 Welcome back to Think Tech. I'm Jay Fidel. This is our view from the North series involving a kind of reflexive examination of American issues from Canada with our friend Dr. Ken Rogers from Kelowna, British Columbia, who is a retired Canadian businessman and who has advanced degrees in economics and business. I was there. I can vouch for it. I can. Hello Jay. So the reserve currency is our discussion today and the reserve currency is an issue that popped out of all the argument controversy about the debt ceiling and it was raised because it had the debt ceiling not been raised. There are those opportunistic geopolitical powers that would have looked to accelerate the decline of the American dollar as a reserve currency, the global reserve currency. How great was that threat? Well, you have to get what is a reserve currency first to determine the effect of somebody not being happy with that or wanting to dislodge it as the most dominant reserve currency in the world. But the idea of a reserve currency is fairly simple. It's when one country wants to sell goods to another country. If you pick a small country like Costa Rica where they produce a lot of let's say bananas, pineapple and palm oil, as well as have a lot of tourists. To them, a reserve currency is important because if they're going to sell their product to a country like Canada where the weather is very different so we need fresh fruit in the winter and so Canada basically pays the Costa Ricans in US dollars. The basis of trade, especially oil, oil is the easiest example because the price of oil around the world is always in US dollars. You don't hear somebody say the barrel of oil per euro or per any other thing. It's always per US dollar. Similarly, the price of gold. Now, if you want to have a different currency, there's no great reason that you can't have a different currency trade. For example, the US dollar amounts to about 60% of the world's usage as a reserve currency. The euro covers about 20%. Well, now in the last couple of years, most of the countries in Europe have adopted the euro internally. For example, France doesn't use or a Frenchman doesn't go to the grocery store and buy his groceries in French francs anymore. He goes to the grocery store and buys them in euros. That was not the case a couple of years ago. Well, a couple of years ago, the French wanted to do some trading with Sweden. They normally ended up doing it in US dollars. Now, the fact that the US dollar is the most common currency used for transactions between countries, not just trade of physical goods, but also capital flows. The Chinese wish to make an investment in Canada, that investment would end up actually being in US dollars. The Chinese would change to US dollars and then the US dollars would change to Canadian dollars in Canada. The fact that the US dollar is dominant in all of these transactions gives great prestige to the US. The little country like Costa Rica or Canada compared to the US economically, it's very prestigious that if you're in Costa Rica and most of your international transactions are in US dollars, all the tourists come to town with US dollars, where tourism is their largest industry really. A typical Costa Rican would think there is no country on earth as prestigious or important as the US. They don't even know what the currency the Chinese use. What is it? No, you'd have great difficulty replacing the US dollar by anything currently except perhaps the euro. The euro's getting closer, but one of the major reasons, for example, you couldn't have the Chinese currency become a reserve currency to the same degree is they do not have a large capital market where large amounts of money can be exchanged quickly. You can buy US Treasury bills. You could buy hundreds of millions of dollars worth in a few minutes and it would run the transaction. It would be very smooth. You have a very efficient capital markets in New York City in particular. The world countries, most of them have a deposit at the Federal Reserve Bank of New York that operates almost like a bank for your transactions in Hawaii. You'd go to one of the local banks and your transactions would be handled. When you buy the groceries, the grocery store would get their money via the bank. Well, the Federal Reserve acts almost like a banker for countries. Canada has US dollars, so when it's buying the goods from Costa Rica, really all that happens is the Federal Reserve Bank of New York shifts the Costa Ricans now have more money and the Canadians have less US dollars on deposit at the Fed of New York. Now that prestige factor is the most important one where another major factor is the fact that countries, let's call it the United Kingdom, Canada, Australia, the US, the European Union all do most of their international transactions in either US dollars or euros. The fact that it's respected in that regard, it facilitates extra trade if you have a smooth way of transacting and you don't have to worry about is this currency any good? If you're talking about China, they have capital controls and so on a minute's notice suddenly if you were dealing in the Chinese currency, it might get frozen or you can't transact it, you can't use it, it's no good for anything else. And if you took it to some other country or to Australia, they'd