Johan De Silva;308638 wrote:I do feel like a simpleton here. The immediate need is surely to prevent structural issues due to high refinancing. All the rest, including Ray’s excellent video explanation, is, as you mentioned, could be some way off. Perhaps the creation of the global stock market index, the Nasdaq, is one attempt to stifle this rot? I maintain that instead of the US leading the rate-cutting cycle, they will achieve all goals by following the rest of the world. I do agree with the importance of energy; it is my biggest sector weight.
Good topic btw.
Why does it need to be immediate or a problem. Over 50% of global reserves are held in USD and more that 75% of global trade is still conducted with USD. As a result, the US can have high level of control of international trade, even if it is not involved.
When US economy is weak, it can migrate the problems, to some degree, to all the countries who hold USD for the purpose of trade. But there is a limit of this exploit. To reduce the risks, other central banks can swap currencies to make the trade easier between them. It can export the structural problems away.
Also because the USD is trusted throughout the world it has a built in anti inflationary measure. US Dollar will always be in demand because of the sheer amount of global trade in US dollars. During the 2008 crisis, the federal reserve conducted several quantative easing, which meant printing money in order to bail out the US banking system so US citizens won't lose their life savings. Problem with printing mass amount of money would normally deplete the value of the currency, but the US dollar did not because it's the world's reserve currency. So people are still using the US dollar but the US export the inflation to every other country which holds US dollars. Which is everyone.
Thus the US has alternatives to manage/export its inflation and problems which others do not, so it can choose to use the other lever of high rates to attract, retain and bolster its status as the global reserve currency, which is currently under attack.
However if another crisis happens and the feds have to make quantative easing and other countries decide not to trade in US dollar then it would cause hyper inflation event similar to what's happening in Venezuela. There are current concerns that the next financial crisis would be a US currency crisis and the the moves by the BRICS and now Saudi have heightened these concerns. So the US needs to defend its position not only to maintain its position but also provide stability - hence why the USD needs to be attractive else there could be a run on it and everything collapses.