Semiquincententacles

Let's start with reserve currency status.

The usual suspects on this are the US has a large budget deficit.

That's true, although note that China's, um, at least the way the IMF computes it, is even worse.

Um, rising government debt, um, the US has a, a debt ratio that's basically doubled from sixty to 120% of GDP over the last twenty years.

Uh, again, um, not that different from China.

And then overall, uh, total economy-wide debt, which is usually looked at as household, non-financial, corporate, and government debt together, here the US has been kind of flat, um, because what was happening was that for a while the government debt was offsetting declines in household and corporate debt, and here China's much worse.

Um, and then the other thing that dollar doomsavers typically, doomsayers typically point to is the increase in US sanctions applied to, um, different entities and individuals, the idea being more and more sanctions would make people less interested in holding dollar-denominated assets wherever they were because they could be seized.

So, um, despite all of this, apparently the dollar can do everything but read because the dollar has been remarkably stable, uh, ignoring all of this, uh, these negative fundamentals.

The dollar took a ten percent hit when Trump was elected, but it's been pretty stable since then, and I'm not really surprised.

Um, we have this reserve currency tracker.

Uh, I would expect the dollar to come under pressure if any of these metrics or some combination of them started to decline.

And what we look at is the dollar share of a bun- a bunch of things that are going on in the global economy, like the dollar share of cross-border loans and the dollar share of international debt securities denominations, and the dollar share of FX transaction volumes, of ex- of ex- FX reserve investments by central banks, of exports invoicing, or of Swift payments.

And as you can see, um, in our reserve currency tracker table that we're showing, through the end of twenty twenty-five, all of these metrics were pretty stable, um, and none of them really experiencing much of a way of substantial declines.

So as long as the widgets driving the usage of the dollar, uh, as the world's reserve currency aren't really changing, um, I differ from some of the dollar doomsayers on this issue.

And the dollar has gone down in terms of its share of global FX reserves by, like, three percent, but what's interesting is that hasn't been ground that has been gained by the yen, the pound, the Chinese currency, or the Swiss franc.

Um, as a matter of fact, all of those numbers are lower than they were, uh, two, three years ago.

What has gone up is this other category which is a, you know, cats and dogs collection of Sing- Singapore dollar, Swedish krona, Korean won, Norway, uh, and other currencies where the IMF doesn't break out the, uh, individual numbers.

Then what about this issue that, oh, the cen- central banks have more and more and more of their, uh, FX reserves in gold? That's a price issue, not an allocation issue.

As we wrote last year, if you hold market prices the same, um, and you look at the actual gold holdings, uh, they're, the, the gold, gold allocations have gone down over the last fifteen years or so.

Um, if we don't change allocations, but we just look at the price change, that's basically the entire thing.

So what's happening is the central banks are getting a markup benefit on their existing holdings, but those allocations aren't really changing much in troy ounce terms.

Okay? And China as the world's reserve currency is frankly an absurd concept.

We write about it.

Um, when you-- It has the highest money supply as a percentage of GG- GDP in the world- Um, if they ever decided to open a capital account, the amount, uh, of that, that giant sucking sound, as Ross Perot used to mention, that you would hear of renminbi rushing out of the country could clobber both their equity markets and their real estate markets.

And we get into some research showing just how different China looks from a macroeconomic per- perspective than other pegged currencies and, uh, floating currencies like the Mexican peso, for example.