say, we don't want that crap, give us some good currency, we'll take US dollars, we might consider some euros, but we'd be less happy with euros than we would US dollars. It's like insurance and trade, isn't it? In other words, if you're a seller and you want to be very sure you get your money, you want to have somebody guarantee stability of the currency and reliability of the transaction and you're not necessarily going to take Peruvian dollars whenever that is because you're not sure that it's going to work, but if the Fed gets involved in the middle, then you have the full faith and credit of the United States to guarantee that this will happen, you will get paid because if you get paid in dollars, you can rely on that. So what about Bretton Woods? This all happened at Bretton Woods after, which is I think New Hampshire, at a meeting in Bretton Woods after World War II. Can you talk about that? Well, that was, you know, at the time the United Nations were formed on the equivalent of stuff. They wanted some stability and currency and prior to World War II, the British Pound had been the dominant reserve currency in the world, you know, but Bretton was blasted in the war. I mean, they were beaten to the ground and the US grew dramatically during the war and its dominance was pretty obvious by the end of the war, so that it was just agreed that and at the time the US dollar was pegged to gold, you know, so that gave an extra bit of insurance uncertainty, you know, and that lasted until Richard Nixon, you know, took the United States dollar off the gold standard and I would say thank goodness finally that, you know, because it was, it had a use at the time of Bretton Woods and prior to that is is everybody felt that least there was something in common, you know. Now, if you use reserve currency, for example, you could actually use gold as a reserve currency if everybody wanted to trade it. Well, you know, you could have if you trusted the Federal Reserve Bank in New York, they could have these big piles of gold, you know, the one closest to the left wall might be Canada's pile and the one in the, you know, third from the left might be the United Kingdoms and when there's a transaction they can just shift the gold from one pile to another instead of the, you know, treasury bills or what they now shift from one pile to another. Well, so, you know, with all of that, the word reserves that takes on a special meaning, it's like if you have the reserve currency, if the reserve currency is the currency of your country, it means you have reserves. You have more reserves than most other countries, maybe then all other countries. And that doesn't mean gold anymore because Richard Nixon disconnected gold and the dollar, but it does mean reserve. What does it mean in terms of reserve? What kind of reserves do you have to have to have what is known as the reserve currency? Well, in, you know, most people's personal lives, they have a bank account, you know, and they have their personal, you know, standby if they want to go to the grocery store, how do they pay? You know, if they want to buy a car, if they want to pay their rent, you know, they need to have their personal family reserves or their abilities to pay. So it's money in the bank? Essentially, it's money to handle the international transactions. So now what we've heard in recent years, I mean, the U.S. history has been spotty since Bretton Woods, since the end of World War II, the greatest generation and all that, since the economics of the 50s, I suppose, when we really felt our oats. You know, we've seen assassinations. We've seen a very regrettable war in Vietnam. We've seen a lot of strange things in politics and stranger yet right now and the dysfunction of the Congress and the Supreme Court. He's a problematic, you know, the guy who writes in the Irish Times says that the U.S. deserves our pity. P-I-T-Y, that's what he says. And this very troublesome because a lot of the reserve currency is a question of confidence in the country that it will remain stable, reliable, that its institutions will be predictable, will not fail. And yet those questions during the Trump administration anyway have been raised, if not longer. And so after a time, you have to think, maybe we should not assume that the United States will remain constant and reliable and predictable and so forth. And there are those, you know, predictors that are saying that, yeah, that's true and we have a slippage. We have a decline of world confidence so that there is a risk to the United States dollar staying as the reserve currency, including most recently Janet Yellen who made a number of speeches over the past few weeks alerting us to the fact that we may not be able to hold on to it forever. So what's the status of that and the decline? Well, a few years ago the United States dollar accounted for about 90% of the world's reserve currencies and currently it's at the lowest level. It's been since Bretton Woods, you know, it's around 60%. Now the euro is about 20%. So, you know, still, you know, we would call it civilized society accounts for that much. But the facilitating trade between countries is an important item so that there are five countries called BRICS, B-R-I-C-K-S made it and it was really Brazil, Russia, India, China, and oddly, South Africa. You know, South Africa is pretty tiny economically compared to the other four. The other four, you know, fit in the top 10 countries economically in the world. And, you know, you can think of the Chinese might, you know, they want to do some trade with some country, you know, like Kenya or something in West and East Africa and it's in US dollars. You know, that would be kind of embarrassing to the Chinese. That's kind of a prestige thing, but also, you know, the Chinese and the Kenyans need to have US dollars while if they don't do as much trading with the US or if you're like China compared to, let's say, Vietnam where, you know, there's the major trade for both countries with each other with China to Vietnam and vice versa. Well, why should they do it in US dollars? You know, it would work more efficiently for them if they could do it in their own currencies. You know, that's the BRICS countries thing is to facilitate additional trade between them and also to avoid some of the nasty things the US does like sanctions. It seemed to be an item that Congress really likes nowadays and sanctions. The fact that the US dollar is so dominant enables these sanctions to work. You know, if the US dollar was not the reserve currency, then the Russians would not be suffering nor the Iranians from US sanctions. You know, the US sanctions absolutely ruined Cuba. You know, Cuba is a neat country. They have neat people, you know, but the US, the idiotic sanctions, in my opinion, imposed on Cuba, have just decimated it financially. Well, you know, what I get out of that is that it's not like the reserve currency gives you a percentage of the deal. Not like you're going to get, you know, anything out of that deal, you only get leverage, power, influence, as you say, prestige. So it's kind of very interesting that even in the Kenya-Russia transaction you talked about a minute ago, well, up till now they were probably using the dollar, even if Kenya doesn't have a lot of dollars. And everybody would buy into the dollar because that was what people do. The shippers, right? The manufacturers, the whole economic framework of the deal involved using the dollar. But now there comes a time when those things are simply not as persuasive. And if the United States prestige is less in other ways, then they're tempted, especially by organizations, collaborations like the BRICS group, to use some other transaction. There's something called LCT, you familiar with that local currency trading in a given region where they're already doing those kinds of things. I think BRICS is not really a region, but it's a larger group of countries that have decided to try to sidestep the American reserve currency. And don't you think we're going to see more of that? We're going to see that happening elsewhere. And we're going to see it led by China who would love to see us lose the prestige. And Russia, of course, that has been the object of our sanctions and would love to see anything bad happen to the United States. So these people are dedicated to try to topple us off the reserve currency. How can they do that? Just ignore it, not trade in it, refuse to take dollars and look for other currencies to step in. I mean, even in the BRICS organization, it's not like Brazilian money is the reserve currency there and something else. I don't remember what it is, but they will pick another currency, any currency other than the dollar, and refer to that. So there's certain currencies that are emerging as the contenders, right? Well, if they do enough trade between certain countries, let's use Saudi Arabia and China, since one could obviously think that China buys a ton of oil, Saudi Arabia produces it, and on the other hand, the Saudis have a lot of money to spend, and so they could buy a lot of Chinese goods. Well, if the trade between them was sufficient, like if they encouraged the trade between them, then they could deal in their local currencies. They would be more acceptable. The risk to the Saudis that the Chinese have a lousy capital market, you can't move a billion dollars of Chinese Ramambi or whatever it's called easily, but they could have the transactions between them work quite efficiently. And when you think of Russia, China, and India, they're in Brazil. All four of those countries are in the top dozen around the world in size, especially if it treated the Euro as if it was one country rather than Germany and France and Italy being sizeable countries on their own. So that that ability to do trade just between a certain group of countries and deal in their currencies more easily is far more workable. And capital investment can work that same way. The Chinese like to their Belt and Road Initiative is they want to invest all over the place, but that's because their goods trade policy is always so controlled that their exports far exceed their imports, so that in order that they don't have pressure with their currency going up, going up so high it spoils their exports that they look for a place to invest the capital that will be a good long-term strategy. But the long-term strategy is the top of the U.S. And I guess these regional arrangements are collaborations between countries that would like to trade in their own currency or in some currency other than the U.S. will