from 2.21% to 2.38%

4) GBP holdings rise to 4.78%.

All numbers UNadjusted so we need to run val adjusted changes through this but the fact that USD holdings fell through a period of USD strength is a standout

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Interestiny, but what happened in the last twenty years Is not necessarily representative of what will happen in the next.. The diversification happened so far aimed mainly at financial optimuzarion; the next round will be determined also by the desire to escape possibile sanctions, at least by a number (not so small) of central banks. A fragmentation of the monetary system seems to me the most likely outcome, with several central banks avoiding all western currencies

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It is one thing to say that USD will decline as a percentage og global assets. Another thing that something will take its place as the worlds most important reserve currency. In a more geopolitically unstable world it seems hard to believe that the USD will be dethroned.

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founding

Although far from being an expert in this area, it seems intuitively correct that most of the dollars’ (even if distant) reserve currency competitors, as articulated in the final pull quote, share this characteristic: “It is no coincidence that every leading reserve-currency issuer in history has had a republican or democratic form of government, with checks on executive power.”

This “rule of law” condition separates the West from China, at least for the foreseeable future. Nothing is forever, though, but it will always depend on what those circumstances prove to be.

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I would think that if/when the need to find an alternative to the USD really does emerge a solution will be created...mater artium necessitas. It seems to me that those arguing that the dollar will retain its privilege no matter what are thinking in terms of alternatives available right now, or in terms of marginal changes to the current system. If we think along such lines then we see nothing on the horizon. Such perspective is however deceiving, as abrupt breaks are more likely to bring about a change of the magnitude needed to pose a threat to the USD.

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I guess since Japan, Australia, Europe, Canada, etc identify themselves closely with the United States, their central bankers have less reason to diversify. But it would be interesting to watch what the central bankers of non-Western countries (e.g., Saudi Arabia, UAE, India, Brazil, Nigeria, etc) do.

I personally do feel less trustful of the US dominated financial system. If I'm not alone, there is a demand for alternatives to the dollar, Euro, Yen, etc.

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The increased role of C$, A$ and CYN since 2000 point to a big change, but as u note only the CYN is truly outside the American orbit. What would be interesting is to look at cross holdings between these three and the US. Although Aus-PRC relations have deteriorated hugely the past 3 years, it would have made sense for Aus to invoice more of its resources exports to Cn in CYN. Avoids the double jeopardy of x-currency movements. I’d be interested to see if that had happened 2000-2018. Doubt there would be any appetite now, but BHP, Rio and others have their own interests to pursue.

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"If it came to the crunch in a confrontation with Russia or China who would doubt which side they would be on?"

Perhaps a third side? "You are either with us or against us" is a rhetorical device rather than an accepted truth, and will become increasingly difficult for America to enforce. https://en.wikipedia.org/wiki/You_are_either_with_us,_or_against_us

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One argument that I heard, in addition to the diversification one which is the topic of #106, is that there could be a move by CB to target lower levels of reserves and be prepared to use capital controls instead when needed. What do you think?

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What role, if any, does gold play in a broader constellation of reserve “currencies”?

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