A reserve currency is a currency that is held in status by institutions all around the world. An employee at McDonalds in the US would look confused if you tried to hand them a British Pound, but an employee at McDonalds in the UK would be business as usual if you handed them a US dollar.
This strength is what allows the US to run such large deficits. It allows them to continuously print more money to pay it creditors which stimulates more demand for its currency, and as long as trust is continued in the US’s ability to find buyers for its debt that should continue.
In recent weeks this strength has been called into question with the agreement between the Saudis and the Chinese with the PetroYuan and the formation of the BRICS alliance.
The overarching theme across the globe is deglobalization. Globalization is what made every nation in the world richer, and what do richer nations do. They try to become the central hub for trade in their region, then the world.
There is an immense pressure in every nation to make sure vital technology does not fall into the hands of foreign adversaries. Semiconductors between the US and China are number one on that list.
There you have it rich nations try to do rich nation things.
So why does this matter for the US Dollar?
Here’s what I’ll tell you. As of today, safety still lies within the Dollar, trade will continue and debt will be created to stimulate the demand. But we today are not in the same position we were before. There are holes in the system, unfunded social security, pension liabilities, and projects that all require capital infusion. Yet when you look at the government debt today it cannot be created as it once could.
When you look at the $31 trillion debt level, most of that is fine today. It’s the refinancing that matters. Most of that debt is financed at near zero interest rates and what happens is not that the government finds money and pay you off. No they print more money and create new debt to pay you with. The problem is this new debt is WAY more expensive, to the tune of it nearly being the projected 4th largest expense on the governments income statement and climbing.
So what happens when they start refinancing, which they always are doing, filling pension and social security holes, and creating new spending bills. The debt climbs higher and we get closer to not being able to issue more.
What happens when you can’t issue more debt, people start buying other debt.
What happens when people start buying other debt, your debt becomes less and less important around the globe.
This is how you lose a reserve currency slowly and other rich nations take over.
So how do we fix this:
Let me be clear, everyone's answer is “let’s spend less and reduce the debt”. I believe that is fundamentally wrong, because it immediately means the Dollar is no longer a reserve currency. The government is the only entity that survives by creating more debt. What we need is an economic boom like no other, deregulation and increased incentives is the move to make.
Let me also be clear, this will not happen quickly. This WILL take years to play out and I wouldn’t make any bets on the Dollar dying next year. I may be 50 by the time the reserve currency is something else.
Anyways those are my thoughts on the Dollar, here’s everything I read and wrote this week.