The USA is the worlds banker of choice. The American political system works and assures all and sundry that no matter what happens, the law will be followed and the system may have swings but it corrects itself in a guaranteed predictable manner.
So what is a bank and what is money?
A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets. A bank is the connection between customers that have capital deficits and customers with capital surpluses.
A central bank, reserve bank, or monetary authority is a public institution that manages a state’s currency, money supply, and interest rates. Central banks also usually oversee the commercial banking system of their respective countries. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the amount of money in the nation, and usually also prints the national currency, which usually serves as the nation’s legal tender.Examples include the European Central Bank (ECB) and the Federal Reserve of the United States.
The primary function of a central bank is to manage the nation’s money supply (monetary policy), through active duties such as managing interest rates, setting the reserve requirement, and acting as a lender of last resort to the banking sector during times of bank insolvency or financial crisis. Central banks usually also have supervisory powers, intended to prevent bank runs and to reduce the risk that commercial banks and other financial institutions engage in reckless or fraudulent behavior. Central banks in most developed nations are institutionally designed to be independent from political interference.
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given socio-economic context or country. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past, a standard of deferred payment.Any kind of object or secure verifiable record that fulfills these functions can be considered money.
Money is historically an emergent market phenomenon establishing a commodity money, but nearly all contemporary money systems are based on fiat money. Fiat money, like any check or note of debt, is without intrinsic use value as a physical commodity. It derives its value by being declared by a government to be legal tender; that is, it must be accepted as a form of payment within the boundaries of the country, for “all debts, public and private”. Such laws in practice cause fiat money to acquire the value of any of the goods and services that it may be traded for within the nation that issues it.
Fiat money is money that derives its value from government regulation or law. The term fiat currency is used when the fiat money is used as the main currency of the country. The term derives from the Latin fiat (“let it be done”, “it shall be”).
Fiat money originated in 11th century China,and its use became widespread during the Yuan and Ming dynasties.During the 13th century, Marco Polo described the fiat money of the Yuan Dynasty in his book The Travels of Marco Polo. The Nixon Shock of 1971 ended the direct convertibility of the United States dollar to gold. Since then all reserve currencies have been fiat currencies, including the U.S. dollar and the Euro.
Thank therefore to the Nixon shock, people with money consider political stability and diversity before they decide which banker of last resort they would rather hold their money.
A reserve currency, or anchor currency, is a currency that is held in significant quantities by many governments and institutions as part of their foreign exchange reserves. This permits the issuing country to purchase the commodities at a marginally lower rate than other nations, which must exchange their currencies with each purchase and pay a transaction cost. For major currencies, this transaction cost is negligible with respect to the price of the commodity.
As emphasised by the economist Avinash Persaud, reserve currencies come and go. “International currencies in the past have included the Chinese Liang and Greek drachma, coined in the fifth century B.C., the silver punch-marked coins of fourth century India, the Roman denari, the Byzantine solidus and Islamic dinar of the middle-ages, the Venetian ducato of the Renaissance, the seventeenth century Dutch guilder and of course, more recently, sterling and the dollar.
Before 1944, the world reference currency was the Pound Sterling. After World War II, the international financial system was governed by a formal agreement, the Bretton Woods System. Under this system the United States dollar was placed deliberately as the anchor of the system, with the US government guaranteeing other central banks that they could sell their US dollar reserves at a fixed rate for gold.European countries and Japan deliberately devalued their currencies against the dollar in order to boost exports and development.
In the late 1960s and early 1970s the system suffered setbacks due to problems pointed out by the Triffin dilemma, a general problem with any fiat currency under a fixed exchange regime, as the dollar was in the Bretton Woods system.
The Triffin dilemma (or the Triffin paradox) can occur when a national currency also serves as an international reserve currency, in which case a conflict can arise between short-term domestic and long-term international economic objectives. The resulting dilemma is thus to choose between these objectives, and was first identified in the 1960s by Belgian-American economist Robert Triffin, who pointed out that the country whose currency foreign nations wish to hold (the global reserve currency) must be willing to supply the world with an extra supply of its currency to fulfill world demand for this ‘reserve’ currency (foreign exchange reserves) and thus cause a trade deficit.
The use of a national currency (i.e. the U.S. dollar) as global reserve currency leads to a tension between national monetary policy and global monetary policy. This is reflected in fundamental imbalances in the balance of payments, specifically the current account: some goals require an overall flow of dollars out of the United States, while others require an overall flow of dollars into the United States.
The Triffin dilemma is usually used to articulate the problems with the U.S. dollar’s role as the reserve currency under the Bretton Woods system, or more generally of using any national currency as an international reserve currency.
The USA knew that agreeing to use the Dollar as a global reserve currency or acting as the worlds banker will cause a trade deficit, and that maintaining American values will ensure that there will never be a run on the bank!
In conclusion, unless the political system in China opens up and the peoples
‘S trust level grows very fast, the USA will remain the world’s banker for a very long time. Africans who think that they can balance USA demands of democracy & human rights with China’s no questions asked infrastructure investments better reconsider. China is not going to empty it’s accounts from the USA anytime soon! The USA is not swimming in debt but in deposits. Our system may seem dysfunction but it self corrects like clockwork.
The USA’s most important resources are: The world’s distrust of their governments & systems, and the American confidence in themselves and their systems. Taken together with the USA being a nation of immigrants, everyone can see themselves in America! No other country on earth can replicate those, may be Australia if it try’s!
As for the Tea Party – Banks do not go around hanging their heads in shame because they have taken in large deposits, that is the reason they exist – to take in deposits, to take people’s money! Reserve Banks exist to take other governments or countries money!
That is our one cent.