The real time number isn't as interesting as the potential future number. If the dollar stops being the reserve currency, the purchasing power of the dollar will crash. No more cheap borrowing, no more low interest rates, hello constant high inflation. The Iran war has made that increasingly likely to happen. It may even have been intentional.
> No more cheap borrowing, no more low interest rates, hello constant high inflation.
Do you mean that we’ll have high inflation because we’ll keep running massive deficits? Because many countries that don’t have the reserve currency also have low inflation.
I think some people think that high velocity is deflationary. So if suddenly dollars are not traded as much, it slow down the dollar velocity and this has a global inflationnary effect. This isn't a bad theory tbh, i believe at least half of it (money velocity decreasing have an inflationary effect on assets, productive or not)
It means high inflation because if we're not the reserve currency, global markets sell their dollars, which leaves more dollars unused, which makes them plentiful, which makes them less valuable. This has a knock-on effect; it makes import goods more expensive, it makes government borrowing more expensive (which raises costs for citizens), and loss of petrodollar (the main reason for us being the reserve currency) makes oil more expensive. To pay for our debt, after we no longer have all this investment (other nations buying our dollars, t-bills), we print more money. So our currency is less valuable, and everything for us becomes more expensive, thus, inflation.
> It means high inflation because if we're not the reserve currency, global markets sell their dollars, which leaves more dollars unused, which makes them plentiful, which makes them less valuable.
So why don't Japan and Germany have high inflation, since those country's currencies aren't the reserve currency either?
For reasons? You want me to tell you the entire economic history of 3 countries in a HN comment? The US has no real industry except finance (well, and healthcare, and real estate (which is/was basically finance)), and our economy is only strong because of the petrodollar-created reserve currency. Take it away and we have a gaping void where an economy used to be.
Japan may implode if the US dollar collapses, due to the weird USD<->Yen cyclical debt scheme (yen carry trade) propping them up. If the world switches to the Yen to price oil this might not be so bad. They also just started moving away from negative interest rates and ZIRP, and BoJ may reach 1% interest at the end of this month. This is good for Japan, bad for US.
Germany is not doing great but they do/did have a strong manufacturing sector.
It's not the deficit itself, it's the quantitative easing that is used to pay for most of the deficit. If the US dollar weren't a reserve currency, printing more money would have a much larger inflationary impact.
The Federal Reserve's Real Broad Dollar Index (RTWEXBGS) is 113.51 as of February. Not saying it would crash losing all of that 13.51 excess overnight, but it's still overvalued against foreign currencies.
> it's still overvalued against foreign currencies
That would make imports more expensive and exports more competitive. Some pain, given we run a deficit [1]. But $50bn/month adustment in a $30tn economy is 2%. Not fun. But not a "crash."
(There is a genuine argument to be made that American voters have been rejecting dollar hegemony across multiple elections for a couple of decades.)
> Perpetual trade deficit is modern system of tribute
Probably not. Equatorial Guinea, Palau and Kyrgyzstan run the largest current-account deficits as fractions of GDP [1]. (Current account counts goods and services.)
Resource extraction... High value infra projects in, low value unprocessed resource out.
Edit: Palau is the exception, it's main industry is tourism. Wealthy westerners come and consume and leave. Palau doesn't produce anything so all that consumption must be imported.
US current accounts deficit ~1 trillion annually, greater than your counterexamples' total combined economies. This should be a clue it's not the same mechanism of action.
It would cause inflation, which would lower purchasing power of imports; It would raise interest rates, which would raise the cost of loans and debt for individuals; and it would make the Government getting loans much harder, leading to spending cuts and higher taxes. All of these things will come together to weaken the dollar, thus making it have less purchase power. Whether it's a crash or slow bleeding out doesn't make a difference in the end.
Do you mean that we’ll have high inflation because we’ll keep running massive deficits? Because many countries that don’t have the reserve currency also have low inflation.