As an advisor, one of my job I genuinely enjoy is to learning international financial markets. The fall of the US dollar as the world’s reserve currency is a topic that has recently caught my attention again, as it has from time to time. In this post, I’ll explain what’s causing this downturn, what it means for your assets, and what you can do about it. If I’ve done a good job, you’ll learn something I feel is really important right now- just keep in mind though, I’m still learning!
Pros and Cons of Using the US Dollar as the World’s Reserve Currency
For a long time, the United States has been the world’s de facto reserve currency since so much international energy trade has been conducted in US dollars. This has given the United States confidence in the demand for its treasuries, making it easier for the country to engage in quantitative easing and financial engineering (printing money is a lot easier when you know other countries are forced to buy it!).
These developments, however, point to a growing trend of major economies diverging from the US dollar and ultimately triggering a war in the financial system. China’s collaboration with countries like the BRICS states and Saudi Arabia to trade outside of USD has gained pace, while Russia’s expulsion from the SWIFT system has brought them closer to China. Because of this transition, assaults against cryptocurrencies, which offer an alternative to government-issued currency, have increased.
The United States’ capacity to engage in quantitative easing and financial engineering may be constrained if demand for the dollar and US treasuries falls, which might lead to long-term rate rises and a reduction in USD-denominated assets. Hang on you say – I thought rates were coming back down this year? Well yes, most of us want to believe this, but that doesn’t make it inevitable (Truth bomb: There’s no incentive for anyone to tell you this).
Background and History
The enormity of this predicament can only be grasped with an appreciation of its background. After World War II, the Bretton Woods Agreement solidified the role of the US dollar as the major reserve currency of the international community. The current condition of circumstances indicates that a turning moment, like to that which happened after the war, is imminent. The future trajectory will be determined by the degree to which economies adjust and realign with alternative reserve currencies.
Funding Options Other Than the US Dollar
Both the Euro and the Chinese Yuan have emerged as formidable rivals to the US dollar in recent years. It’s also possible to invest in gold or a cryptocurrency like Bitcoin through the lens of someone positioning for this possibility. Let’s be clear though: The end of the dollar as a global reserve currency might spell the end of the fractional reserve banking system as we know it, which would have devastating effects on economies, society, and (dare I say) civility throughout the world.
Timeline
When exactly will this change take place? This the burning question on everyone’s mind. Although everything appears to be happening in real time, there are a number of factors that might speed up or slow down the process. When will this happen depends on factors including political upheaval, economic policy, and technological progress. Try to understand why there’s a hot war currently, then understand more about CBDC’s, and you’ll start to form a timeline that may actually be quite accurate.
Digital Currencies Issued by a Central Bank (CBDCs)
The dollar’s fall from grace as the world’s reserve currency has, in my opinion, made the West’s adoption of CBDCs all the more important and also, inevitable. Digital currencies are being studied and developed by central banks throughout the world as a potential stable and safe substitute to traditional currencies. My belief is that they are well advanced down this path, and all that’s required for their mainstream roll out, is a use-case (financial crisis).
Conclusion
The dollar’s demise as the world’s reserve currency is a complicated but it’s crucial thing to get your head around. If all the wealth we’re trying to build travels on the rails of a financial system largely controlled by the US Federal Reserve, pay attention when people like me start talking about stuff like this! As a financial advisor and an everyday citizen living in what I believe is still the best country in the world (New Zealand), I think it’s important that you know what’s going on with the future of CBDCs, the fractional reserve banking system, and any prospective alternatives to the US currency. You may do well not to worry about any of this, yet also consider the impact of currency changes by diversifying your investments and keeping an eye on the geopolitical and economic policies of the world.
For further study:
https://www.cs.mcgill.ca/~rwest/wikispeedia/wpcd/wp/1/1973_oil_crisis.htm
