If the US Gov. defaults on it's debt...?

Rightwing

cryptocurrency wrote: »

And if they were to lose reserve status how do you see that effecting it's GDP/Debt ratio...they are in effect losing it daily as more and more nations tie up direct deals between them.

It would go back to debt to 100% gdp, losing the reserve currency would be a huge blow to them.

cryptocurrency

Its fairly likely to happen, be it a basket of currencies or what ever, it will take away the exorbitant privilege they have had given the right to live without working that much to maintain it.

A Scoundrel

America is not going to lose its reseve currency status.

In fact it's no unhealthy thing to have alternatives. I've long believed that's what the Euro needs to become. But the USD still isn't going anywhere.

JackH14

The US will not default and will not lose its reserve currency position. Which currency would replace it? There is no currency out there strong enough to usurp the USD. And on the issue of default, the US will continue to roll over its debts as it has been doing for years. There is no shortage of willing lenders because of volatility in other currencies and governments. A US government bond is probably the safest investment in the world, maybe besides gold, even with debt levels rising

sin_city

Who says we need a reserve currency Jack? China is already getting ready for a non US dollar world with all the currency swap deals with ever increasing numbers of countries.

I think the FED is buying up all the bonds, most of the them anyway.

Even with the hint of a taper the rates began to increase. They will continue to buy and thus print the dollar into worthlessness.

You will get the return but with much less purchasing power....a la Greenspan

JackH14

A world without a reserve currency would be very volatile and would be playing with fire.

Personally, I think the recent currency swap deals are an attempt to promote the use of renminbi around the world rather than prepare for the collapse of the USD and, knowing the Chinese, they probably want the renminbi to be the new reserve currency and these recent agreements could be the first wave of attempts to cause this.

sin_city

JackH14 wrote: »

A world without a reserve currency would be very volatile and would be playing with fire.

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Please elaborate

JackH14

First off banks and governments hold large quantities of the USD in reserve because they know that the USD will hold its value over time and will continue to be accepted by everyone due to it being the reserve currency. Other currencies do not have that privilege. That allows foreign governments to protect their currencies against speculative outflows caused by a few major investors who start a chain reaction. A government, using USD, can purchase its own currency and protect its value. This can only be achieved by using the USD because the government needs to have its USD reserves either in cash or in very liquid securities. Only in very large markets are there enough very liquid assets and even simply enough of the currency to allow many governments across the world to hold these significant reserves.

Secondly, without a reserve currency the exchange rates would fluctuate crazily because if banks and governments did not have a large market, the USD market, to sell their reserves even one large bank selling its reserves in a smaller currency would have a major impact on that currency's exchange rate. By having one currency, the reserve currency, which has a large enough market to allow the whole of the world to participate in without a few trades distorting its rates, volatility is reduced.

Pennystockwhiz

I don't think it's a matter of IF the US Gov will default on it's debt it's a matter of WHEN

sin_city

JackH14 wrote: »

First off banks and governments hold large quantities of the USD in reserve because they know that the USD will hold its value over time and will continue to be accepted by everyone due to it being the reserve currency.

ahem, sorry do you mean gold? I mean correct me but aren't they buying more gold than USD these days?

JackH14 wrote: »

Other currencies do not have that privilege.

It only had that privilege because it was originally backed by gold. When people countries starting claiming their gold back with dollars a decade or so after WW2, eventually Nixon was forced to cut the dollar from the gold standard.

Please have a look at this short clip from former French leader Charles De Gaulle

JackH14 wrote: »

Secondly, without a reserve currency the exchange rates would fluctuate crazily because if banks and governments did not have a large market, the USD market, to sell their reserves even one large bank selling its reserves in a smaller currency would have a major impact on that currency's exchange rate. By having one currency, the reserve currency, which has a large enough market to allow the whole of the world to participate in without a few trades distorting its rates, volatility is reduced.

Who says we need exchange rates? Anyway the BRICS countries are looking into moving away from the current dollar system. It will end soon. How did we ever manage to cope before the dollar? We did before and we will again.

andrew

sin_city wrote: »

ahem, sorry do you mean gold? I mean correct me but aren't they buying more gold than USD these days?

I don't think he means gold; banks and financial institutions, as far as I'm aware, don't tend to hold gold. It's a commodity, and commodities tend to be pretty volatile. In addition, they don't earn a guaranteed return in comparison with bonds, which have a fixed return.

Who says we need exchange rates?

There's a concept called the trilemma which does a pretty good job of explaining the various pros and cons of fixed and flexible exchange rates. As we're seeing with the Euro right now, some argue that we need exchange rates because they allow countries to adjust to negative shocks without undergoing painful internal devaluations and extended periods of high unemployment.

smelly sock

begood20000 wrote: »

If the US Government defaults on it's debt will that in turn cause another financial crisis that could result in Irish banks collapsing, hence everyone losing their savings?

Forgive me if the above is a silly question but perhaps there is someone here a little more informed on such matters

no more sky sports in the white house.

JackH14

No I don't mean gold. If I was a bank and I was looking to hold currency reserves purely for stability and safety and not for return, I would be buying the USD. As it has such a large circulation and is backed by the US Federal Reserve it is not prone to exchange rate shocks or excessive volatility. And since every bank must hold a minimum amount of reserves under law and always holds more than that requirement, banks will continue to buy the USD.

Amirani

Pennystockwhiz wrote: »

I don't think it's a matter of IF the US Gov will default on it's debt it's a matter of WHEN

Why do you believe this to be the case out of interest?

Rightwing

andrew wrote: »

I don't think he means gold; banks and financial institutions, as far as I'm aware, don't tend to hold gold. It's a commodity, and commodities tend to be pretty volatile. In addition, they don't earn a guaranteed return in comparison with bonds, which have a fixed return.

.

What happens is that the central banks lease their gold to commercial banks at less than 1% a year. The commercial banks then sell that gold and plow the proceeds into higher-earning investments.

sin_city

@Andrew


Yes they do hold it. It's considered money and has been for many thousands of years.

Actually, gold reserves as a % are not decreasing in central banks. The reserves of the USD are diminishing.

http://www.gold.org/download/pub_archive/pdf/Central_bank_diversification_strategies_paper.pdf

Gold is very stable over a long period of time and holds is purchasing power.

andrew

sin_city wrote: »

@Andrew


Yes they do hold it. It's considered money and has been for many thousands of years.

Actually, gold reserves as a % are not decreasing in central banks. The reserves of the USD are diminishing.

http://www.gold.org/download/pub_archive/pdf/Central_bank_diversification_strategies_paper.pdf

Gold is very stable over a long period of time and holds is purchasing power.

Have you got any data to support the statement that Commercial Banks hold a significant quantity of gold? The pdf you linked supports my point, as it shows that gold reserves have remained completely unchanged in the last 13 years, at 13% of official reserves.

More interesting as you mention (and more on topic for this thread) is the fact that the same chart shows that the share of US dollars in global reserves has fallen from 62% to 54% over the same period. As a result, The Euro, Yen, Pound and 'other currencies' have all seen an increase. The Euro in particular has seen a big increase from 16% to 22%. It'd be interesting to see whether the trend out of the dollar continues given the debt crisis, or whether the debt crisis has had any effect whatsoever. It'd also be interesting to see what effect the European debt crisis, and generally low interest rates have had also.