Wesley’s Rant: Is the Dollar Still King?
Wednesday, April 19, 2023
Recently when meeting with clients a few of them were asking me about the value of the dollar and what would happen if the U.S. Dollar were to lose its reserve currency status.
Firstly, what exactly does reserve currency mean? A reserve currency is a foreign currency held by a central bank. When a country acquires reserves, it does not place the currency in general circulation. Instead, it parks the reserves in the central bank. The reserves are acquired through trade, with the acquiring country selling goods in exchange for currency. Currently the U.S. Dollar is the dominant currency for the world. Because many central banks and financial institutions around the world want to hold U.S. dollars and dollar- backed securities like U.S. Treasury bonds. There is strong demand for U.S. dollars. That demand, in turn, allows the United States to borrow more cheaply (at lower interest rates) than it would otherwise.
There are currently five reserve currencies. The U.S. Dollar, the Euro, the Japanese Yen, the Chinese Renminbi, and the British Pound Sterling. Latest news articles have indicated that China has been reaching agreements with various countries like Russia, Brazil, Saudi Arabia, and a few others to increase the use of the Chinese currency when it comes to trade between those countries. This has increased the concern that the U.S. Dollar will no longer be the reserve currency of the world and undermine U.S. dominance on the world economic stage.
History is full of economic and societal collapses. The Mayan, Incan, Roman, and Ottoman empires are just a few examples. To some extent the United Kingdom saw the pound lose its dominance as the reserve currency as it slowly lost its power and influence in the world. Anyone that thinks the U.S. and the dollar could not face the same fate does not pay attention to history. China certainly has grand ambitions, and they are a fierce competitor to the United States when it comes the world’s economy. However, I doubt China will succeed. When you think about what made America strong, it was not the victory of the revolutionary war. It was the creation of the Constitution and the culture that founded its principles. The rule of law, private property rights, democracy, and free elections ushered the United States into dominance and its currency becoming the reserve currency of choice. Currently, the U.S. dollar represents approximately 60% of reserve currency and 90% of global financial transactions.
If the U.S. continues printing too many dollars and continues to grow the size of government, the dollar’s strength will continue to diminish. As Milton Friedman said, the more the government is involved, the higher the price of things and the lower the quality. If you are convinced that the dollar will be replaced as the dominant reserve currency, what do you think will replace the dollar in that position?
What made America strong is not its natural resources, which it has, but its citizens and freedom. China, Saudi Arabia, and Russia may have resources, but they are not free countries. A country that can take your assets and imprison its citizens will not become a world reserve currency. It is highly unlikely that the dollar will lose its status in my lifetime. However, it does not mean it could not happen in my children’s lifetimes. The “King Dollar,” will only stay that way if the U.S. keeps it fiscal and monetary house in order. We all know that government spending is out of control and that our politicians have used the last two “crisis” periods to expand the size and scope of government, not shrink it. This trend of spending and bad policies from our elected politicians must change, and it is long past due to start that process.
Managing Partner, Financial Advisor, CFP®, J.D.
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