probably grow over time, don't you think? And as the U.S. demonstrates a lack of what do you call it, a lack of organization and Congress, a lack of strong government historically, then we lose the prestige and they are more likely to do that. So what's the future? Well, the future for quite a while, the U.S. dollar will remain as the dominant reserve currency. You have stupid things like the Congress or the Republican side dealing with that debt ceiling limit. The U.S. needs to get rid of that debt limit requirement of Congress having to raise the debt limit, since it's really they've already approved the bills. Why did they then decide we're not going to pay after the fact? It's just a stupid political stunt that jeopardizes the reserve currency factor. Now, back to one point you made was the U.S. does not get a fee every time somebody's using the U.S. dollar for transactions, but the U.S. does benefit. You know, for example, the U.S. can run a budgetary deficit at Congress more easily than any other country because of the demand around the world for U.S. dollars, the fact that the Costa Rican or the Kenyan, they need to buy U.S. Treasury bills so they can have their trade transactions so that that tends to make U.S. monetary policy more flexible than any other country's monetary policy. You know, Canada, for example, when in the U.S. raises interest rates, you know, Canada pretty well is forced to follow because otherwise the capital will flow from Canada to the U.S. You know, where interest rates are higher and people want to get a better yield or they'll invest in the U.S. stock market. You suggest, and that's exactly what Janet Yellen said, that there's a long, slow process and it's not going to happen overnight, but it is in some ways inexorable and that ultimately it will happen. I just wonder, you know, whether this is event driven. In other words, suppose the U.S. does something really stupid. Well, they do that lots. Lately in particular. I mean, how can you have two parties and one party? Is their leaders a criminal? Exactly. This is not helping us. This is not helping us reserve, you know, with the reserve currency or with American prestige. But suppose we do, suppose we elect Trump again and he takes steps that are, you know, adversarial to Europe and to, you know, global policy. And it's really intolerable because he doesn't care, but it's intolerable. He gives arms to Russians, steady Ukraine. Yeah, right. That kind of thing. If that happens, if it's really gross like that, is it possible that Janet Yellen's prediction and your prediction of a slow gradual decline in our ability to preserve the reserve, you know, will accelerate? Yeah. Absolutely. So go ahead. Oh, well, it really, in many regards, you know, the reserve currency, I mean, it's not as if the U.S. will go bankrupt. If it's, if the U.S. dollars no longer the reserve currency, you know, it just a very prestigious thing that assists the U.S. to accomplish a bunch of its objectives. It'll just be less able to accomplish those objectives. You you know, have more trouble. Like the U.S. has a ridiculous negative balance of trade, you know, and you have a ongoing federal deficits. Well, if you're not the reserve currency, it'll be tougher to do both of those. You know, you'll need more financial discipline and more trade discipline or, you know, the U.S. dollar will go down in value, you know, so that you know, it'll adversely affect a lot of things in the U.S., like at things you sell, you'll get less money for. Well, that suggests that that if we were not the reserve currency that we would have a more difficult time in managing our trade relations, our fiscal policy at home, our debt in general. And I remember that not a long time ago, a few weeks ago, when we talked about the resistance to lifting the debt ceiling, that there were all these warnings that if we don't do that, all kinds of things would happen. And these things would affect the man in the street, the woman in the street. And that our quality of life, our quality of consumer life would change. And only one of those things was we might lose the reserve currency. But just taking it all by itself, Ken, just the reserve currency, if we lost that, how would it affect my life as a consumer? How would it affect our daily collective lives in the country? How would we know that something bad had happened? Or would we be impervious to that? In between. That is, you really wouldn't have a major dramatic effect on an individual living in Hawaii, or Montana, or Colorado, kind of thing. If you were a J.P. Morgan bank, the biggest bank in the world, you would know the difference because you would have, you know, your quantity of financial transactions would be diminished greatly. You know, the U.S. annual gross domestic product is around $25 trillion, where there's about $7 trillion in these international reserves, you know, just in U.S. dollars. So that, you know, that, you know, amount of that, how many treasury bills does the rest of the world own? Well, you know, if those suddenly aren't there, you know, the U.S. federal government has a problem, you know, like with their debt, you know, no, it won't happen quickly, though. You know, they could get even, even Trump, you know, as much as Europe shuddered with, you know, with