Is the U.S. Dollar Going to Die? Does It Matter?

At some point the U.S. Dollar will likely crash and lose its reserve currency status – sending the entire U.S. economy into a tailspin.

Throughout history, the world’s most powerful country (economically and/or militarily) has usually provided the world’s reserve currency.

Since the 15th century, Portugal, Spain, The Netherlands, France, Great Britain (1815 – 1920), and the United States (1921 – current) have all provided the world’s reserve currencies.

A currency becomes a reserve currency when it is the most available, the most trusted, and the easiest to exchange.

Being a reserve currency means that most of the world’s trade, debt, and bank reserves are held in that currency – which is of course the U.S. Dollar today.

This in turn creates an enormous demand for dollars which provides enormous benefits to the U.S.

Our reserve currency status allows us to borrow trillions of dollars at much lower rates than we could otherwise, and that in turn allows us to run enormous government and trade deficits (where we import far more than we export) at the same time (something no other country can do).

So – losing our reserve currency status would be catastrophic because we’d lose our ability to borrow and import goods – and both interest rates and prices would shoot through the roof. Our economy would grind to a halt for a while at least, and we’d probably see severe goods shortages as well. We would also probably see rampant inflation because our government would be forced to print money instead of borrowing (which is why countries with huge deficits and no reserve currency status see such high inflation).

TLDR: Losing our reserve currency is a terrifying prospect. But – will it happen soon?

Not a Chance

This is something that macro-experts Jeff Snider and Brent Johnson both often discuss in response to the thousands of other “experts” who are constantly predicting the dollar’s imminent demise.

I am blogging about it today because the discussion surfaces so often nowadays, given America’s precarious state, and because geopolitical analyst and author, Peter Zeihan recently weighed in on the topic with an EXCELLENT AND SHORT VIDEO discussing the topic as well.

And – he is in 100% agreement with Snider and Johnson.

Here are some of the reasons why the dollar remains safe for many years to come – no matter how screwed up America’s finances get.

U.S. power does not come from the dollar’s reserve currency status. The dollar’s reserve currency status comes from the U.S. military power. Zeihan reminds us that the U.S. Navy is 7x more powerful than the rest of the world’s navies – combined – and that power is largely why the world uses and trusts the U.S. Dollar.
The “BRICs” are not taking over. BRIC stands for Brazil, Russia, India, and China. The acronym came from a Wall Street trader who simply illuminated those countries as bond markets to watch. The countries are too small and have too little in common with each other and other countries to take over the reserve currency. Also – nobody trusts Russia or China.
Competing Currency Needs To Be HUGE! This is the biggest factor and what Snider and Johnson focus on the most. The total market for U.S. Dollars is monstrous – in the tens of trillions of dollars – and no other currency besides the dollar can even come to close to providing enough volume for that market.
Need massive trade deficits. One of the ways America provides dollars to the world is through its huge trade deficits. No other country could run such huge trade deficits for a variety of reasons.
China will not take over. Many observers continue to insist that China will eventually provide the reserve currency. But – China’s economy and demographics are much weaker than most people realize (per Zeihan and Snider), and the Chinese Yuan is the “most manipulated currency” there is, per Zeihan. He points out that China has “printed” 2.5 times more currency out of thin air than the U.S. has in recent years and that China’s currency issues are “10x worse” than the U.S.
The U.S. is less screwed up than everyone else. This is a point that Brent Johnson makes repeatedly. Yes, we are a complete and total mess – with our politics, our trade deficits, our aging population, and our government deficits – but, everyone else is far worse, as hard as that is to believe.