The top reserve currency is generally selected by the banking community for the strength and stability of the economy in which it is used. Thus, as a currency becomes less stable, or its economy becomes less dominant, bankers may over time abandon it for a currency issued by a larger or more stable economy.
The US Dollar has been the main reserve currency since WWII, but there is a mistaken impression that it is the only reserve currency in the world. In actual fact, the dollar as a reserve for countries has actually been falling steadily since the early 70s, when Nixon stopped the conversion of USD to gold - something that the US had guaranteed could be done at a fixed rate. In 1975 USD was 85% of global reserve currencies, and today it is at 57%. The Euro sits steadily around the 20% mark, the Pound around the 4.5% mark.
Reserve currencies aren't guaranteed
Granted, the US kills anyone who wants to price commodities in anything else.
However, killing leaders doesn't scale very well, especially if those leaders are from countries that people care about, unlike Gaddafi in Libya. And it definitely doesn't work if multiple large countries choose to go in another direction.
Based on the current actions of the US government and the way it has chosen to approach international trade, I suspect that countries are considering the future of trade, and whether they want to continue allowing the US to lead financial operations. The US has only been able to build its superpower status off the back of the agreed conditions, and now that it is breaking traditions, then it opens up the opportunity for other countries to follow suit.
It should be remembered that there have been many reserve currencies that have come and gone over the last two thousand years, and they go because they are tied to a centralised nation, or empire. And as I have discussed many times in the past, all empires fall. The US is a financial empire that has extended its influence through money markets, rather than land expansion - Yet, based on the current US administration, they might be getting into the land expansion game also soon. Like a house made of straw compared to bricks, an empire built on money is less stable, because of the nature of money itself.
Money only has perceived value.
It is the belief in money that provides its value, where people are willing to take something that is actually worthless in exchange for good and services, because they believe they can trade that worthless money in on other goods and services in the future. If this believe is lost, then the value of the money is also lost. And, if this belief is eroded and the the issuing country is seen as unstable, no one wants to use it as a reserve currency.
The reason that the US is able to hold onto their power, is because they are running a massive debt economy, which positions them as the largest consumer market that every other country wants to have a piece of. Many countries in the world rely on the US consumer market for their value, and would take a significant hit if they lost access. This is why the trade tariffs are so effective, because countries like having the flow of printed debt coming their way.
And this is one of the major issues with money, because it isn't actually tied to anything, which means it is possible to effectively print more of it, and then create mechanism to use as sinks to store that value so as not to upset the applecart too much. This is why the derivative market is worth an estimated four times more than every other asset on the earth combined. It is a massive black hole that absorbs the debt that is being printed, in order to keep the confidence in the economy.
Lots of wealth "on paper".
The problem with paper wealth and debt, is that humans live in the physical world. (I was going to write "reality" but that doesn't seem to really be the case.) The physical world values things differently to the financial world of belief of value. People need food, shelter, healthcare, community, infrastructure, education, goods, services...
Eating the derivative value of a carrot, isn't filled with nutrients.
And what these trade tariffs have highlighted, is that the US is vulnerable to financial undermining, because they are resting on the current situation that as the largest economic consumer with a market running on debt that is attractive to sellers, they can force the rest of the world to comply. However, there is a little wrinkle here, because the while the US consumes an estimated 25% of the world's resources, they are only 5% of the global population.
What this means is if the rest of the world can increase their own consumption slightly, and make up that 25% easily. And of course, it isn't a straight increase, because if the US were to be left out of the global economy, the increase would only have to account for the percentage that is going to the US, not for what is sourced from the US for their own consumption.
The wastage of US consumption is enormous, but it is subsidised by the financial markets and debt, making it cheap to be wasteful. If the same level of consumption happened in other countries based on current costs, it would be incredibly expensive. Not to mention the draw on natural resources being untenable.
That is a pretty interesting look at oil usage, considering that the US uses more than the two most populous countries in the world combined, that make up almost 40% of the global population. Add to that the fact that China produces over 30% of the world's manufacturing, and it is even more incredible, isn't it?
