I spent a week or so recently writing about the problem of money, concluding with a discussion of the dollar’s reserve currency status. There, I noted that, in the next 10 years or so, the dollar would remain the dominant reserve but that other currencies, particularly the euro and the yuan, could also become major reserve currencies if they addressed certain shortcomings.

Per Bloomberg today, the yuan has passed the euro to become the second-most used trade finance currency. Use of the yuan was 8.66 percent in October, up from 1.89 percent in January 2012, while use of the euro dropped from 7.87 percent to 6.64 percent.

One more reason to be grateful we live in the U.S. is the peaceful nature of our geopolitical neighborhood. With Canada and Mexico as our major neighbors, we really don’t have to worry about facing a local war—something Americans don’t appreciate enough. The fact that the Cuban missile crisis continues to resonate suggests what an exception it was. Other countries aren’t nearly so fortunate.

In several posts last year, I wrote about the increasingly serious face-off between China and Japan—with Taiwan and Korea also in the mix—over territorial claims in the local seas. Although the problem hasn’t gone away, it’s been subsumed in other, more urgent news since then. Recent events suggest it’s time to take another look.

In the previous four posts in this series, we focused on the role of the dollar in the U.S. economy. We found that the money supply has actually been growing more slowly than the economy as a whole, and that, for most sectors, credit isn’t a problem either. In fact, scarcity—one of the two key properties of money—is being maintained at reasonable levels. We also looked at how that might change in the future, and what to watch for.

Now, let’s move on to the role of the dollar in the international system—specifically, the question of whether the dollar will collapse or at least lose its role as the world’s reserve currency. In this discussion, our conclusions about scarcity remain, but an added dimension must be considered: how scarcity has been maintained for the dollar, not just in absolute terms but also in relative terms, compared with other currencies. Next, we have to reintroduce the concept of exchangeability, which, besides being a fundamental characteristic of money, is also key in analyzing the future of the dollar.

Looking at yesterday’s post, it is clear that there’s a disconnect between consumers and business again—but in the opposite direction from what’s been happening recently. Over the past couple of years, consumers have spent while business sat on its cash, refusing to invest or, more particularly, hire. While consumers had led the recovery thus far, it was apparent that, to take the next step, business had to start to hire and invest.

I mentioned yesterday that consumer confidence had declined since the shutdown, while business surveys had come in much more strongly, indicating that this transition might be starting. Today’s data points suggest that, while consumers are closing their wallets somewhat, businesses are beginning to open theirs.

I have been shamelessly avoiding writing about the Affordable Care Act, better known as Obamacare, because it was both inherently too political and economically too nebulous to really get my hands around. Apart from noting that it would inevitably create additional headwinds to growth and job creation—which isn’t a value judgment, but an economic fact—I haven’t weighed in on the law itself. An opinion on the law has to be a value judgment between competing goods, a relative cost-benefit analysis that everyone has to do for himself or herself.

Now, however, we’re at a place where the law itself is not at issue, but the implementation is, and that is having (and will continue to have) economic and market implications that we should be aware of.

The real news from yesterday is, of course, that the Boston Red Sox won the World Series at Fenway for the first time since 1918. Nothing else even comes close. End of post.

“Pro football is like nuclear warfare. There are no winners, only survivors.” — Frank Gifford

That pretty much sums up my take on the most recent confrontation in Washington, DC. No one won, and everyone lost. The Republicans took a huge poll and public relations hit, for no gain at all. The Democrats didn’t lose as much but, in many ways, came out looking just as petty and political. Congress has hit all-time lows in public support, something I would have said was almost impossible, and the White House has been roundly and justly lambasted for its lack of leadership.

Recently, I was invited by the CFA Institute to contribute some thoughts to a discussion about why the Fed doesn’t forgive the debt. My commentary was published, and I’ve received some very nice feedback on it. You can read it here.

I’ve spent quite a bit of time over the past couple of days talking with advisors about the potential consequences if the government doesn’t make a deal in time. Yesterday, I did an interview with Chuck Jaffe of MoneyLife Radio that focused on exactly that. As we move closer to the supposed drop-dead date—that would be tomorrow—I thought it would be useful to look at how I’m thinking about investing.

First of all, let’s hit a couple of points I’ve made before. In the longer term, the events of the next week or so will not be significant. The U.S. economy is diverse, solid, and set to outperform for at least the next 20 years and probably more. Markets will reflect that growth, and, longer term, you absolutely want to be invested here. At the same time, current valuations are at the very least not cheap, and it’s been some time since we’ve had a correction in the U.S. stock market. Quite apart from the current situation, we are overdue. Again, this isn’t to minimize what might happen, simply to put it in context.

Over the weekend, I traded e-mails with one of our advisors, who pointed out that I hadn’t yet done a complete explanation of the situation in Washington, DC. Sure, I’d touched on various aspects of it, but I hadn’t really looked at the thing as a whole. So here’s my take. Thanks, Alex, for the great idea!

The Big Picture