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Permalink Reply by Jacob McDermott on September 24, 2012 at 12:18am

China has been hitting up countries left and right for a couple years now to try to get them to use the Yuan instead of the dollar for a variety of transactions not just oil related. They have gone to south america, africa and elsewhere. Russia has also been interested in doing this, specifically they have discussed with China entering into a basket of currencies arrangement, which is UN backed.

For them it makes good policy sense. Instead of fueling an economy other than their own they are breaking away. While it harms the US it is something that if we did it there would be mass support and cheering. I cannot accept a double standard thus I cannot fault them for wanting to do this and spending the effort over the last few years to make it happen.

Why does the reserve currency matter so much? Well there is something called "seniorage" which is basically free money the government can spend. It costs $0.10 to print a high security note, anything but the $1. If they print a $100 there is $99.90 in seniorage as long as that $100 bill does not come back to the US.  2 out of every 3 dollars that goes over seas does not return, which results in assets that can be spent by the government. If those dollars return there is a low demand for dollars and the US has to make good on the value of those dollars.

The low demand influences exchange rates directly (its value compared to other currencies) while the repayment of the seniorage depletes assets that would make it stronger. Kinda a double whammy. Many nations globally keep gobs of dollars on hand specifically so they can buy oil. Those nations (or corporations within those nations) may decide to play the FOREX markets to get better deals, which in turn is a good thing for them, again I cant apply a double standard so I cant fault them for that.

The deals we made to get the dollar as a global reserve currency were based on some promises. After WWII we promised that we would not go off the gold standard. When we went off the gold standard we promised we would not trash the value of the dollar. We broke our promises can you really blame others for no longer wanting to support that arrangement?

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Permalink Reply by Jacob McDermott on September 24, 2012 at 7:57pm

The only way to do that is to curtail spending. While I do not see this happening if "regulate" had its original meaning from article 1 section 8 clause 3 (interstate and foreign commerce clause) 80% of the federal government would go away. This means that a 40% or so drop in federal income tax (and 15% because medicare and social security because those too are not constitutional) would be realized.

In 20 or so years the national debt would be repaid and the remaining 40% could be returned to the people.

Granted states will have to increase taxes to make up the difference from what they were getting from the feds but that puts the power closer to the people so they can hold elected officials more accountable. Additionally there is inherent waste anytime money passes through a middleman. They have overhead from employees to offices and other things. By removing the feds from the equation (who pay the states and do not directly fund projects directly) less overall money would need to be spent.

This strengthens the dollar, removes most of the power of the federal reserve who only has power so long as the US is a debtor nation, and allows for people to "vote with their feet" by moving from one state to another that has laws they more agree with.

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