Have much fear, de-dollarization is here!
In (monetary) economics, a convenience yield is a non-monetary benefit derived from an asset's -- typically money's -- superb liquidity, abundance, acceptance etc. Money is the obvious example and the numerical value we place on this: if interest rates at a bank account is 5% and you're holding cash, the convenience yield of cash is about 5%.
Applied for USTs, it's the lower rate that Treasuries yield compared to what otherwise would have been the case, or, sometimes, what other countries' govs pay for their borrowing. Economists (#1428602) usually estimate this at about 0.5% -- 50 bps -- for the U.S.
Alas, says John Plender for the FT, it's going away too. And, if you couldn't tell from the FT coverage + front-page image, it's Trump's fault.
the “convenience yield” on US government IOUs — the premium investors place on holding such securities for their safety and liquidity — has declined, thereby eroding the subsidy enjoyed by US taxpayers from the issue of supposedly safe assets. And the hedging benefits of government debt have diminished as stocks and bonds have become more closely correlated.
With US public debt approaching wartime levels as a percentage of GDP, professional investors are understandably in a funk. Increasingly they question whether the US has the fiscal capacity to support the huge balance sheet liabilities it creates through its current account deficits.
Their worries are exacerbated — excuse the familiar litany — by Trump-induced geopolitical fragmentation, erratic policy shocks including a tariff policy designed to hurt America’s friends more than its foes, a sustained assault on Federal Reserve independence and neo-imperial threats to annex Greenland.
Dedollarization was always inevitable — stagnating, waning empire and all of that — but orange man on steroids probs didn't help things.
archive: https://archive.md/iYGfF
But what will be the next safe haven asset?
That is the question.
Also, the inertia built into the US treasury shouldn't be overlooked. Every financial model worldwide kinda uses the US treasury rate as their "risk free rate". Treating treasuries as a risky asset would require rewriting a lot of models, which itself introduces a lot of institutional friction that gets in the way of any large scale change in behavior.
The Chinese Yuan is increasingly used for trade payments...aptly as China now dominates global trade in manufactured goods and commodities.
USD 'petrodollar' dominance of global trade payments is waning.
Gold is increasingly used for SoV, as an alternative to USTs.
Years ago China shifted storage of its surpluses away from USTs and toward funding global infrastructure and stacking gold.
China mines more gold than any other nation.
Bitcoin is a small niche, but highly volatile SoV.
The wealth of nations is inextricably connected to the success of their governments in the contest for resource hegemony, power projection, institutional leverage and trade competitiveness.
'Free markets' are an ideal far removed from real world power dynamics and organised human groups seeking advantage over each other.
The US and China are in a contest for hegemony- the outcome is not yet decided...but you can to some extent protect your position if you acknowledge the reality of the current situation...which some may be afraid or hesitant to do.
stay tuned, for the NEXT FT piece I'm posting!
Spoiler: it's shining
I agree that de-dollarization is inevitable, but a smooth monotonic descent is not. Hold on to your butts.
Butts, plural?!
However many you've got