38 Comments

Thank you so much, Noah! It's so annoying to see people freaking out about shit they don't understand.

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No one would ever trust that a floated Yuan would stay that way. China operates at the whim of its current dictator--sometimes stable, sometimes feckless.

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Does Australia’s Superannuation system have anything to do with investors diversifying into Australian dollars (9.5% soon rising to 12% of every Aussies gross income is put into legislated retirement savings accounts, we’ve had it since the 90s and it now has 2 Trillion in assets under management, which is a bigger number than others mentioned in this post) or is that irrelevant because the majority of Super is in shares and it’s just that as a stable, law based, growing economy it’s a good choice for the same reason Canada and Sth Korea are?

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author

Probably the latter.

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“Can somebody tell me when the U.s. dollar lost its status as the world’s reserve currency?” -- Jack Dorsey, Block CEO

A $2 trillion loss in cryptocurrency markets and not a ripple in currency markets, stock exchanges, etc. Blockchain has applications, but not in crypto currencies.

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Also, "gold-backed" and "stable" are mutually exclusive properties, unless you're one of those morons who insists that if the price of gold in dollars doubles, the value of the dollar has halved, even if the price of a loaf of bread in dollars remains unchanged.

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Why is no one making the point that only the Republicans have caused the US Credit Rating to be reduced by S&P? No, the Republicans have not causqed the US to default, but their threat did casue S&P tp remove the US AAA rating.

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People have made that point.

"Making the point" isn't as game changing as you seem to think it is.

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In the latter part of the 2010s, the BRICS countries were also pushing their own "internet", which basically was having a single ingress/egress to the country which they could turn off, filter, etc (as China/Russia do already). Their argument was "a better faster internet for the next generation", China is still pushing the ITU to accept some of their proposals. It's now on the back burner.

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The dollar market is huge, dwarfing all other currencies. As an example, 10-15 years ago a Mexican branch of a non-Mexican bank (sorry, I don’t remember the bank) was sanctioned by U.S. Treasury Department (FINCEN) for facilitating drug cartels’ money laundering. I was curious about why the branch would use U.S. dollars to launder the money if they knew that the U.S. government could go after them? I called an acquaintance at the Fed who was an expert in foreign transactions. He said the branch really had no choice. No other world currency, including the Euro had sufficient financial depth to handle the huge volume of the illegal drug trade. Even if the transactions originate in Europe or Asia, the shear volume of the transactions meant that they would eventually have to use U.S. dollars to clear through one of the New York clearing systems, subjecting the originators to U.S. anti-money laundering laws.

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This all raises the question of why there are so much misinformation on currencies out there to begin with. Two reasons:

1) Right-wing retirees paranoid about their wealth are most likely to get invested in this conversation online, and they are neither reliable sources of information not especially discerning consumers of information. This is the engine that drives the bad business/econ content.

2) There is real money to be made manipulating opinion on foreign currencies and inflation. The most obvious is a pump-and-dumps originally at the behest of gold-traders (remember Bush-Obama era cranks) and now at the behest of crypto-traders. Afforementioned right-wing paranoid retirees are often the marks, but are mid-level marketers of the collective pyramid scheme.

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Thanks for the post Noah, very timely!

I was wondering if you had any thoughts on Zoltan P’s recent paper “War and Commodity Encumbrance” (blob:https://plus2.credit-suisse.com/91ea57ae-7969-422c-8237-0ffdb1ca18d1)?

In it he talks about “ the idea of “BRICS coin” as a commodity-weighted neutral reserve asset that encourages members to pledge their commodities to the BRICS “cause” “

Might this have more chance of displacing the USD in commodity flows? Despite your fourth point, it seems to me to be very useful for the US to buy commodities in a currency it’s able to print…

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One of the things that Saddam Husein was up to, before the Iraq War, besides starting the Intifada in Israel, was a determination to create a basket of currencies in which to accept for his oil. Have contended, that was perhaps the main reason for the war, a desire to maintain the dollar, at all costs to the Iraq's.

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Did you even read the article? If you did, you would know that 1. Trusting Saddam on anything is bonkers 2. Oil demand doesn’t really effect the dollar all that much and 3. Diversification away from the dollar would be good for the US!

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The U.S. Government is committed, at least for the present, with maintaining the all mighty dollar. It is not particularly run managed by economist but rather by politicians and ideologues. They have little or no intent on changing the present role of the dollar, for them it is a political cost, and one beyond their willingness to pay.

Was not talking about oil demand, but about pricing all oil, worldwide, in a basket of currencies. That would have diminished the dollars influence, something no politician is willing to do.

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Did you read the post above? Lmfaooo

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I've waited for an explainer like this for so long. Thank you. Makes me laugh at all the anxiety spikes I'd get when reading some dollar doom article on Bloomberg.

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This was a great piece that got me thinking - does the US Treasury hold foreign currency reserves? And the answer was easy to find - it does! Mainly in Euro and Yen. The other question is this - why, as the world's fiat currency, would the US hold any foreign currency reserves at all?

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Someone good at economy check my logic:

If the US finds itself in a crisis where it needs to suddenly buy a lot of stuff from EU or China at steep price - who knows what circumstance that is - then the relative price of the dollar will change and make the emergency spending even more expensive. So its a way to hedge against not everything being made in the US, even though the US doesn't have to worry about the dollar completely collapsing.

We could hedge in a small currency, like I dunno the Malaysian ringgit, but the volatility in that currency means that its a lot more risky/costly to hold that just as insurance, while at the same time its less likely that a single small country will be able to hold us over a barrel.

