An update on the U.S. dollar and it’s hegemonic role as the world’s preferred reserve currency
The U.S. accounts for 26% of the global economy as measured by annual GDP.
And the U.S. dollar still accounts for 58% of global reserves. It was already declining in this regard, pre-Covid & pre-Ukraine War. Yet despite massive money creation, mismanagement of Fed debt, and arguable abuses of the dollar, it is still in place for years ahead.
In following some of the brightest minds on this subject, I don’t see how it’s unseated without at least these conditions being present:
1. The emergence of a strong, proven, gold-backed alternative reserve currency, which will also require significant trust, deeper and more liquid capital markets than the U.S., and an open capital account (those last two are critical).
2. An emerging dominant world economy that has sufficient working population AND population growth, that can produce most of its own food, energy resources, and is protected by natural borders.
3. The ability for the lead country of that alt system to project power globally at a moments notice which would require:
- Both superior naval & air power.
- Superior satellite & recon capabilities.
- A fleet of nuclear powered air carriers that surpasses U.S. & joint capability.
- A fleet of nuclear powered deep sea submarines that surpasses U.S. & joint capability.
- Deep experience operating elite units in counterinsurgency situations.
4. Given all of the above conditions, there would need to be a major war resulting in an uncontested unseating of the current reserve status position country.
5. The development of global financial centers of trade to rival the West. For instance it might require Shanghai, Singapore, Hong Kong, and Dubai to collectively displace New York, London, Tokyo, Zurich, Chicago, Miami (et al). And all of these centers of finance would have to be "off" of the U.S. dollar as a primary mode of exchange, trade settlement, and use as reserves.
Remember that trade is settled and reserves are held primarily in US Treasuries, as they represent a nearly risk-free option.
And we have, by far, the deepest, most liquid capital markets and transparency.
What happens from here though with the amount of Fed debt we're racking up through CTRL+Print & Spend is up for debate. One could argue that a certain amount of "inflating our way out" will occur, as has been the pattern throughout history (American Revolution, Civil War, World War II).
I have also noted the following order of events proposed recently by an anonymous (but learned) financial pundit as a possibility of the future path.
- Credit downgrade so nations dump US treasuries
- Rapidly raise rates
- Restrict swap lines causing US dollar shortage
- Stage "incident"
- Dollar skyrockets
- Panic spreads to financial system
- Nations collapse
- Print trillions & buy your cheap debt
Let's call this sequence "just for fun". It's one that I'll save and reflect on later, in case it starts to take shape.
As always, we welcome all ideas, opinions, and arguments.
From The Visual Capitalist: