Q&A – Is the US Dollar at Risk of No Longer Being the Reserve Currency?
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Today’s entry: I am a long time listener and highly respect your research ethic. The talk of the dollar being removed as the world standard has subsided a little bit, but I am still concerned as the consequences seem devastating to our country and to every citizen. Would you please discuss what would need to happen and the likelihood of this happening. Thanks for all you do.
Bottom Line: Thanks for your support and great question. The U.S. dollar losing its status as the world’s reserve currency has been seriously oversold in my opinion. The risk of it happening over the near term isn’t zero, but then again, you could say the same thing about the risk of a tsunami hitting South Florida. However, to your point, if either happened the effects would be devastating. Let’s dive into this a bit.
The reason there had recently been chatter about the US Dollar losing its status as the world’s reserve currency was due to what some had dubbed “The Rio Reset”. The recent (17th annual) meeting of the BRICS countries, or Brazil, Russia, China, and South Africa in Brazil was hyped by some to be the meeting that would lead to end of the US Dollar as we know it. In reality, it was the least relevant of these annual meetings to date. In fact, it was so irrelevant that for the first time Chinese President Xi Jinping didn’t attend, and btw, neither did Russian President Vladimir Putin. By the end of the summit headlines like this were essentially all that came out of it: Brics is sliding toward irrelevance – the Rio summit made that clear.
Before going any further, it’s probably important to take a step back and explain what the US Dollar being the world’s reserve currency means. This is an official economic declaration which was ratified by what was known as The Bretton Woods Agreement during World War II. Preceding this accord across 44 Allied countries during the second world war, gold was the reserve currency around the world. However, the limited quantity available, and the need for countries to focus on the war effort independent of mining efforts, created a need for a more efficient payment system to prevent commodity shortages during the war. Upon the conclusion of the second world war, with the Allies victorious and the United States emerging as the world’s leading superpower, all countries, including those not allied during the war were compelled to recognize the supremacy of the US Dollar as the world’s new reserve currency.
The US Dollar, as the world’s Reserve Currency, results in any commodity that’s purchased by wholesalers, anywhere in the world, is purchased in US Dollars. The term for this is US Dollar denominated. The implications for us are significant...especially given our spending habits personally and as a country. Commodity prices from eggs to oil are already highly volatile as we’re all very well aware. But then imagine adding a whole other layer of volatility to the commodities we purchase. If the US Dollar is no longer the standard, Dollars would have to be converted into the new reserve currency, meaning that the Dollars’ relative strength would be paramount in determining the cost of goods. If the Dollar were to collapse due to debt and a lack of demand – we might be talking about Dollars, the way people talk about pesos. But with that said, here’s why this risk of this happening anytime soon isn’t any more likely than a tsunami paying us a visit. The biggest reason for this is...
What would need to happen in order for any of this to take place? There would have to be a viable alternative. The bottom line. There isn’t any for the foreseeable future. That’s due to both the size of the U.S. footprint around the world and the underlying political realities of our only potential near-term competition.
The U.S. economy accounts for over 26% of the world’s GDP and the U.S. Dollar for a 58% share of total global wealth reserves. The closest competition to the United States is China with 19% of the world’s GDP and China’s Yuan with 2.1% of the global reserves. There simply is no comparison and what’s more is that China’s economy and the status of the Yuan have been falling in recent years. China’s influence peaked in 2022 and has been falling relative to the U.S. each year since.
There simply isn’t a viable alternative. A currency like the Chinese yuan or even euro for that matter, would need global trust, full convertibility, and liquid markets. No options come close. Then there’s the political side of the coin. How many developed countries will choose to unite behind China become the world’s reserve currency and leading superpower? The politics most certainly don’t align. We’d almost certainly have to fight World War III, and lose, for that kind of political realignment to take place for the foreseeable future. That’s true even with the debt and deficit issues the U.S. has and is projected to see.
The wild card in this conversation is adaptation to crypto currencies going forward. In time it’s possible that decentralization resets the way global currencies work, but it’s still way early. The total market cap of all crypto currencies around the world is about $4 trillion, or less than the value of NVIDIA alone. In other words, the entire universe of digital currencies, independent of potential pushback for adaptation, is nowhere close to having the scale to replace the Dollar as the reserve. Again, for the foreseeable – let's say next five to ten years anyway. I hope that’s helpful and makes you feel a bit better about it.