Trump's, you know, pro-Russian kind of policies, anti everybody else. That really played a role in reducing the status of the U.S. dollar as reserve currency. That's why it's only 60 percent now, you know, and it wasn't very long ago. It was, you know, well over 80 percent. However, you know, it's not a, it's not a sure death for the U.S. that their dollar would not be the same. But then, you know, you know, if you think of all the political speeches of the U.S. is, you know, you know, we are the world leader, we are the biggest and best and strongest and so on. Well, that just won't be so anymore. You know, one thing that strikes me, and maybe this is, let me impose this to you and see what you think. If I find one day that the U.S. is no longer the reserve currency, it goes from 60 to 50 to 40, and the RMB or the rubble or the pound or the euro have become, you know, the majority of the world currency. It's kind of a canary in the coal mine, isn't it? In other words, it's not by itself. It's not, you know, a single factor kind of way of a metric. It really reflects that other things have happened. Other things have caused us to lose ground on the amount of our reserves and our reserve currency. And therefore, if I find one day that that number has gone from 60 to 40 to 30, and I look around, I will probably find that that my quality of life ain't so good anymore because it reflects other things. It reflects, you know, a myriad of other things that that will affect my quality of life as a consumer, as a player in the economy. Don't you think? In other words, my earlier question, I posed what happens if the reserve currency declines all by itself, but it would never be all by itself. It would be linked with all kinds of other factors, right? That's right. You know, for example, let's suppose you and I get to decide for the whole world that let's just replace the US dollar as reserve currency, you know, and let's let's call the new currency the gold, though, you know, put an O in the end of gold just so that it has some semblance of history. Okay. And we get some place that the whole world accepts as wonderful, honest, stable, workable. Let's pretend we pick Switzerland just to pull it out of the air. You know, it's not in the euro. You know, it's not, you know, the US dollar, it's, it's, you know, it's has always been respected for, you know, currency. But if every country in the world says, okay, we will also support gold. And so Switzerland could set up like the Fed of New York does. Everybody has their deposits that, you know, back up their pile of gold, you know, and so all the trade transactions happen in gold. You know, so now that's unlikely to ever occur, you know, because let's say Canada in the US do enough trade between them that I mean, I can go to a credit union in, in, you know, a little wee town in British Columbia, and, and say, I'd like to buy some US dollars, and they actually have them in a vault, bring them out. You know, it's, it's, you know, that common that, that you need you at individuals in Canada, take US dollars and use them for generally traveling to the US or traveling anywhere. You know, they do, we don't go to the Bank of Canada and the Federal Reserve of New York and they're involved at all. So just a chartered bank. So that you can have transactions that are done otherwise, like the US would have the loss of, of the flexibility they now have with monetary policy, be a little tougher to do Janet Yellen's job. She'd call it a lot tougher, but I call it a little bit tougher. You'd have, the US Congress would have more difficulty running deficits forever, or the size of deficits that they now do. The New York money market would not be as big as it now is, you know, and so lots of those wealthy people and vultures would suffer. And that means the stock market too, doesn't it? Oh, there would be less money in, well, you really have, why do people invest in the New York Stock Exchange? You know, there's, is the confidence in the US dollar is part of that, you know, but if you simply, you know, spread out, you know, all countries transacted, did their international financing and international trade in a variety of currencies, you know, the US dollar might still be one of those currencies just at 20%, instead of 60%. Well, it'll still have what does the US New York Stock Exchange constitute, you know, it's just a huge stock market where if you want to invest in Microsoft or Amazon, you invest there. But if you, you know, if you want to buy, you know, you know, one of the big Chinese companies, you know, you usually can buy it on either the London Stock Exchange or the New York Stock Exchange. Well, so much of this has got to do with public confidence, confidence in the future, confidence in the country, confidence in the market, and confidence in the dollar. And I think we have to be very conscious of that in this country right now, because confidence is not like it was. That's all the time we have, Ken. Thank you so much for this discussion. This really helps to understand, you know, where we are and where we might go on reserve currency. See you next time soon. All right. I kind of agree with you. I think confidence and prestige are somewhat the same in this problem or opportunity, whatever you want to call it. Hello, I can.