Being the reserve currency means the rest of the world accumulates your liabilities as their savings, i.e. it means you are the world's largest debtor, and the world's largest net importer. That is how the rest of the world accumulates your currency - because they sell more to you than they buy from you, allowing them to accumulate your fiat.
So this "reserve currency" status is a great burden to US industry, which is why China has created a web of laws that effectively make it illegal to be a reserve currency. The entire east asian bloc has industrialized based on an export led growth model -- that is, exporting more than they import, and thus being accumulators of other nation's currencies. It's not that they need to accumulate dollars, they just need to accumulate some other country's currency, otherwise it's mathematically impossible to run a trade surplus.
A lot of people don't understand this distinction between positive and negative -- e.g. accumulating the currency of other nations and other nations accumulating your currency. These people hold to what I call the fallacy of "the equality of all good things". These are the same people that argue for a "strong dollar" and also "strong exports", when actually these are opposites. I think of this as a form of tribalism, where the analysis is limited to "our guy good, their guy bad. X good, Y bad".
Such people are resistant to trade offs, e.g. you get the advantage of cheap consumer goods by being a net importer, but you have the disadvantage of losing jobs and industries to those nations that are willing to have expensive consumer goods for their populations in order to export more and import less.
In any case, continuing with lists of fallacies, we can say that America having a "strong economy" has little to do with its reserve currency status. Rather, it needs
1) a large bond market
2) investor rights protections
3) a legal framework allowing foreign capital inflows and outflows, with little friction.
4) A relatively stable currency.
To see how important this is, take the example of Russia, which decided that it will sell its oil to India by accumulating rupees. That's great, there was much celebrating "multipolarity" but the fact of the matter is the Rupee has lost over 20% of its value (in dollar terms) since Russia started accumulating it, and India has laws blocking Russia from selling its rupee holdings for other currencies, it can only use those Rupees to purchase Indian goods and take them back to Russia. So now Russia has tons of rupees it can't use except to buy Indian goods, and has started requiring India to pay with Quatari Riyal, as Quatar as more investor friendly laws. Also, there is not that much you can buy with Riyal, when you have two hundred billion dollars of value a year you want to park in some foreign jurisdiction, Quatar just can't absorb that. China isn't willing to accept it. India will accept it but not let you take it out. Where are you gonna put it?
So we see, we have already left the world of "America declining! The Dollar is collapsing!", because like it or not, even though America has tarnished its reputation of respecting investor rights, it's still miles ahead of any alternative when you need to park overseas earnings.
China blocks foreign capital inflows. Europe suffers from all the problems that the US does and even moreso as they are now openly seizing foreign ships and the bank accounts of private citizens - for example freezing bank accounts of people with Russian sounding last names - and Europe has even more barriers to moving money in and out.
So in which jurisdiction will you park your overseas earnings if not the US?
There is no alternative. No alternative is even beginning to appear over the horizon.
While I am holding forth on all these fallacies, another one is what I call the "balloon theory" of trust. This is the assumption that because the US, which used to be a high trust, investor-rights respecting nation, but has begun losing those investor rights credentials after seizing the sovereign assets of Afghanistan, Iran, Venezuela, Syria, as well as other official enemies - that because of this, some other nation must magically arise that will have that reputation for respecting foreign investor rights. E.g. that trust is a balloon, and if you squeeze one part of it, another must by necessity expand. This also comes from tribalism, e.g. the view that if your enemies suffer that you must benefit. But trust isn't like that, it could just be that as the US begins to look less attractive, then no other nation will take its place, and this will create real problems for the export-led growth economies in Asia, as they need some nation whose currency they can accumulate in order to run the trade surpluses needed for them to maintain domestic employment.
re: "you either have strong currency or strong exports"
if i understood correctly, you are stating that the only way to have strong exports is by having cheaper labor ("... losing jobs and industries to those nations that are willing to have expensive consumer goods for their populations in order to export more and import less.")
well, that is one (easy) way to do it, but it's not the only one. for example, you could have more productive labor. i think the fact that underdeveloped countries are still net importers of complex goods such as cars and computers, despite having the cheapest labor, supports this.
also if you allow for some poetry, i guess we could say that trust is like a baloon in the sense that a tiny hole can destroy it completely and abruptly
No, you did not understand correctly if your eyes read "cheap currency" and your mind read "cheap labor". Something went wrong between the text processing unit and the meaning processing unit. Perhaps your meaning processing unit is overwhelmed with all sorts of preconceived notions and voices that are interfering with your text processing unit.
Look, this is not hard. You have two countries, one makes bad apples and the other makes fantastic, amazing, glorious apples. One was seeded by Johnny Appleseed and the other by Johnny Rottenseed. The only labor involved is picking the apples, which both countries do equally well. Does that mean that the GA (Glorious Apple) country will run a surplus against the BA (Bad Apple) country?
No, it will not.
Trade will still be balanced, because the exchange rate will adjust so that neither country is running a surplus or a deficit. Maybe one Glorious Apple is worth 10 Bad Apples. Then the Bad Apple country will import 100 glorious apples and export 1000 Bad Apples.
So the terms of trade, the ratio of GA/BA rises, so that total trade is balanced. It is balanced when one glorious apple dollar is worth 10 bad apple dollars.
The only way that this will not happen is when someone interferes with the exchange rate. Now, if someone interferes, say by making it illegal to sell more than 5 Bad Apples for 1 Glorious Apple, then Glorious Apples will look amazingly cheap to the Bad Apple people, but the Bad Apples will look awfully expensive to the Glorious Apple people, and so this artificial strengthening of the Bad Apple currency will create a huge trade deficit, as people rush to dispose themselves of their bad apples and obtain the superior and affordable glorious apples.
