Is This The End For The U.S. Dollar As World Reserve Currency?

the US dollar has been the dominant Global Currency for a generation but many people are now questioning whether that period of dollar dominance is coming to an end including its use as a global Reserve currency in this video we look at the evidence behind that claim and we look at the precedent of what happened to the previous Global Reserve currency which was Sterling we also consider the alternatives to the dollar and finally we look at the economic impact on the United States if de-dollarization were indeed to occur this video is sponsored by wise and if you use the link in the description below you'll get a free first transfer of up to 500 pounds for new accounts so let's look at whether this is the end for the us as a reserve currency in a bit more detail let's begin by looking at what we mean by Reserve currency to understand that let's begin with what we mean by Foreign Exchange reserves these are just foreign currency Holdings by your central bank so for example the Federal Reserve could hold Renminbi or it could hold Sterling then a reserve currency is just one of the most popular currencies which are held by central banks across the world how does the Central Bank end up with foreign exchange reserves well it simply has to be in a country which exports more than it Imports in currency terms and if that's true then it's going to accumulate that foreign currency and presumably invest it in government bonds in that foreign currency a nice example is China which famously has the largest foreign exchange reserves globally it has just under three trillion dollars worth in fact if you look at the graph in the bottom panel here but the reason for that you can see in the top panel which is that it's exported more than it's imported in other words it's net current account has been positive for a long period of time now many of us find ourselves in a situation either as a business or an individual where we have to pay for something in a foreign currency or we get paid in a foreign currency and wise who's the sponsor of this video let you do that very efficiently and economically I first came across wise when I had to transfer some money to a colleague in India and I was amazed at how much cheaper it was to do that through wise than it was say through my bank now wise was launched in 2011 with three founding principles for transfers the first one is that they should be economical and fair you'll notice that you see all of their rates up front the second one is the transfer should be easy the third principle is that the transfers should be fast most of them happen almost instantly or on the same day wise also offers the ability to set money aside in jars this ensures that you don't inadvertently spend money which is generating income for example you could set aside money for salaries taxis or expenses in any currency that you want and you can take money out of the jar anytime you like alternatively if you don't keep money in a jar the money that you keep in a wise interest can account will still earn interest whether it's in a business account or whether it's in a regular account wise does this by investing in safe short duration government bonds in that currency now returns aren't guaranteed because rates will vary with interest rates which are set by central banks now viewers of pension graph get a special offer from Wise where if you use the link in the description beneath me you'll get a free first transfer of up to 500 pounds and this is for new wise customers only we saw that a reserve currency is just a foreign currency held by a central bank but which are the most popular Reserve currencies well as you can see in this tree map the dollar is utterly dominant that's still the case at the end of 2022 the total reserves stored in the US dollar are about six and a half trillion dollars and that makes that 54 of global reserves the currency which is in second place is a euro and that makes up about a fifth of global Reserve then we get to the much smaller currencies so for example the Yen makes up about five percent Sterling makes up just under five percent and the Chinese renmin b or the Yuan makes up about 2.5 percent if we look at the proportion of money held in each of those Reserve currencies over time going back to 1999 you can see that the US dollar has become less popular so it started off at just under three quarters of reserves and now it's at just over a half so there has been a gradual tailing off of dollar popularity now many people think the Renminbi is moving up very rapidly and it is in relative terms but so are other Reserve currencies such as the Canadian dollar and the Australian dollar it's not just about the amount of trade which happens in a currency it's also the ability to earn revenue and interest in that currency so if you look at the yield in a particular currency the Australian dollar has been very attractive for some time now when interest rates were very low the Australian yields on government bonds were relatively High and the volatility of the currency was also quite low so in risk-adjusted terms the Aussie dollar was quite attractive so it's not just about trade it's also about investment and risk-adjusted returns which makes a particular currency attractive to some extent central banks actively manage their reserves to generate Revenue so why is the Greenback being questioned