U.S. Dollar: “I’m Not Dead Yet!”

A Case for why the U.S. Dollar is not done -- Analyzing currencies is weird, and most people don’t get it.  Sometimes, I think I don’t get it.  There is nothing fixed in our economic world, no fixed measure of value.  Everything trades against everything else.  Currencies exist to make the trading easier. 
Imagine a matrix that is millions by millions, with trillions of exchange rates for one good or asset against another.  With currencies, it simplifies.  Each nation prices out goods and assets in their own currency, and then currencies trade against each other, subject to arbitrage with commodities, and commodity-like assets.

(the Aleph Blog) -- Anyone who has read me for a while knows that I am not a bull on the US Dollar.  But where I part ways with the grizzly bears (call me a teddy bear  ), is that the fundamental accounting identities must be maintained.  Whatever country of our world has the status of reserve currency must issue debt, and a lot of it, that other countries can invest in to park their idle cash balances.

It does not matter what currency crude oil trading, or any other trading, is denominated in; it does matter in what currency the proceeds from the sale of crude oil is invested in.  So long as the US runs current account deficits, foreigners must acquire US assets in order to fill in the gap.  In the past that has mainly been bonds — agency, mortgage, corporate, but increasingly Treasury notes.

It is not that easy to abandon the US Dollar.  Where do you go?  The yen will suffer for years as Japan heads into demographic decline and large structural budget deficits. The Euro is still an experiment; there are many pressures on it; its survival is mot assured. Nothing else is large enough or stable enough, or mature enough to run the deficits necessary to have the debt markets, to be the global reserve currency.  As an example, China does not want to run deficits, nor is its financial system strong enough to bear the wear and tear of global use of its currency.

So, when reporters write pieces indicating the imminent demise of the US Dollar, I don’t buy their arguments:

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SOURCE: http://alephblog.com/2009/10/07/us-dollar-im-not-dead-yet/