DJ Did You Know Monday PM



Here is some fuzzy math for you to digest. Trade deficit and how it affects the economy and in particular, currency. A trade deficit occurs when a country exports more goods than it imports or imports more than it exports. To accommodate global trade, countries keep “ Foreign Currency Reserves”. But how holding that currency reserve affects trade is the fuzzy math.


For example, China. China’s yuan is pegged to the U.S.dollar. If China stockpiles the dollar it raises the dollar’s value versus the yuan making Chinese exports cheaper than American made goods increasing China’s sales.


A lot of central banks use their reserves to keep their currency value lower than the U.S. dollar for the same reason. Japan buys U.S. treasuries to keep its currency value lower ensuring that Japan exports stay cheaper.


Keeping that in mind, here is where it gets dicey. By stockpiling U.S. dollars and decreasing the value of a country’s currency, so their goods are cheaper than the U.S.’s goods, it also works in reverse. If a country wants to increase its value it sells their U.S. reserves, but in doing so decreases the value of the dollar.


High global demand for the dollar allows the U.S. to borrow money at a lower cost and amplifies the power of its sanctions, but this dollar supremacy comes at a cost. Increased foreign demand for U.S. bonds bids up the dollar and makes U.S. exports less competitive, resulting in trade deficits and lost jobs. ( The Federal Reserve says that at any given time, about 45% of all U.S. banknotes are held overseas).


All told, anyone looking for all the U.S. dollars in the world in December 2022 could expect to find approximately $21.2 trillion in existence, using the M2 money supply definition. If you just want to count the value of notes and coins, there are about U.S. $2.3 trillion worth of notes and coins floating around the globe.


The IMF recognizes eight major reserve currencies: the Australian dollar, the British pound sterling, the Canadian dollar, the Chinese renminbi, the euro, the Japanese yen, the Swiss franc, and the U.S. dollar. The U.S. dollar being the most commonly held reserve currency, making up more than 60% of global foreign exchange currency.


The fact that this manipulation of reserve currency mechanism even exists is insane. When countries can manipulate their reserves and adversely affect the economies of another country at will, is a pretty strong indicator the global financial system is in need of revamping. Countries need to sell and export what they can produce and import what they need to survive. And it is all based on how their currency is valued or devalued. The concept of a GCR and all the mechanisms, agreements and activity related to pulling it off, is not only feasible but a necessity.