Jp¥-€-US$-Cn¥ monetary axis

Barry Eichengreen has recently published a book called “The Exorbitant Priviledge“, about the rise and fall of the US$’s priviledged role in world economic affairs, its coming fall from grace and what it means to the USA and to the rest of the world. This is not as much an incredible unheard of insight as it is an incredibly well written book, Mr Eichengreen being a particularly good communicator. As he has been stumping around the world talking about some of his insights. After his Der Spiegel interview, here’s his WSJ article.

The point is that right now the dollar’s role as the world’s reserve currency is an advantage that its native users can use for competitive gains. Whenever there’s trouble, even when it emanates from the USA, people rush to US$ denominated assets. As other competitors to the US$ emerge (such as the € and the Yuan, which have joined the Yen as substitutes), the USA will stop enjoying this priviledge. This’ll mean the US Treasury will find interest rates increasing while other countries will see a lowering in their interest rates. The rest of the world will gain some stability while the USA will gain some volatility.

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