Recapping my views on USD as a reserve currency
TL;DR - Nobody wants to own an asset that someone of else has a veto right on it. Think about how you would feel if your car would take you anywhere you wanted, except to competing dealerships or mechanics. You'd be furious. It's your car and should take you wherever you want it to take you.
This is the big problem with the USD today. You cannot spend your money to buy things that the US government does not want you to buy. This could be buying Russian oil or Iranian pistachios or whatever. Nor can those countries pay you in USD for legitimate goods you have for sale - e.g. buying machining tools from you.
Since money is supposed to be a medium of exchange and a store of value, weaponization of the USD undermines both of these roles. However, since (1) there is a ton of USD in the world, and (2) it is the least dirty of the laundries (i.e. as far as fiat currencies go, it is better than most), then for now it gets a pass.
I am not in the camp of the people who think that USD is in imminent danger of losing its status. These things take time. By some metrics the British pound is still a reserve currency, and its heyday was long long time ago. By the same token, the USD does not have to become fully knocked off its perch in order for the US to feel immense pain.
I originally calculated the beginning of the of USD end as a reserve currency in the late 1990s and projected the date to be 2035 +/-5 (as a standard deviation, not absolute range). Over the years this has tracked well and I have made adjustments. I now think that 2030 +/-3 (again as standard div) is a better estimate.
Like all hegemons, USD has held on to power due to a lack of alternatives (most hegemons kill the opposition leaders, and the US has done its share of this in defense of USD. But to be fair, much of the wounds of the opposition have been self inflicted).
What is changing is this:
#1 An increasing number of Americans are waking up to the fact that printing the global reserve currency is not their personal interest.
#2 The US' ability to defend USD as a reserve currency is eroding. Partially b/c the US debt/GDP is too high. And also because the US political agenda is coming to direct conflict with the role of USD as a reserve currency.
#3 Technology is making it practical to create viable alternatives to USD
#4 There are only so many hits an armor can take before chinks open and an arrow gets through. China, Russia, Iran, LatAm, and even EU all are taking shots. Eventually one will make it through.
#5 The world has seen many reserve currencies (I put a chart on this in a previous post). The average lifespan of a reserve currency is ~80 years. Some go to 120 years. The USD is long in the tooth. Like all other former reserve currencies, nobody sees an alternative, just like nobody knows what he will die from. But if you are over a 100 years old, you know that it will happen. It make take another 10 years, but it will happen.
All this said, China has no desire to replace the USD with RMB. Unfortunately, American policies are pushing them to lean that way.
PS A while back I started using the phrase "tick tock" in my writings about USD so that searching for on the Art of Investing will bring up the collection. I also try to keep the content traceable by replying to posts on the subject. So you can usually click on the post I am replying to for more context. This is true for all my posts, not just the USD.
#ticktock |