The dilemma is that while disruption to trade with the US is bad for the financial markets in their current conditions, shifting trade to increase slightly around the world will make up the shortfall quite quickly, and would do it in a likely less wasteful way, while bringing more prosperity and quality of life to the average global citizen. But, the markets will crash - and all that inflation that has been pushed for decades into derivative markets that is tied to the US dollar, will become largely worthless, especially if simultaneously, there is a shift away from the dollar as a reserve currency.
Maybe the rest of the world would create a globally backed currency instead, a decentralised token that no single entity has control over, in order to prevent the Triffin Dilemma, which is the conflict of economic interests that arises between short-term domestic and long-term international objectives for countries whose currencies serve as global reserve currencies. If they decentralise the main reserve currency, it reduces the potential for manipulation and economic strong-arming, which is what we are seeing today. Perhaps if Keynes got his suggestion passed with the "bancor", a supranational reserve currency, we wouldn't be in as much of a mess today.
But the problem is, Keynesian economics is only really effective in national interests, where the wealth is kept within the borders. The problem with it now is, that we don't live in that kind of reality, as global conglomerates can not only invest their money anywhere in the world for the greatest return, they can also sell their products and reduce their taxes in alternate countries for greatest savings. This breaks Keynesian economics at the core, because it takes control away from the government, and puts it into the hands of profit-seeking corporations, who in turn use their economic strength to manipulate policy to favour them evermore.
While I have little faith that the governments of the world will do what is right for the people of the world, it is good to remember that the conditions we have now, are only ever temporary. The problem many have with Trump is that they have been making profits off of the conditions, and now Trump is attempting to break the conditions to have more profits for himself, and the US oligarchy. However, if the rest of the world cooperated to change the financial system to improve conditions for the average person in the 7.7 billion outside the US, it would increase global consumption that would erode the value of the US market enormously, and potentially increase wellbeing at a rate we haven't seen before, because it would also reduce the value of the derivative markets, where wealth is only on paper, not tied to reality. Plus, it would distribute trade activity to many more companies and small businesses, rather than rely on the US conglomerates.
Software can be replaced.
Those who want the US to succeed are those who will benefit from the success, but that isn't going to be the average American. And even if it is in the short-term good for unemployment in the US, the trillions of dollars of investment are going to be spent on maximising profits for the owners, which means keeping headcount down, and controlling leakage of value to non-owners. Robots and AI will get the majority of jobs, not people. Dark factories where they don't even need lights on because no human works in production will be built, and the American people will again be left out of the economy, while those at the top make even larger profits.
But hey... Let's keep trying to "make it" in America.
Taraz
[ Gen1: Hive ]
For someone who went to Wharton, Trump has an amazingly infantile understanding of how money works. The USD has been a powerhouse of global finance since WW2 because of globalization. And he just stabbed globalization in the back.
But did he go to Wharton, is that just where he got a certificate from? Can anything he has done be trusted... well, perhaps paying off Stormy Daniels. :D
I feel the EU should apply a lot of pressure on the US now. China will continue to I think.
Killing globalism is kind of the point.
Yet, they still want access to all the global money flows.
Killing globalism does not end international trade.
The main issue is realizing the limits of comparative advantage. The economic concept of comparative advantage is what is used to justify closing down domestic factories and opening up replacements in lower-cost countries.
Just because Japan can make cars more efficiently doesn't mean that they should make ALL cars. Globalism insists that capital should flow to where it is the cheapest to produce a good (outsourcing), with the implication that lower prices will offset the loss of wages. Clearly the evidence shows otherwise.
A healthier approach is for all nations to produce goods and exchange those goods, versus the globalist view of a few nations producing the majority of certain goods and exporting them to everybody else.
While I am very much not in Trump camp, I am in the same boat that is USA. All my investments are here and are USD denominated. So I have no choice, but to root for team USA.
Creates a bit of a problem for the smaller investors, right?
It sure does... what a mess...
This is another wealth transfer to the mega rich, from everyone else.
I think having a open ledger of all the transactions that go back and forth between nations wouldn't be a bad thing at all. We need a little more transparency in the world right now. Like real transparency, not what administrations try to convince us is transparency.
