PARADIGM SHIFT
Future of Reserve Currencies
The US dollar has been the global reserve currency since the end of WWII.
That means countries around the world hold US Treasuries in reserve, allowing them the capability to strategically buy and sell their own currencies as they attempt to maintain stability of value.
As deglobalization has gained some momentum around the world, could there come a time when world trade is divided into two or more BLOCs?
That is, could countries begin favoring trade with one another to the partial or total exclusion of outsiders?
And if so, would the US dollar be at risk of losing its global reserve status?
Oliver Fines, CFA, and Mark Higgins, CFA, tackle this question in a recent podcast.
In their opinion, the US became the world reserve currency largely due to the dollar’s convertibility to gold in 1944.
Even though the gold reserve was eventually removed, there has never since been a better alternative for the reserve currency, as the momentum of the US’ economic power continues to build upon itself.
Because US Treasuries are in such high demand, some speculate this allows the US government to borrow at lower interest rates than might otherwise be possible. But without the backing of gold, what prevents the US dollar from declining in popularity against, say, the euro or even cryptocurrency?
The perception of the US dollar’s strength is largely tied to its perceived ability to make good on its payments sustainably (without harming its economy), and that means a prudent handling of national debt.
Alexander Hamilton insisted upon the following two principles for public debt:
A nation needs sound credit in order to fund the response to public danger when it arises.
The public credit should be paid back once the danger subsides.
And the US roughly followed this guidance up until its dollar became the world reserve currency after WWII.
But we became too comfortable, growing the national debt from about $200 billion at Bretton Woods (1944) to over $36 trillion today.
The point that Olivier and Mark make is that the US deficit levels are not sustainable. If they continue this way for another couple of decades, there will need to be a massive cut (20%+) in US spending, which will largely include programs which US citizens have come to depend on and plan around.
The better option, in their opinion, is to make smaller changes now which will minimize the pain necessary to make things sustainable.
There is a strong necessity to restructure the US budget, which is currently being examined by DOGE. Although it won’t be easy, a successful budget restructure could help solidify the US dollar as the only viable world reserve currency for decades to come.
The possible end of the dollar’s reserve status wouldn’t likely spell disaster for the US economy (it’s much less important than many assume), but taking steps to strengthen our long-term economic sustainability is one positive development that’s long overdue.