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History of Plaza Accord in 1985 to deal with strong DXY

Discussion in 'The Kruse Longevity Center' started by Jack Kruse, Oct 6, 2022.

  1. Jack Kruse

    Jack Kruse Administrator

    I doubt the US does this for two reasons:
    1. Strong DXY makes war for China tougher
    2. Triffin's dilemma = The dollar could not survive as the world's reserve currency without requiring the United States to run ever-growing deficits. This is why the Bretton Woods system blew up in 1971. Proof Triffin was right: today the dollar's role as the reserve currency has the United States running the largest current account deficit in the world.
    • Why Triffin paper predicted Bitcoin would be innovated..........
    • A popular reserve currency lifts its exchange rate, which hurts the currency-issuing country's exports, leading to a trade deficit.
    • A country that issues a reserve currency must balance its interests with the responsibility to make monetary decisions that benefit other countries.
    • Another reserve currency replacing the dollar would increase borrowing costs, which could impact the United States' ability to repay debt.
    • A new international monetary system would potentially help countries maintain a reserve currency status. The US central bank initially defaulted to SDR or CBDC, but the private sector came up with BTC as an alternative. What is the SDR? It is another possibility for reducing the pressures countries face trying to maintain reserve currency status: a new international monetary system—an idea floated for several decades as a potential solution. One possibility is the special drawing right, a type of reserve asset maintained by a global institution, such as the International Monetary Fund (IMF). An SDR is essentially an artificial currency instrument used by the IMF and is built from a basket of important national currencies. The IMF uses SDRs for internal accounting purposes. SDRs are allocated by the IMF to its member countries and are backed by the full faith and credit of the member countries' governments. The makeup of the SDR is re-evaluated every five years. I doubt this works because it requires trust from those countries in the basket together.

    Triffin implications:
    By "agreeing" to have its currency used as a reserve currency, a country pins its hands behind its back. To keep the global economy chugging along, it may have to inject large amounts of currency into circulation, driving up inflation at home. The more popular the reserve currency is relative to other currencies, the higher its exchange rate and the less competitive domestic exporting industries become. This causes a trade deficit for the currency-issuing country but makes the world happy. If the reserve currency country instead decides to focus on domestic monetary policy by not issuing more currency, then the world becomes unhappy. Today the world is right here.

    Reserve Currency Paradox
    Becoming a reserve currency presents countries with a paradox. They want the "interest-free" loan generated by selling currency to foreign governments via the Treasury market, and they need to be able to raise capital quickly because of high demand for reserve currency-denominated bonds. This is why a no-bid Treasury auction is a warning sign that the ceiling of Triffin has been hit. The decision to print money at this time means you have to balance the needs of the domestic US Treasury versus the risk of hyperinflation. At the same time, the US Treasury wants to be able to use capital and monetary policy to ensure that domestic industries are competitive in the world market and to make sure that the domestic economy is healthy and not running large trade deficits. The US has failed at this. This is why China has such a huge trade surplus with us. Unfortunately, both of these ideas—cheap sources of capital and positive trade balances—usually can't happen at the same time.

    He pointed out that the years of pumping dollars into the world economy through post-war programs, such as the Marshall Plan, were making it increasingly difficult to stick to the gold standard in 1971. The country had to achieve this by instilling international confidence through a current account surplus while also having a current account deficit by providing immediate access to gold. This is why Nixon went to China in 1971 and turn it into our factory to replace manufacturing in the Mid West.

    Issuing a reserve currency means that monetary policy is no longer a domestic-only issue—it's international. Governments have to balance the desire to keep unemployment low and economic growth steady with their responsibility to make monetary decisions that will benefit other countries. Thus, the maintenance of remaining the reserve currency status is a threat to national sovereignty.

    I believe this is why Bitcoin will benefit taxpayers in the US or ex-pats who leave it. It is a currency that solves this paradox and it remains outside the Fed and Treasuries domain.

    JanSz, ND Hauf and caroline like this.
  2. Jack Kruse

    Jack Kruse Administrator

    In this economy right now the metrics are telling market participants, true price discovery now belongs in a museum.

    Many who suffer from fiat ignorance now believe BTC is going down when the opposite is true because of the first post in this thread.
    JanSz, ND Hauf and caroline like this.
  3. Jack Kruse

    Jack Kruse Administrator

    Seems the G20 has just made a deal on Plaza Accord 2.0

    I think sovereign risks however are already at the central banking level in the US. This tells me the insurance industry has a lot of counterparty currency risk now.

    The NAIC is already calling bullshit on the rating companies on BBB debt, and the LSTA is apoplectic over their counterparty risks. Now with the pension mess in the UK, the checks and balance system on its plumbing will create an endless sea of stress tests and liquidity buffers galore. The bid for the support tranches was always the catch 22 in the system.
    John Schumacher likes this.

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