I think this is reversed. A currency can be devalued a number of times before it stops being used as the reserve currency. Reserve currency status does not prevent devaluation, it allows devaluation. Think of the Roman Empire debasing the coinage for hundreds of years before people gave up on it. The post Bretton-Woods system goes back to the 70s -- we are just on decade number 5. Lots of devaluations are ahead.
Well, now the dollar is not just a reserve currency, it's a floating one. I'm not sure to what degree "devaluation" is a meaningful concept in that environment - certainly not "a devaluation", referring to a discrete event. The devaluation is a continuous, ongoing operation, as exchange rates move in real time, and as CPI changes happen.
So when economists talk about "devaluation", they include floating currencies. What that means is that the investment demand for the currency declines, causing the currency to decline.
What are the mechanisms that would cause the investment demand to decline? It can be any of
- different tax treatment
- reduction in respect for property rights of foreign investors
- changes in interest rates
- political instability causing fears of the above
Other factors may also come into play. But at some point, some of these factors cause foreign investors to take a second look at whether they should reduce their purchase of dollar assets, and that reduction in investment demand causes a devaluation.
If the demand for foreign investment in the US falls below the demand for US investment abroad, then what happens is that the currency falls so that the trade balance swings away from deficit and into surplus. That is true irrespective of whether we need those foreign imports -- we will need to find domestic substitutes or do without. Therefore this devaluation creates hardships.
But none of the above necessarily means that the dollar stops being a reserve currency. It's enough that the rest of the world pairs back their positions, as the relevant factor is the flow, not the stock.
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In essence, what really matters is that the USD remain the reserve currency.. That arrangement is what, it's (ab)using to run the show..
I think this is reversed. A currency can be devalued a number of times before it stops being used as the reserve currency. Reserve currency status does not prevent devaluation, it allows devaluation. Think of the Roman Empire debasing the coinage for hundreds of years before people gave up on it. The post Bretton-Woods system goes back to the 70s -- we are just on decade number 5. Lots of devaluations are ahead.
Well, now the dollar is not just a reserve currency, it's a floating one. I'm not sure to what degree "devaluation" is a meaningful concept in that environment - certainly not "a devaluation", referring to a discrete event. The devaluation is a continuous, ongoing operation, as exchange rates move in real time, and as CPI changes happen.
So when economists talk about "devaluation", they include floating currencies. What that means is that the investment demand for the currency declines, causing the currency to decline.
What are the mechanisms that would cause the investment demand to decline? It can be any of
- different tax treatment
- reduction in respect for property rights of foreign investors
- changes in interest rates
- political instability causing fears of the above
Other factors may also come into play. But at some point, some of these factors cause foreign investors to take a second look at whether they should reduce their purchase of dollar assets, and that reduction in investment demand causes a devaluation.
If the demand for foreign investment in the US falls below the demand for US investment abroad, then what happens is that the currency falls so that the trade balance swings away from deficit and into surplus. That is true irrespective of whether we need those foreign imports -- we will need to find domestic substitutes or do without. Therefore this devaluation creates hardships.
But none of the above necessarily means that the dollar stops being a reserve currency. It's enough that the rest of the world pairs back their positions, as the relevant factor is the flow, not the stock.