now well many people have pointed out that the dollar was used as a kind of weapon it's been weaponized as a currency and that was in the wake of what happened when Russia invaded Ukraine when the US and many of its allies confiscated reserves from the Russian Central Bank so other regimes around the world are worried about falling foul of Western government policy foreign policy and so perhaps they're moving their money out of the dollar as a result if you don't want your reserves to be confiscated well you could store the them in other currencies or perhaps in gold in addition to that some countries such as Brazil you can see here are questioning whether they should trade in the dollar at all so this quote which was made when he was visiting Shanghai in April is quite an interesting one he says every night I ask myself why all countries have to base their trade on the dollar why can't we do trade based on our own currencies who was it that decided that the dollar was the currency after The Disappearance of the gold standard so certainly for bilateral trade he has a point why should Brazil and China when they trade with each other not trade in Brazilian real and Chinese Renminbi beside me here you can see the amount of exports between the two countries and they've certainly increased a lot recently now you can see that Brazil is running quite a big trade deficit with China so presumably it's getting Renminbi through that trade so having Renminbi Reserves would make sense for the Brazilian Central Bank however being a reserve currency is not just about bilateral trade many countries choose to trade in dollars even if the US is not involved in the transaction why is that well it's very cheap to trade in dollars you can exchange them on any Global Forex exchange and it can do that with tiny bit offer spreads and it's a relatively stable currency which is an attractive Prospect if you're worried about volatility so certainly for bilateral trade people could use the Renminbi but as a kind of trade currency even if China's not involved I don't think it's as attractive now let's look at a precedent for a global Reserve currency fading and this is Sterling if we look at the percentage of foreign currency reserves between 1950 and 1980 notice the fact that it's very gradual the rate at which Sterling declines now the beginning of this period just after the second World War Sterling made up about half Global reserves a little bit more in fact but then gradually what happens over time until we get to the early 70s is that it declines to something like one-third of reserves then in the early 1970s there was a very sharp move downwards as the US dollar became much more dominant now the reasons behind that are kind of interesting and historical if we look at a global map there were several countries around the world which had Sterling as their currency either directly or indirectly because the value of their currency was pegged to the value of sterling the two would move up and down perfectly in line with one another and these countries central banks also held deposits at the bank of England but the colors on this map also show you what happened over time which was the fragmentation of this so-called Sterling Zone such that nowadays the Sterling zone is non-existent some countries which you can see on a map left the Sterling Zone before 1972 to but almost all of them left after why did Sterling fade in this way well it certainly started with the first world war and the second world war when remember currencies were pegged to the value of gold now that requires you to have lots of gold reserves to back up your currency but War's incredibly expensive and this depleted the UK's gold reserves particularly in World War II Plus at the same time the US was economically ascended so in 1913 they established the Federal Reserve System which stabilized their financial system and after the second world war the U.S expanded into the vacuum left by the UK after it had to pay off all of its huge War debts and there's another Factor here which is that the UK joined the European economic Union in 1973 and although it wasn't explicitly stated to be a condition of membership the fact that many commonwealth countries held reserves with the bank of England was a sticking point for countries like France so certainly by 1973 that Sterling Zone had ended and the UK had its own fair share of economic crises which it had to deal with and the long-term pattern that we see in the valley of Sterling versus the dollar is one of the valuation the exchange rate used to be four dollars to the pound this is just after the second world war but really the period after the 1970s Sterling has been flirting with parity with a dollar where it's one dollar for each pound the very high inflation period in the 1970s certainly contributed to that the US had very high policy rates and that certainly strengthened the dollar a great deal so that was the first time that Sterling had really got close to parity then there was another crisis in 1992 when George Soros broke the bank of England and the UK was forced to leave the European exchange rate mechanism then in 2016 Sterling took another tumble with the brexit referendum result so what it seems like is Sterling has been weakened by each of the successive crises it never really fully recovers to the levels it was at previously so I think the primary lesson we can learn here