Currency War’s Prize: Privilege to Print “World Reserve Currency”?

Salvador Dali: a surrealist artist for a surreal currency
[courtesy Google Images]

Salvador Dali (1904-1989) was one of the world’s premier surrealist artists.  During his peak popularity he enjoyed a peculiar privilege: Whenever he wrote a check, he embellished the check with so many distinctive flourishes and artwork, that many people refused to cash his checks. 

Why?  Because they believed his check (an intrinsically worthless piece of paper) was—as a work of art signed by the Dali—worth more than the face value of the check. 

Result?  Dali frequently didn’t have to actually pay for many of the goods and services he purchased by check with a deduction from his bank account.  Dali could buy dinner or a new pair of tools and discharge his debt with nothing more than a few doodles.

Dali was essentially printing his own fiat currency (an intrinsically worthless piece of paper just like a US fiat dollar).  His celebrity allowed him to use that “currency” to discharge his debts without redeeming that currency at Dali’s bank.

In that regard, Dali was able to emulate the US government’s ability to issue fiat dollars (the World Reserve Currency) and never have to actually redeem the fiat dollar. 

I.e, whoever prints the world reserve currency doesn’t have to actually pay his bills.  At least not for a couple of generations.

Bill Holter recently wrote that China:  1) is (like the rest of the world) heading towards an economic depression; and 2) wants the Chinese yuan to become the world’s reserve currency:

“I believe China will fare poorly when the paper and derivatives markets around the world collapse.  They have a very over levered real estate market . . . . Their real economy and manufacturing will suffer as global demand drops further because of economic depression.

“It won’t be ‘pretty’ but China will survive and eventually thrive.

“Why?  Because undoubtedly, China is working toward the yuan becoming ‘a’ reserve currency and, given time, “the” reserve currency.”

Holter’s article didn’t explain why issuing the World Reserve Currency might mitigate China’s exposure to the effects of economic depression.  But I see that cause-and-effect relationship as profound and worth an exploration and explanation:

•  If China foresees that it will soon suffer an economic depression, can China therefore seek to mitigate the effects of that depression on the Chinese people by snatching the status of “World Reserve Currency” for its yuan?

Yes.

History tells us that the fiat dollar’s status as World Reserve Currency has allowed the US to enjoy an unearned and unprecedented prosperity over much of the past 45 years.  During that time, the intrinsically worthless dollar was (and still is) accepted as payment by the world creditors because the dollar was the World Reserve Currency.

It should follow that, even in the event of a global economic depression, whichever nation(s) issue(s) a “World Reserve Currency” will tend to prosper to a greater degree than the nations that do not issue a world reserve currency.

Issuing the World Reserve Currency won’t guarantee happiness in a time of economic depression.  Still, doing so, will function like a life preserver after a ship sinks:  while the rest of the survivors struggle to grab some debris to keep them afloat, the person who issues the World Reserve Currency can bob up and down in the water without much effort or concern.

•  Today, in the midst of a global economic depression, the US economy may not be very strong, but it’s still stronger than most other national economies. At least part of the reason for America’s relative economic strength is the fact that the US fiat dollar is still the—or at least “a”— World Reserve Currency.

There’s little doubt that the dollar’s status as World Reserve Currency has kept it alive and relatively valuable ever since the dollar became a pure fiat currency in A.D. 1971.  Likewise, most agree that if the US dollar lost its status as World Reserve Currency, the dollar’s perceived value would plunge.

Thus, it appears that the US economy depends on the perceived value of the dollar, and the dollar’s perceived value depends significantly on retaining the status of World Reserve Currency.  It should therefore follow that if a global or national depression is coming, whichever nation(s) that can retain or acquire the status of World Reserve Currency for its national currency should be highly motivated to do so.

•  The US government has allowed the fiat dollar to slide into deflation on the US Dollar Index (USDX) for the past eight months. Why that evidence has been allowed remains a mystery.

However, that deflation might be explained as an attempt to shore up the dollar’s claim on the status of World Reserve Currency.  If the dollar’s value fell much further due to inflation, so might its claim to title as World Reserve Currency.  On the other hand, if deflation was allowed to increase the dollar’s value, its claim to title as World Reserve Currency might be strengthened while competing claims from China were weakened.

We can therefore speculate that one of China’s solutions to its upcoming depression might be to acquire status as (a) World Reserve Currency.

Is status as “World Reserve Currency” the ultimate prize in all of the currency wars that are now being waged among the world’s fiat currencies?

•  Mr. Holter continued:

“[China] understands the dollar game fully. They have known ever since and even before 1971 the rules were “never pay” or settle as the key component.”

And that’s the great advantage of issuing the World Reserve Currency— like Salvador Dali, a government that issued the World Reserve Currency might never have to repay its debts in full.  A government able to print the World Reserve Currency can just discharge its debts with paper or digital fiat currency “spun out of thin air”.

Without our dollar being the World Reserve Currency, could the US have fought the war in Viet Nam?  Could we have invaded Iraq, meddled in Libya and Syria, and provided massive support for Israel?  Probably not.

The privilege of issuing the World Reserve Currency grants incredible power to the issuer.  He can acquire property or alliegiance without conquest or actual payment.  However, like all incredible powers, issuing the World Reserve Currency also tends to corrupt the issuer.  Even so, the temptation to wield such power is beyond the capacity of most men, governments or central banks to resist.

As issuer of the World Reserve Currency, you never have to say you’re sorry—at least not until your fiat currency finally fails about two generations after its onset.

•  Mr. Holter used China’s predicament as grounds to predict that China will inevitably reprice the yuan in terms of gold and will be forced to raise the price of gold dramatically.

I’m looking at the same predicament and speculating that:

1) Having the privilege of issuing the (or “a”) World Reserve Currency provides the issuer with enormous economic advantages and political power; and,

2) If a US, Chinese or global economic depression is coming; then,

3) The US should be working determinably to retain the dollar’s status as World Reserve Currency.  (This determination might even explain why the US has allowed deflation on the USDX over the past eight months); and,

4) China might also be working determinably to acquire the status of World Reserve Currency for the yuan in order to mitigate some of the adverse effects of the coming economic depression.

If so, this may be evidence that the real prize in the modern currency wars may be privilege to issue the World Reserve Currency.