HEDGE RESERVES

“So I used to say the the recipe for an international currency was size, stability, and liquidity. Big economy, stable economy, liquid financial markets, but I would add security as a fourth ingredient. Military security, first, the ability to defend your own borders. Secondly, the ability to protect your trade routes.”

“By and large, this process worked well, just like the comptroller of the currency keeps careful watch on the quality of the banknotes that are printed in the United States today. The Spanish crown had a mechanism... the quality of the coin was maintained for three centuries and more. And that's what made for its wide acceptance.”

“Interest rates would be higher than otherwise because the treasury would not have kind of automatic insured market for additional treasury debt from foreign central banks and governments, so they would have to offer higher interest rates to place that debt. And we wouldn't get that automatic medic insurance when a bad thing happens. In 2008, when Lehman Brothers failed, we did the bad thing, but the dollar strengthened. So I think those effects that it would become harder for us to import and export, interest rates would be higher, and higher treasury interest rates spill over into higher mortgage rates for your Ohio truck driver.”

“I am reminded of what famous international economist Rudy Dornbusch said about currency crises that they'd always take longer to arrive than you thought they would, and then they occur more violently than you ever imagined they could. So, you know, it's like who who said there are two ways of going bankrupt slowly and then rapidly. So I think we are seeing the beginnings of the decline of the dollar as a global currency as central banks are trying to hedge their bets, moving out of dollar US Treasury securities into gold and other nontraditional reserve currencies. The analogy I sometimes use is, like an iceberg, which melts very slowly until a whole chunk big chunks calve off all at once.”

“But copper is inconvenient for large value or significant value transactions. Copper is not a very, it's abundant, it's not very valuable. People had to carry around large numbers of copper coins on a necklace around their neck or in their pockets. They needed something of higher value. And silver was convenient for regular commercial transactions in China.”

“I think we are seeing the beginnings of the decline of the dollar as a global currency, as central banks are trying to hedge their bets, moving out of dollar, US treasury securities into gold and other non-traditional reserve currencies.”

“If you worry about being the target of sanctions, you put that gold on a boat and you bring it back home. You vault it at home where it's safer from sanctions than our dollar deposits or US treasury securities. But if you bring it home, you can't use it for anything. It become it it's hard to use for payments. It's dense and and if you've ever picked up a gold bar, you know it's dense and heavy, and it can't be lent, pledged as collateral, whatever.”

“Another fact I was reminded by in the course of writing the book is that the dollar hasn't been the dominant currency in The United States for the entirety of this country's history. So Alexander Hamilton, famously created the US Mints in the early eighteen nineties, but there was such a shortage of gold and silver in the country before the California Gold Rush and the Nevada Silver Rush that the dominant unit used for transactions were Spanish silver coins, pieces of eight, you know, Spanish pesos or or dollars that were cut up like a pizza in eight slices. It was legal tender in The United States as late as 1857.”

“The exception is Florence, whose florin was probably the dominant currency in Europe from the late thirteenth century into the early fifteenth. They were not a first class military power. They were too small. A city state in Tuscany with modest hinterlands and no natural resources to speak of, but a lot of commercial prowess and the first, crew international bankers. They used finance to project financial power and encourage use of their currency despite the fact they that they weren't a dominant military.”

“Spanish silver got everywhere. And as you say, it was, in a sense, the first true global currency in that earlier international currencies like the Dutch gilder, they got to Asia via the Dutch East India Company... but they never got to Latin America. Spanish silver got everywhere.”

“My view at this point is that plain vanilla cryptos are still volatile, and, therefore, they're least likely to be used in actual payments on day to day basis. And if they're not used in payments that will limit their use for other things, that stablecoin the case for stablecoins is yet to be proven. I think central bank digital currencies are coming. So I would put my money, I think, on combination of central bank digital currencies and tokenized bank deposits, not on stablecoins and Bitcoins.”

“I do worry worry about excessive financialization. I think we saw its pernicious effects during the global subprime crisis and the global financial crisis between 2007 and 2009. And I worry about private credit and and and AI investment in the present present context. But I I I I don't think it's the dollar's international role that is primarily at work here. It's simply that our highly developed financial markets are attractive places for highly compensated people to play and concoct new financial instruments in in in in ways that may be channeling resources into activities that don't have the highest possible payoff.”

“The Byzantine Empire gets short shrift. In my view, it was characterized by fiscal prudence. One of the things that was important was that, for many centuries, despite having hostile rivals and enemies on all borders, it basically lived within its budgetary means. So the pressure to debase the currency, issue more coins of less value in order to divert more resources to the government and the military. That pressure was not so intense. So that enabled, if you will, the solidus to retain its value for a long time. It circulated around the Mediterranean, but also into Asia and and India and elsewhere.”

“I think the renminbi can come into more widespread use among countries that are geostrategically allied with China, but not globally. The problem is not that China trades too little. It's the leading trading partner, leading trading power around the world. But there are those political constraints that Chinese authorities can change the rules of the financial game tomorrow morning. The People's Bank of China is not independent of the government. It is required to take marching orders from the executive branch.”

“I would tell them read more history. I would tell them that the shift from one dominant currency to another is rarely smooth. It comes with disruptions, and we all know that the best defense against disruptions is diversification, not putting all your eggs in in in one basket given all the stuff that's going on in the world at the moment. I think sometimes the obvious advice can be the best advice.”

“The analogy I sometimes use is like an iceberg, which melts very slowly until a whole chunk, big chunks, calve off all at once. So that's kind of the scenario I imagine.”