is that once you stop being a reserve currency it usually means devaluation of your currency so what are the alternatives to the US dollar a lot of people have been saying that the Renminbi the Chinese currency could be an alternative to the dollar and there are many factors holding back the Renminbi from being a reserve currency firstly it's not freely convertible if you have dollars you can convert them on any Global exchange very cheaply and very easily however if you've got Renminbi there are capital controls the second point is kind of interesting which is that in order to get hold of a particular currency it has to run a trade deficit in other words it has to import more than it exports that just creates a flow of its currency out into the world which central banks can then buy whereas as we saw China's been running a trade surplus for some time and there's no sign of that ending so if you did want to build up a stockpile of Renminbi in order to perhaps intervene in the currency markets you can't really do that easily unless your exports to China exceed your Imports which is fairly unusual at the moment for any country another Global Reserve currency hurdle which I think China will find it difficult to reach is whether you can have transactions which don't involve China but which do involve the Renminbi it's completely understandable when Brazil trades with China for it to do that in Renminbi but what about if Brazil were to trade with say Russia or the Philippines would it do that in Renminbi it's certainly possible but at the moment that non-bilateral trade is still mostly carried out in US Dollars why is that Well Network effects are really important here because the dollar so established as a trade currency and as a way of funding trade most of that's happening in dollars it takes a very long time for that momentum to disappear so the moment I think the only real alternative to the US dollar would be something like the Euro because that's the second largest currency in terms of reserves and it satisfies a lot of those constraints for what you'd look for in a reserve currency so finally what would D dollarization mean for the US economy I think the first point here is that the speed of de-dollarization is absolutely critical if it happens quickly that could be very destabilizing consider just one aspect of that think about how much of global Equity markets are invested in the dollar sixty percent of developed markets are in U.S Equity markets so if the US dollar were to suddenly devalue they would have a huge negative effect on all of those Investments so a lot of financial Plumbing at the moment depends on the US dollar and if we were to pull that rug out from the financial markets it could disrupt things hugely however as we saw in the case of the UK what I'd expect is that the US would see a very gradual decline not an overnight shift to another currency but I think what worries most Americans certainly is a loss of political influence and economic influence that goes with loss of Reserve currency status that's how to quantify but just look at the example of the UK and how it's lost its political clout over the decades since the second world war so what were the Direct effects beyond the US economy well we saw for the UK that it meant devaluation of its currency and that wouldn't be all bad for the US for example service exporting companies like apple and like Netflix and a lot of their revenue in foreign currency so this would boost their revenues in dollars it would also make their exports more attractive however it would be inflationary because the U.S Imports more than it exports and there'd be a pass-through effect on inflation as those Imports became more expensive then the final effect which would also be a problem for the United States is that because central banks wouldn't have to buy so many treasuries they'd be less demand for those treasuries and yields would probably be higher they would push up the cost of borrowing for the US government but also for U.S companies and that would probably be a drag on growth and also on U.S Equity market growth so I think when you actually look at the evidence of what currencies could potentially be Global Reserve currencies the list is fairly short and I can't really see the currency which is in second place the Euro being widely adopted certainly not at the moment and I think the Renminbi just doesn't satisfy a lot of the constraints particularly easy convertibility I think for the time being we're just going to have to get used to the dollar being dominant and it's only for bilateral trade we could see a multi-polar world but the dollar I think is here to stay for the rest of my lifetime at least now don't forget our offer from Wise you'll find a link to that in the description beneath me where you can get a free transfer of up to 500 pounds if you're a new wise customer on your first transfer and as always thank you for listening

Channel: PensionCraft

Views: 46,647

Keywords: us dollar collapse 2023, us dollar reserve currency, global reserve currency explained, economy news, economics, reserve currency, reserve currency explained, reserve currency history, reserve currency status, reserve currency dollar, pension craft, pensioncraft, ramin, ramin nakisa, investing, us economy 2023, us economy, dollar crash 2023, dollar crisis

Id: V9hgaiSngz4

Length: 16min 18sec (978 seconds)

Published: Sat Jun 03 2023