Do central banks compete with each other? Which of them is the dominant entry in this marketplace? Who is second and third? What is the primary product offered. How powerful does one need to be to become a leader?
These sound like questions an investor would ask about a stock they were investigating. Market share. Barriers to entry. Cost control. Product shelf. Price control. Financial strength and flexibility. Continuity of management. Do the same questions matter in the world of monetary policy?
There is no obvious way to decide how they fit using business metrics like sales or profits. Nonetheless there are ways to think about them.
The US Federal Reserve seems dominant. The US currency is a standard throughout the world and the Fed seems to set the price of their product as they wish. Bear in mind all prices are relative not absolute.
Their advantages are clear. Size matters. The cost of the product is near zero and there are barriers to entry. (Not many startups with new ideas.) The advantage that matters most though is the ability to set prices. As long as people want to own US$ currency and bonds they will dominate.
Many people think the advantage cannot last. Surely China, or Europe, or a Chinese-Russian coalition will gain favour. Not impossible, but very difficult.
Europe seems not to be able to manage themselves, so relying on them for the equivalent of a universal currency and a safe haven for bond investors seems improbable.
China is still an adolescent. Maybe someday they can be both dominant and reliable, but they are not yet transparent enough to carry it off.
The China/Russia coalition looks exciting but history is persuasively against it. China does not trust Russia and vice-versa. A person with experience in China has told me that the Chinese don’t trust each other, never mind Russia.
In a business like Coca-Cola, the big advantage is to be able to command a price. The construction cost of the product is near zero. Distribution is expensive, but if you can set the price, it really does not matter. Advertising is likely more than the cost of the product.
There are others like that. Beer, fashion goods, perfume, whiskey, Apple products, Ferraris, and Super Bowl tickets. Truly developed brands. You sell for whatever you happen to need.
The US$ is like that too. Too understand what happens to the American economy, try to understand what would happen to Coke or Apple if they had to compete on price.
I think you could expect a complete reexamination of overhead, spending policies and a shrink of the production side in favour of efficiency over convenience. Rather like England after World War I.
Investors should factor the remote possibility that the US$ will be less dominant into their planning and make currency diversity part of their portfolio parameters.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
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