America First vs. US Dollar as Major Reserve Currency

The Internet has been crawling with articles about the “death” of the U.S. dollar as the world’s principal reserve currency. Although reports of such “death” have been greatly exaggerated, the amount of U.S. dollars held by the world’s central banks in relation to the amount held in other reserve currencies has been fluctuating downward.
Reserve Currencies Historical 2
Why Should You Care?

Why care? Why would the U.S. dollar present status as major reserve currency be of interest to the average American?

The U.S. has an enormous national debt, a huge trade imbalance, and a disappearing middle class due to focus on either high-paying tech jobs or low-paying service jobs. Add to these concerns a push toward more of the same from current legislators that propose vote-getting green deals and Medicare for everybody.

The U.S. dollar status as a major reserve currency has a significant effect on all of these matters.

Background

Reserve currencies are held by governments and institutions to facilitate international payments. They also serve to influence the value of national currencies – for example, a country can buy or sell its national currency to boost or deflate the currency’s value.

What becomes a reserve currency depends on the global market. The currency of a developed country with a reputation for a stable economic and monetary system becomes popular, government central banks start shoring up their reserve accounts with it, and pretty soon the International Monetary Fund declares that currency a reserve currency.

Today the major global reserve currencies are: U.S. dollar, euro, Chinese renminbi, Japanese yen, and pounds sterling. The latest entrant is the Chinese renminbi, declared a reserve currency by the IMF in October 2016, as a result of China’s economic growth.

Benefits of Being the Issuer of a Reserve Currency

The issuers of these elite currencies enjoy two principal benefits only dreamt of by non-reserve-currency countries.

* Reduced exchange risks: Example – Commodities such as oil are sold in U.S. dollars. So the U.S. can purchase oil without needing to do any exchange of currency. But Brazil, for example, needs to first exchange its currency into dollars in order to purchase oil. Currency values fluctuate hour to hour, so planning and executing currency exchanges are risky and expensive propositions.

* Reduced borrowing costs: Reserve currencies enjoy higher demand than non-reserve-currency ones, since countries need to keep them in their portfolio in order to engage in global trade. This demand translates into low borrowing costs for the issuing country. The same would hold true if, say, Apple or Facebook issued corporate bonds that were in high demand – the companies could promise lower yields than if fewer investors wanted to purchase the bonds.

The Drawbacks

Unfortunately, being the issuer of a major reserve currency brings curses as well as benefits:

* Reduced borrowing costs induces more borrowing. That is true whether we are talking about a family taking advantage of lower credit card rates to purchase a new washing machine, or a legislators taking advantage of lower bond rates to finance his promises of more benefits for his constituents. Easy money eventually results into detrimental and unsustainable debt, such as we have today in the U.S.

* Countries that hold reserve currencies issued by another country are slow to rise against issuers, thus allowing issuers more leeway in economic and monetary policies. The U.S. for example can keep its voters happy by showering them with a variety of programs, paying for them by printing money. As the pile of fiat currency backed by nothing but “full faith and credit” rises, global trust eventually diminishes.

* Issuers of reserve currencies must be willing to operate under a current account deficit, which is mostly caused by importing more goods than exporting. For example: If U.S. consumers buy a lot of computer equipment made in China, a lot of U.S. dollars end up in China. China can then use those dollars to invest in bonds issued by the U.S. government. With money from the sale of those bonds, the U.S. can finance road construction, green new deals, etc. The U.S. factory worker, though, is left behind.

To put it in simpler terms, if the USD weren’t the world’s major reserve currency, probably its value would have fallen, US exports would be more competitive, and more people in the US would have jobs making goods for exports … While some people have said that the use of the dollar as the world’s major reserve currency is an “exorbitant privilege,” other people argue that it’s actually an “exorbitant burden” for just this reason.” What Happens if the US Dollar loses its Status as the World’s Major Reserve Currency, Quora.com, April 15, 2019.

Reserve currencies

* Major currencies have come and gone throughout history, so there is no reason to expect the U.S. dollar to retain its status forever.  This chart developed by JP Morgan’s Michael Cembalest, is helpful in visualizing the turnover of reserve currencies.

Source:  We Believe the US Dollar Could Lose Its Status as a World Reserve, Zero Hedge, July 23, 2019.

 

The Contenders

With the fall of every major currency there are winners and there are losers. Today, some powerful potential winners are working to be the successful contenders in replacing the dollar, or working to implement their agenda by dethroning it.

* China makes no bones about wanting the renminbi to replace the dollar as the principal global reserve currency.

* Germany, France and the U.K. adopted the Instex system in January 2019 in order to allow their companies to get around U.S. sanctions, dollars and banks, and trade with Iran.

* Even Facebook has gotten into the act by developing its own “global currency.” Some say FB has aspirations that the Libra will someday serve as a reserve currency, although that goal is not listed in the white paper that describes the objectives of this blockchain currency.

* The United Nations is not a country nor a jurisdiction such as the Eurozone (really!), so theoretically it cannot issue currency that might compete for reserve status. However, the U.N. is an amazingly powerful force that can drill its ideas into the heads of globalists everywhere. One of its ideas is the “retooling” of the current reserve currency system. The current system still has as its basis, albeit tangentially, in the economic market. Countries get to be reserve currency issuers because the market finds their currency desirable. Conversely, the U.N. wants a managed system based on what one could call “from each according to his ability to each according to his need.” Sound familiar?

… the build-up of global imbalances to global crisis levels may be traced back to a trap inherent in the reserve and payment system whereby reserve-creating countries are able to run payment deficits as long as other countries find it in their interest to keep building up their international reserves in the currencies of the reserve-creating countries … What is required is a reserve and payments system that does not rely on national deficits to provide reserve assets … Of great interest are proposals to shift to the allocation of SDRs based on need or performance, instead of on economic significance that determines voting shares in the IMF. Ocampo (2009) proposes giving larger allocations to countries with the highest demand for reserves and allowing IMF to use unutilized SDR’s to buy bonds from developing countries.”  UN report Retooling Global Development and Governance edited by Bloomsbury, June 2010.

So the pressure is on, and the U.S. is at a crossroads. As with so many things in life, the choices are based on short-term gains that benefit the here and now and long-term gains that make present perpetrators pay for their sins.

Decisions should be made, hopefully in favor a retaining the market-based system of reserve currencies.

What To Do?

More folks need to care about real issues. The eventual unraveling of the nation’s economy due to unsustainable national debt and negative trade will harm everyone – conservatives, progressives, the privileged by birth and the unfortunate by circumstances.

Conventional wisdom has embraced a “strong dollar” and defense of its status as the principal reserve currency no matter what. However, today’s scenarios are developing into something quite different. The current administration and President Donald Trump in particular have called for the following U.S. goals,

* Growth of good-paying manufacturing jobs in order to diversify from the trend toward high-paying white collar jobs and low-paying service jobs. A strong dollar would hinder sales of U.S. made goods to domestic consumers who could easily keep buying imported goods. Assuming that U.S.-made goods would not depend heavily on imported components, a strong dollar would hinder U.S. manufacturers’ ability to export their goods.

* Lowering the level of the national debt. U.S. administrations always give lip service to the need to control the gargantuan national debt, without ever doing anything about it. The dollar’s strong position as the major global reserve currency, as noted above, aids and abets the continued growth of debt.

For decades, the U.S. stood out as the one nation that traditionally preferred its money superpower-strong. Investors flocked to it, enabling the U.S. to borrow lots of money at low interest rates. American consumers feasted on it, buying imported goodies for less … The president obliterated any remaining strong-dollar allegiance with a July 20 tweet saying the strengthening dollar was “taking away our big competitive edge.” …
By abandoning the strong-dollar mantra, Trump may be signifying he’s willing to toss tradition aside and join ranks with other countries that have weakened their currencies to get a leg-up in world trade.  The Strong Dollar, July 20, 2018.

President Donald Trump’s viewpoint as expressed in the above-mentioned tweet might be something for conservatives who traditionally support the idea of a strong dollar to consider.

Progressives who claim to want everyone taken care of might note that blue collar workers have been left behind since the U.S. push to focus on the white collar financial and technical sectors.

And everybody might consider what our current piling up of cheap debt to support our lifestyles will do to our children, grandchildren and generations to come that will have to deal with that can that we have kicked down the road.