Real transparency is a hard thing to get, especially when governments and corporations are involved.
Trump says that everything is gonna boom. For once I agree with him. I just think that ,,boom'' will be a negative thing. Like a kaboom. But you are right- no matter what happens he and his rich friends are gonna get richer. Also I think I saw a comment calling Musk a first lady. That made me laugh.
There is an inevitability of it, and the more we support the governments, the more likely it becomes.
Regarding reserve currencies, apparently some hedge funds paid their margin calls in gold last Friday as they were out of liquid cash.
So I can't help wondering if gold, or a gold backed currency will make a comeback.
Maybe. The problem might be, that there is only something like 12 trillion worth in gold - is that enough to back all the currency needs? It covers what there is now though.
Edit - and that includes all the jewellery in that estimate of the 12.
It can. But the problem with gold is that its value has been artificially set by governments in the past, which is problematic because fractional banking makes the money supply inflationary. This breaks the peg with gold, which is why money isn’t backed by gold anymore. Gold is too unwieldy to maintain a floating exchange value in a global market. The closest we can get is Bitcoin or something similar such as Litecoin or other fixed-supply cryptos. Maybe all of them.
Fractional reserve lending should be severely limited - but it isn't.
I don't disagree. I haven't quite come to a conclusion. Clearly, fractional reserve lending is, by design, inflationary. But using a pegged gold price can lead to lack of market liquidity, as we have seen historically. This is what led the USA to supplement the money supply with silver, until abandoning gold and silver altogether and moving to fiat.
What I don't know, and have not found, is what I described earlier, money backed by a free-floating asset. Bitcoin illustrates this well. You can redeem dollars for Bitcoin, but the price changes based on economic conditions. It seems to work, but it is not yet at the levels needed for global commerce and to become the global reserve currency. So, we'd have a global economy that runs on both limited supply crypto(s) and fiat money to balance out the tight liquidity and inflation that plagues them individually. Certainly, we could look at the history of gold since leaving the gold standard, but in this non gold standard period, gold has not been considered money, which skews the data. On the other hand, Bitcoin models what could happen if we returned to the gold standard without a pegged price.
Ultimately, nobody knows how well pairing a market priced deflationary currency (gold, BTC, etc) with an inflationary fiat currency would work. Would they balance out? So far it seems that BTC has a tendency to eat up liquidity when there is excess and spit it out when it is lacking. The biggest friction to a dual currency system is taxation. But I think it is unlikely we shall see any bold moves to change that.
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What have I studied and learnt till now, US dollars is one of the strongest weapons for the US. That's why they were furious when BRICS came up with the idea of their own currency.
The ideas have been around for a long time, but no one has been willing to really push on it yet. However, the more instability in US trade, the more likely it becomes
It takes time. Gradually, India is building itself, China is already a massive player along with Russia. One more mistake from the US and it might spark up the BRICS.
The ending paragraph is actually a pathetic state..if robots and AI takes o we and the top people keep getting wealthier…what will the situation of the average American be
shit.
😏
That’s sad
I think allso the SWIFT system worldwide keeps USD as reserve currency.
Everyone does.
It's very clear the US uses so much oil compared to China and India, that really just shows how much waste there is. Maybe other countries can balance things better
The US has a lot of oil to waste - but the rest of the world doesn't need it either.
hahaha well said !LOLZ
This is a fascinating analysis of global oil consumption and its implications for the global economy. The connection between US oil usage, China's manufacturing output, and the potential instability of the US dollar as the world's reserve currency is compelling. The suggestion of a decentralized, globally backed currency to mitigate the Triffin Dilemma is an intriguing solution, although the practical challenges of implementing such a system are significant. The historical context referencing Keynesian economics adds another layer of depth to the argument.
Keynesian economics is not even effective in "national interests," whatever those may be to whoever decides such things. We were promised price stability, economic equality, and prosperity without financial collapses. Instead we got wars, depressions, recessions, and debt while the concentration of wealth accelerated.
killing is a bit drastic, but it looks like the euro might be the next reserve currency then. 🤔😐