I don't know much about montary theory but from what I do know it seems unlikely that in my lifetime the US dollar will be threatened as the world's reserve currency.
I can only think of the euro, yen, renminbi, rupee and perhaps the pound as currencies that are backed by strong enough political forces to be considered as reserve. But there are many threats which each of these routes, do you trust the Chinese central bank? Is India stable enough? Is the EU stable enough? They are losing a prominent member in March 2019, will the UK recover post-brexit for the pound to be attractive??
Even then, as stated other nations have deep ties with the US which increases the risk of moving from the dollar. We provide for Japan's defense, we are the biggest funder of NATO, etc. While Trump has moved the US away from international institutions during his term I have no doubt that the US will continue to dictate global economic policy after his term is complete.
In many ways, while it's fun to speculate, I don't see the rest of the world having the will or options to move away from the dollar as a reserve currency.
Imo, the US dollar will remain the world reserve currency and the safest thing as long as the US military remain the most powerful. Sure, EU politics could be more stable but they can't defend against threats (Russia).
Also, I don't think many people, countries and businesses are going to trust China. They have a bad track record especially in crypto (detaining CEOs, freezing money, etc...). Everybody else is too small to matter (ie: New Zealand, Emirates, etc...).
I'm not educated in the economics of reserve currencies [1] so would be interested to hear what informed minds think. If we look at the top 5 reserve currencies in the world today (USD 62%, EUR 20%, JPY 6%, GBP 4%, CNY 2%), the USD is entirely dominant but it also means that any perturbations to it might destabilize the global economy.
Honestly I can't see any candidates to actually replace the dollar. To become the world reserve currency the issuing country has to be very stable, make their capital markets as open and transparent as the US, accept running a large trade deficit and issuing government bonds to almost anyone no matter the geopolitical situation.
China is stable, but without a regime change they are not at all interested in opening their financial markets. India is large and a little more open, but the big question mark is stability (both external wrt Pakistan/China and internally). The EU could do it but first they'd have to get buy-in from the export giants which seems unlikely and they'd also strain the relationship with the US.
"The dollar is the reserve currency of most of the world because of the explicit threat of violence. This isn't hyperbole, this is reality."
This is mostly a conspiracy theory.
And this: "It's simple. You take the loan in dollars, then pay us back in goods, sold at a discount in dollars. If you don't, we sanction and embargo you. "
Is essentially not true in any broad sense.
Also, there is no such thing as a 'world reserve currency'.
The US does use some leverage to require that Oil is traded in USD, particularly with Saudi Arabia, but that's the price of effectively keeping that nation relatively stable, which is not unreasonable.
Outside of Oil, there's really no reason for any nation to transact in USD or to keep reserves other than for what makes sense to them.
Oil is a key issue in the equation, but it's not actually essential.
The USD is mostly a reserve currency because of the size, openness, and relatively integrity of the US system.
The Euro is definitely a 'reserve currency' along with UK pound, but proportionally so.
The RMB isn't really a reserve currency because of lack of transparency in China, that said, the sheer power of China means that nations that trade with it will adopt it as a reserve on some level.
Cryptos unfortunately don't really solve the problems in this geopolitical equation.
I know how it works, but the trend to replace the US dollar as the world reserve currency is already happening, being driven primarily by China and Russia. Be it a currency basket, IMF SDRs, 'petro', or something else, they're working on alternatives. It won't happen overnight, and the effort may ultimately fail, but it would foolish and complacent of the US to count on having the world reserve currency forever. A multi-polar world eventually won't accept it, both b/c of the Triffin dilemna and balance of power games.
The status of USD as global reserve currency will end whenever the way the US treats holders of its debt becomes worse than someone else's. For now, China is not trusted to play nice with their currency, Europe keeps dipping down into negative interest rates, and everywhere else might become a different nation next year. If China becomes nice (not going to happen), Europe gets its act together (unlikely), or the rest of the world becomes stable for investment (not going to happen as long as the US is running around preventing it), the USD will be the best reserve currency any country can choose.
There is none and that's the only reason the dollar is still a reserve.
The only two competing currencies who have large enough economies are Euro and Yuan.
Euro can't be reserve because they are not an industrial powerhouse any longer and also a vessel of US for the most part.
Yuan can't be reserve because of lack of faith in Chinese government and currency controls.
The yuan still has the best shot though as many developing countries are in agony and the US has decidedly receded from the world stage, which means it's status as reserve currency is questionable at best.
The US $ may stay the official reserve currency but I expect many pairs of countries to start dealing directly in one of their own currencies. The effective transition off of the dollar as the reserve currency will probably be gradual as more alternative currencies are used by trading partners.
I keep hearing this business about the US being a reserve currency and it makes no sense.
First off, lots of other currencies are valuable without being reserve currencies. Swiss franc, Japanese yen, etc. Being a reserve currency probably boosts USD a bit but it's not the only pillar holding the thing up that people imply. If you disagree show your model: You have to believe that value for the euro, GBP, JPY, Swiss Franc is determined by thing X, USA does not have thing X and instead depends on being a reserve currency.
Second, what's the alternative reserve currency? Bitcoin? Don't make me laugh. RMB? Even more ridiculous. Euro? Probably the most realistic contender but seems to have major governance problems. As with democracy, the USD is the worst reserve currency, except for all the alternatives.
US military dominance is what makes USD the world's reserve currency which in turn drives 30-40% of our GDP if we start to withdraw it will start to affect USD standing as a world's
reserve currency.
For one the USD is only the largest reserve currency used internationally: GBP, EUR and JPY are also used as reserve currencies. For another the US has been trying to reduce the role of the dollar as a reserve currency because it actually has significant downsides and fewer benefits than is popularly portrayed - this even has it's own term, "exorbitant privilege". Here's Ben Bernanke talking about it:
The implication is really the other way around. The USD was the reserve currency in part because of the credibility of the US government's financials (and also because of amount of trade, etc). But obviously, the US has taken a huge beating credibility-wise recently.
After all, Sterling used to be the world's reserve currency : things change.
I can only think of the euro, yen, renminbi, rupee and perhaps the pound as currencies that are backed by strong enough political forces to be considered as reserve. But there are many threats which each of these routes, do you trust the Chinese central bank? Is India stable enough? Is the EU stable enough? They are losing a prominent member in March 2019, will the UK recover post-brexit for the pound to be attractive??
Even then, as stated other nations have deep ties with the US which increases the risk of moving from the dollar. We provide for Japan's defense, we are the biggest funder of NATO, etc. While Trump has moved the US away from international institutions during his term I have no doubt that the US will continue to dictate global economic policy after his term is complete.
In many ways, while it's fun to speculate, I don't see the rest of the world having the will or options to move away from the dollar as a reserve currency.
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