Are the days of the US dollar as the world’s reserve currency numbered?
The US dollar has been the world’s reserve currency for over 100 years, but how long will it be before a new unit of exchange replaces it? It can be said that payment platforms have upgraded their infrastructure to be able to process transactions using digital currencies. Will the USD be replaced by a China-backed form of digital currency or a basket of global assets?
“Every dog has its day” is an expression believed to have originated around 405 BC when a Greek playwright, Euripides, was mauled and killed by a pack of dogs. An analogy to this tale might be the US dollar. So, is the end near? In other words, has the powerful greenback “run its course?”
Historically, global reserve currencies have typically been replaced as a result of military conflict, but will the US dollar be replaced, not by war, but by economics? While the US economy is still the largest in the world, its economic dominance has declined and continues to decline as a percentage of global GDP. As The Independent newspaper reports, even in the area of renewable energy: “America is losing its superpower status to China… Between 2010 and 2020, China has spent almost twice as much as the United States on investments related to the energy transition and leads in employment in renewable energies”. Meanwhile, the main attributes a global reserve currency needs are the confidence of businesses and countries to use it, both as a medium of exchange and as a store of value. However, it would seem that as a store of value, the US dollar does not have a great track record.
Decline in the value of the US dollar
Source: Libertas Wealth
As we increasingly see our lives become digital, national geographic borders seem to matter less. So, will a digital currency replace the US dollar? One of the recurring reasons organizations cite for using blockchain technology is the transparency it provides and transparency helps build trust and any new currency will need to be trustworthy. The global economy has collapsed under a mountain of debt and global debt levels have reached what some believe to be unsustainable levels.
Global debt issued by governments now stands at over $71 trillion – this borrowing “frenzy” having been fueled by weak economic growth resulting from the COVID-19 pandemic. Governments have lowered interest rates, potentially breaking their own laws by engaging in “monetary financing”. In fact, this practice is illegal in many countries like Japan and Europe and occurs when a central bank creates money to buy government bonds, which actually allows those governments to spend without boundaries.
In 2014, the European Central Bank (ECB) was prohibited from doing so. Indeed, its quantitative easing program has already been called into question by the German Constitutional Court, which has threatened to no longer provide additional financial support to the ECB. Germany’s Constitutional Court issued a verdict in May 2020, determining that the ECB had potentially acted illegally by purchasing €2 trillion in government bonds. In addition, Germany owes over $2 trillion and the recent Russian-Ukrainian conflict will only increase inflation rates globally, further intensifying pressure on interest rates. increase.
Given that France, Germany and Italy are the biggest buyers of Russian gas in Europe, it will certainly not be possible to find alternative energy suppliers – quickly or cheaply – this will undoubtedly add new inflationary pressures in the EU. Could this then mean the beginning of the end for the euro?
Meanwhile, US public debt has increased to 98% of GDP (over $30 trillion) in April 2022, and the Chinese have over $10.5 trillion in public debt, or 60% of GDP. In the United States, corporate stock buybacks continue, resulting in only three S&P 500 companies being debt-free, namely Abiomed, Intuitive Surgical and Monster Beverage.
The US dollar, itself, has been the reserve currency for 99 years, so is it time to replace it? After all, the American currency replaced that of Great Britain, which replaced that of France, which replaced that of Holland, which replaced that of Spain, which had replaced the currency of Portugal in the 15th century. ! So, over 540 years of history seems to indicate that the average duration of a world currency is 94 years, but the US dollar has already surpassed it.
World Reserve Currencies Historically
Source: JPM / Hong Kong Monetary Authority, 2011
Relentlessly, there is no doubt that mounting debt is becoming a big problem for everyone. According to the World Bank, the “tipping point” is reached when a country’s debt-to-GDP ratio approaches/exceeds 77%. Well, the United States is way beyond that at 98%! The COVID-19 pandemic has certainly exposed the fragility of complex international supply chains and the Russian invasion of Ukraine has highlighted how the world is potentially at the mercy of what may well be suppliers of unreliable commodities, such as petrochemicals and/or grains .
Will this lead to increasing nationalization and an end to the era of hyper-globalization – knowing that the US and Australia both remain in a trade war with China? As people focus more on corporate ESG (Environmental Social Corporate Governance) credentials and a demand for more equality in society, is America’s “freewheeling capitalist style” really what it is? what does the world aspire to in the future?
So, given all of this, what could replace the US dollar as the world’s reserve currency? The US certainly won’t appreciate seeing the once mighty greenback (aka US$) move, so how long before we see a new currency knock the dollar off its perch? There is evidence that more and more jurisdictions are trading oil, gas and other commodities, as well as settling in currencies other than the US dollar.
There are rumors that the Saudis are willing to accept the Chinese yuan instead of the US dollar, which means it could signal the beginning of the end of the petrodollar and subsequently the end of a global dollar reserve currency. Americans? Rather than a national currency replacing the US dollar, could we digital will the currency supplant it? A digital currency backed by a real, tangible asset such as a basket of stocks, bonds, commodities, etc.
The “gut” answer would likely be a digital currency, one of which was recently launched by the world’s second-largest economy, China. To gain international usage, will the Chinese insist that their digital currency become the mode of payment at the airports, railways, roads, bridges and ports that China has paid for and built as part of the Chinese Belt and Road Initiative (BRI) which more than 146 countries have now joined.
Indeed, the IMF and the Bank for International Settlements have been advocating for digital currencies for quite some time and, notably, many countries are now looking for digital currencies for their own country. Alternatively, could we see a new global currency collateralized against global real estate – an asset class that Savills says is worth more than $326 trillion worldwide? To put this into perspective, the value of cash circulating in the world – i.e. physical money (coins, notes) and virtual electronic bank accounts is $40 trillion.
Regardless of this, however, one of the main challenges that digital currencies running on a blockchain-powered platform have faced is the number of transactions a blockchain can process per second. But, according to Analytics Insight, this problem could now potentially be solved since “TechPay Coin’s performance has been proven to be 43,000x faster than Bitcoin, 20,000x faster than Ethereum and even 4.5x faster than Solana, making it the fastest infinitely scalable Blockchain to date” .
So just think for a moment, when was the last time you used cash? Indeed, do you even have cash on you or do you rely on debit cards, credit cards or your mobile phone to pay for goods and services? We have seen an explosion in the use of challengers/neo banks and payment platforms, many of which are now able to accept and process digital currencies. Therefore, the infrastructure is arguably in place for a digital currency to replace the US dollar as the global currency. The question is: are you ready? How would this impact your business and your family’s finances?