On the other hand, suppose that we see the Bad Apple country running a deficit against the Glorious Apple country. What can we surmise? That for some reason, the investment demand for Bad Apple currency is high, causing people to want to accumulate Bad Apple dollars, even though the Apples made there kinda suck. That investment demand is what creates the trade deficit, by inflating the value of the Bad Apple. And it is the only thing that can cause that deficit.
Nowhere anywhere here does the price of labor enter into the picture. That is a you story -- I would try to fix that meaning processing unit.
> you did not understand correctly if your eyes read "cheap currency" and your mind read "cheap labor".
i actually read "expensive consumer goods for their populations" and concluded "cheap labor", as i pointed out. suppose you ask citizens from nation A and nation B how many hours they'd have to work to be able to buy a certain good. if both answer the same number, then how can you say that the good is more expensive in any one of the nations? and if citizen from nation A answers a larger number than citizen from nation B, so that the good is more expensive in nation A, then how does A not have cheaper labor than B, as one unit of the same good literally buys your more labor from A than from B?
i'm still digesting your apple example.
i'd be interested if you could cite a real case of this happening, because it doesn't agree with everything that i have seen. for example, sometimes the apple business in BA will simply die. this is what i was getting at when i mentioned that "underdeveloped countries are still net importers of complex goods". if you take a mildly complex good like refrigerators or office chairs, chances are that a random not-so-developed country has some local manufacturers. but they're just struggling, not exporting proportionally larger quantities. indeed the only way they'd export K>1 refrigerators for every Samsung imported is if there were 0 exports and 0 imports (so the country is so poor no one has a good refrigerator).
also, suppose that BA produces a total of N apples per year per capita. if the people in GA work the same hours, then GA produces the same number, N, of apples per year per capita, because they are both equally good at picking apples. since trade is balanced, it does not affect the level of value/utility/wealth on each side, whatever the amount of trade. so in the end, for the same hours worked, BA has a total product of N bad apples per year per capita, which is 10 times less than GA, which has a total product of N good apples per year per capita. people in BA are poorer.
assuming people in this economy just buy/sell work and apples, the people in BA must work for less value, i.e. they are cheaper labor. if labor in BA is more or less than 10x cheaper than in GA, then apple orchards will simply close in BA and reopen in GA or vice-versa until it gets 10x cheaper, at which point there's no point in switching. this is moreover compatible with the real anecdotal examples i mentioned i have seen.
So this "reserve currency" status is a great burden to US industry, which is why China has created a web of laws that effectively make it illegal to be a reserve currency. The entire east asian bloc has industrialized based on an export led growth model -- that is, exporting more than they import, and thus being accumulators of other nation's currencies. It's not that they need to accumulate dollars, they just need to accumulate some other country's currency, otherwise it's mathematically impossible to run a trade surplus.
A lot of people don't understand this distinction between positive and negative -- e.g. accumulating the currency of other nations and other nations accumulating your currency. These people hold to what I call the fallacy of "the equality of all good things". These are the same people that argue for a "strong dollar" and also "strong exports", when actually these are opposites. I think of this as a form of tribalism, where the analysis is limited to "our guy good, their guy bad. X good, Y bad".
Such people are resistant to trade offs, e.g. you get the advantage of cheap consumer goods by being a net importer, but you have the disadvantage of losing jobs and industries to those nations that are willing to have expensive consumer goods for their populations in order to export more and import less.
In any case, continuing with lists of fallacies, we can say that America having a "strong economy" has little to do with its reserve currency status. Rather, it needs 1) a large bond market 2) investor rights protections 3) a legal framework allowing foreign capital inflows and outflows, with little friction. 4) A relatively stable currency.
To see how important this is, take the example of Russia, which decided that it will sell its oil to India by accumulating rupees. That's great, there was much celebrating "multipolarity" but the fact of the matter is the Rupee has lost over 20% of its value (in dollar terms) since Russia started accumulating it, and India has laws blocking Russia from selling its rupee holdings for other currencies, it can only use those Rupees to purchase Indian goods and take them back to Russia. So now Russia has tons of rupees it can't use except to buy Indian goods, and has started requiring India to pay with Quatari Riyal, as Quatar as more investor friendly laws. Also, there is not that much you can buy with Riyal, when you have two hundred billion dollars of value a year you want to park in some foreign jurisdiction, Quatar just can't absorb that. China isn't willing to accept it. India will accept it but not let you take it out. Where are you gonna put it?
So we see, we have already left the world of "America declining! The Dollar is collapsing!", because like it or not, even though America has tarnished its reputation of respecting investor rights, it's still miles ahead of any alternative when you need to park overseas earnings.
China blocks foreign capital inflows. Europe suffers from all the problems that the US does and even moreso as they are now openly seizing foreign ships and the bank accounts of private citizens - for example freezing bank accounts of people with Russian sounding last names - and Europe has even more barriers to moving money in and out.
So in which jurisdiction will you park your overseas earnings if not the US?
There is no alternative. No alternative is even beginning to appear over the horizon.
While I am holding forth on all these fallacies, another one is what I call the "balloon theory" of trust. This is the assumption that because the US, which used to be a high trust, investor-rights respecting nation, but has begun losing those investor rights credentials after seizing the sovereign assets of Afghanistan, Iran, Venezuela, Syria, as well as other official enemies - that because of this, some other nation must magically arise that will have that reputation for respecting foreign investor rights. E.g. that trust is a balloon, and if you squeeze one part of it, another must by necessity expand. This also comes from tribalism, e.g. the view that if your enemies suffer that you must benefit. But trust isn't like that, it could just be that as the US begins to look less attractive, then no other nation will take its place, and this will create real problems for the export-led growth economies in Asia, as they need some nation whose currency they can accumulate in order to run the trade surpluses needed for them to maintain domestic employment.