re: Beginning of the End of U.S. Dollar Hegemony

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On the other hand, the amount of dollars that could potentially enter circulation (and that are out of direct control of the Fed) does somewhat concern me. Aside from Chinese holdings, financial institutions in the US are holding more dollars in reserve than probably ever (I would say it's definitely true in nominal terms, probably true in real terms).

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That's the funny thing, when the primary dealers signed up to access the Fed's window in '08 they also signed up to comply with the increased regulation that comes with such an option. I've talked about it alot, Dodd-Frank and BASEL III have increasingly made dealers no longer dealers, just brokers. There are very few market makers out there anymore since these institutions can't take risk. They used to be able to buy a position from a seller, put a positive carry hedging position on the opposite end of this trade and then hold this till another counterparty wanted to buy. No longer the case, they immediately look to unload most risk because of risk capital requirements. This is not the case for Treasuries as they have very low risk capital requirements.

The other side of this is when the Chinese sell Treasuries or unwind FX reserves, they'll either sell to large asset managers or these same banks. So the end result is that you have a situation where even though the Fed can't just directly reverse-repo out reserves or raise reserve requirements to restrict money in the system, they still have a lot of regulatory oversight over these institutions in addition to having even more control over short-term rates with the new reverse repo facility (I think my thread is on the second page here). Hence I don't have a lot of concerns on the potential for a flooding of the system with dollars, in addition to that fact that even though Chinese dollar reserves are very subtantial, they're still only ~20% of M2.

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I say this because a few years ago, the monetary base actually started to exceed M1, which had never happened before.

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As you probably know that's just due to excess reserve build-up, which gets included in the monetary base but not M1 since its still not techinically "in-the-system". The Fed still has direct control over these reserves through a couple different methods.