Touchmaster said:
the Euro is a stronger currency than the Dollar and has been for some time - and currency reserves held in Euros provide a diversification in case of dollar depreciation..
Now that you have moved away from the conspiracy theory aspects of the crude-priced-in-euros question and more into the real world, there are a couple of points that we can agree on. First, the euro does provide diversification for portfolios; unfortunately, as I mentioned above, there are many, many more investment opportunities denominated in dollars than euros. Nonetheless, as time goes by there will be an increasing number of investments denominated in euros.
I must disagree to some extent with your comment about the euro being stronger than the dollar "for some time". It depends on the time interval under examination. There have been time periods in which the euro has languished relative to the dollar and vice-versa. In general, during times of upheaval and stress, you find the dollar appreciates due to its attractiveness as a safe-haven currency. A major factor in currency relative valuations (especially in the short term) is interest rates. (Countries with higher interest rates offer higher holding period returns, all else being equal.) During the part of the previous interest rate cycle in which the Fed was aggressively lowering rates, the dollar mostly traded lower relative to other higher-rate currencies. More recently, as the Fed has been raising rates, the dollar in general tended to move higher. Now, with the Fed seemingly coming close to an end of the higher rate cycle (at least for now) and with the ECB talking about raising rates, the dollar has once again been generally softer.
Touchmaster said:
why do countries not have their currency reserves denominated in Euros? Because they need to buy oil, the most economically important of commodities, with dollars, or at least have done since the seventies and up to the present day.
Like most generalizations, this one has enough of a grain of truth to be fairly widely accepted. It is true that oil importing countries maintain some reserves in dollars in order to accomodate payments for crude. But guess what? Non oil-importing countries maintain dollar reserves as well. Furthermore, the dollar has been the world's preferred reserve currency since it displaced the British pound in that role following WWII, long before oil imports assumed the importance that they have today. Show me a country that does not trade with the US and you might, emphasize
might, be able to show me a country that does not maintain dollar reserves. But countries that do not trade with the US are few and far between.
Touchmaster said:
Control of the world's currency reserves has given successive US governments a literal 'licence to print money', and has allowed the economy to be kept afloat by producing more and more dollars which are sold abroad for more than their intrinsic value... if they could no longer do this then the deficit chickens would be coming home to roost pretty swiftly..
Control of the world's currency reserves? You're kidding, right? You slip in a couple of quite reasonable, non-conspiracy theory comments and then you come back to this laugher? In order to control the world's currency reserves, you would have to control the FX market (thats were reserves are bought and sold on a second-to-second basis) and the market for US Gov't debt (thats the market into which most currency reserves are invested). The currency market is the world's largest market in terms of currency flows, followed by the market for U.S. Government debt (Bills, Notes, and Bonds). Nobody, but nobody "controls" the world's currency reseves. Not the US gov't, not George Soros, not SAMA, not the Sultan of Brunei, nobody.
But thankfully, there is a reasonable part to your statement, and that is, "if they could no longer do this then the deficit chickens would be coming home to roost pretty swiftly." But in order to make this statement reasonable, you gotta make "do this" refer to the continued willingness of our trading partners and investors worldwide to accept dollars in exchange for goods and services and seek out dollar denominated securities for investment purposes.
As anyone who has not been living in cave is aware, the US has been running increasing trade and budget deficits. And as Alan Greenspan has warned, there is a limit to this. While we are not at those limits yet, at least according to most popular benchmarks, we cannot continue to increase these deficits ad inifinitum. As Greenspan observed, a continued lack of fiscal discipline can cause us problems somewhere down the road. We have room and we have time, but we have neither in infinite quantities.
IMO, the fiscal situation today is very reminiscent of 1968, when LBJ decided that the US could have guns and butter. That is, the Fed gov't could have both a huge welfare program ("The Great Society") and finance the Vietnam war without a tax increase. Consequently, deficits went through the roof. We paid for it in the '70s with first with accelerating inflation and economic contraction to go on the inflation wagon. (Thats a grossly simplified overview, but it hits most of the high points.) As such, the lack of fiscal discipline is a chief disappointment with the Bush administration.
On balance, Touchmaster, you've gotten at least somewhat away from the conspiracy theory stuff, and IMO, thats a good thing. We've gotten way off topic with this; probably should take it the Econ forum.