Salvatore Babones is Australia’s globalization expert. He is an associate professor at the University of Sydney. He and I discuss the role of the US Dollar. Is its demise as a reserve currency overdone or likely?
All Hail The Mighty US$ – With Salvatore Babones
– Regarding the USD, Mr. Babones makes a number of interesting points I wasn’t aware of. But it only confirms the views I already had.
– But there are a number of things he “doesn’t get” (like so many other US centric economists who drink the US centric “Kool-aid”).
– The swaplines from the FED with other central banks are NOT to help out e.g. the ECB, the BoE or the RBA. These swaplines are meant to save Uncle Sam’s “rear end” from rising interest rates. Central banks around the world have USD reserves and those reserves are invested in USD denominated securities like US T-bonds. (Never heard of the PETRODOLLAR system ?) When there is a shortage of USDs around the world then central banks are FORCED to sell their US T-bonds in order to get their hands on USDs. Guess what happens when all central banks sell their US T-bonds ? Rising US interest rates any one ? And with interest rates going through the roof the US economy is “cooked” as well.
– Yes, the US stock & bond markets are the deepest and the most liquid in the world. And that’s precisely why the USD rose in the 2nd half of 2008. Because when one is long USD denominated assets then one is also short the USD at the same time. And that includes the central banks with their holdings of US T-bonds (think: PetroDollar).
– Let’s assume I have USD 10,000 and want to buy shares Apple. Then I sell my USDs and buy Apple. But when I sell shares Apples then I also buy USD at the same time. Similar story for commodities (priced in USD) & USD denominated bonds. So, when everything gets sold the demand for USD will exceed the demand for AUD, NZD or EUR. Precisely as a result of those “deep & liquid” US markets.
– The USD will dominate the 21st century ? As soon as the US financial system “gets cooked” the world wide domination of the USD and the PETRODOLLAR system is “cooked” as well.
I just looked up the history of articles as published by Babunes and I read quite a few… interesting fella, history of his articles quite explains his perspective’s vantage point.
Not sure if he sees the woodworms in the woodwork of US$… but then again, who am I to argue.