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It still needs to hold foreign currencies to manage exchange rates.

https://www.investopedia.com/terms/e/exchangestabilizationfund.asp

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Didn't the Swiss do something a few years ago where their currency was appreciating too much because people saw it as a safe haven, so the Swiss bank essentially said 'we will literally do whatever it takes to keep the price of the currency stable,' and that effectively stopped the buying of francs. Am I remembering that right?

I always thought of CHF as being one of those secondary reserve currencies but I see it's way behind the countries you mention. I'm guessing China is also afraid of a scenario like that, where foreign traders have too much influence on the price of the yuan?

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They devalued their currency, which was horrific for me as my Genentech options were held in Roche stock which is denominated in Swiss francs. Every person who had either options or Roche stock lost a lot of money that day. It was awful.

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Surely one point of holding a claim on a company's profits rather than cash assets directly is that the company's products and outputs is the same regardless of local currency fluctuations, no? I can see how if most of Roche stock's value is based on revenues in local CHF with sticky prices then you end up with lower (non-CHF denominated) EV, but surely the Swiss domestic market for biotech and pharma Co.s is trivial compared to the international market, right? There just aren't all that many Swiss.

Or is the issue that Roche had large CHF cash reserves to which shares represented a claim and suddenly that took a major haircut (which obviously would tank the non-CHF denominated cash value)?

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It's a Swiss company and its shares are denominated in Swiss Francs.

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Sure, but if I own a barrel of oil denominated in yen, and the yen is devalued by half, I still have a barrel of oil and now it's just worth twice as many yen because the underlying asset's intrinsic value isn't generally a function of the currency in which it's denominated. I'm asking by what mechanism this *wouldn't* be true of a share in a Swiss company.

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I don't know. All I know is I had $125k in available options and after devaluation I had $75k and I had to pull the rest out of a retirement fund to finish the remodel of the home I'd purchased the year before. I also know that there was a lot of hedging and trading in the Swiss Franc the day before devaluation was announced, so the news leaked to selective people who then made a bundle off of it.

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OK, so musing on your question last night I think I arrived at an answer. Options are granted on the basis of a "strike price," which is the price of a stock on a certain day - your options grant for that year is set at that strike price and if the stock appreciates - then you earn the difference. When the franc was devalued the price of the stock dropped, costing anyone who had options set when the franc was high - a lot of money. Here's the headline from that day, Jan 15, 2015: "UPDATE 5-Swiss shares post biggest one-day fall since 1989 on franc furore. One trader described the central bank’s move as “carnage”, while Swatch Chief Executive Nick Hayek called the franc’s surge in value against the euro an economic “tsunami” for Switzerland, which sells more than 40 percent of its exports to Europe." Hope that helps explains it and thanks for making me search out this info - I learned something myself!

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Feb 6, 2023·edited Feb 6, 2023

So let me see if I understand this correctly because I think I'm not *quite* following but I think I'm getting closer (the emphasis on option strikes is a key feature (and thanks for the follow-up!))

I can see how the option strike price is going to have huge market movement effects if the real value of the underlying remains the same but a currency is devalued and the strike price remains in nominal francs, but AFAICT this is potentially valuable for calls and carnage for puts, but I presume you were long the stock rather than short it?

So, simplified example:

(1) Roche shares are mostly a claim on future profits (and thus agnostic to currency valuation) and so more similar to a barrel of oil than just a claim on existing franc-denominated cash reserves in the sense that, let's say, if the value of the franc does down by 50% the stuck is just worth twice as many francs -- simplified example: at Time 1 Roche stock is worth 50 francs, (pre-say a 50% devaluation), at time 2 Roche stock is worth 100 francs (post-50%devaluation)

(2) A call for some post-devaluation has a face strike price of 70 francs, and the call is strictly in nominal rather than real francs -- so devaluation suddenly converts from out out of the money call option into an ITM option and nets the holder of the option a profit of 30 post-devaluation francs - cha ching!

(3) By the same token, anyone holding a 70 put just got totally hosed

It sounds like either you were majorly short Roche, or else I'm missing something obvious. Guessing it's the second one....if Roche had large CHF reserves to which Roche shares represented a claim then maybe you get the opposite effect.

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It used to be the case that CHF and JPY were those safe haven, but honestly the only safe haven in the last 10 years is the good old US dollar.

See 2022...dollar up and everyone suffered.

BoJ bank of japan burnt millions to buyback the yen

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Russia and Iran certainly wouldn't use Tether to conduct trade. It's a centrally managed currency with a blacklist that would definitely be invoked if the US government leant on them.

They could try using a decentralised alternative like DAI instead, although I don't know why they would do that instead of just using their own currencies.

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And Still; the undisputed and highest liquidity currency out there; The US 'greenback' Dollar.

For what is worth we cannot deny the cable (british pound) had a strong jab after the great financial crisis but coming into the round 10 it failed to keep the pace.

The euro looked strong, fast, reliable and the same story took place in Round 10.

God knows the underrated dollar has the stamina to punch his foes in the championship rounds.

Go Dollar!

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Aren't there annual passport value articles that county how many nations accept each other's passports? The US is up there. A US passport will be accepted by a lot of nations, but not everyone is cool with a US passport.

In contrast, just about everyone is happy to take US dollars. If you has some reason to buy something from North Korea or Eritrea, odds are they'd let you pay in dollars.

P.S. One of the things I liked about the Transporter movies was that all the goon money was five hundred euro notes. It was nice to see the bad guys using something besides US hundred dollar bills.

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