The US Will Lose Its World Reserve Currency Status
The US dollar is on life support, and there is no way around it
Free use under the Pixabay license. Attribution of photo here: Pasja1000
COMING THIS WEEK: A 2-part article with predictions for global events in 2023 based on historical patterning. Thank you for your patience. It’s proving to be more time-consuming than I originally anticipated. I look forward to sharing it with you.
Note to Readers: I originally published this article, under the same title, on Medium on 12 May 2022. However, I updated and expanded it this week and removed the original version from Medium. People outside the Medium bubble deserve the chance to read it for free, especially as it’s becoming more prescient by the day.
For probably anyone reading this article, there has only been one world reserve currency in their lifetime: the US dollar—technically, it’s a Federal Reserve Note/FRN, but we’ll save technicalities for another day—and there have been 5 others officially recognized prior to it. We will examine a brief history of these currencies, their downfall, and how they pertain to our lives today.
For the sake of space and clarity for readers, I have grossly simplified the highly nuanced content around this subject so that anyone, regardless of their knowledge of monetary systems, can understand the big picture.
What is a World Reserve Currency (WRC)?
According to an article in the FOREX section of The Balance, they define a WRC as:
“…a foreign currency or precious metal that is held in large quantities; it may be held by a country’s government, central bank, or other monetary authority. It is used for participating in the global economy, such as through international transactions or investments.
In general, a reserve currency is one that:
Has the depth and liquidity to allow for reliable and efficient international transactions.
Can be freely and easily exchanged for other currencies.
Is held by many monetary authorities and institutions, in significant amounts.”
Previous World Reserve Currencies
Reserve currency status was typically assumed by a European country whose empire was strong, yet still expanding.
Portugal 1450–1530 (80 years)
Spain 1530–1640 (110 years)
Netherlands 1640–1720 (80 years)
France 1720–1815 (95 years)
Great Britain 1815–1920 (105 years)*
Note: Dates taken from the Midas Gold Group.
*Britain’s dates as the Reserve Currency are debatable. I discuss this below.
And all these countries inevitably lost their world reserve currency status due to the convergence of their empires weakening and war. As Chris Ferreira writes on SeekingAlpha, “Each country that rose to ultimate global dominance of commerce declined due to an over-saturation point.” And Graham Smith, an economics journalist, explains, “In each case where a reserve currency has gained and lost status as such, war and conquest have played an extremely centralized role.”
For example, towards the end of the Dutch’s reign holding the WRC status––a position they had due to the once vast power and wealth of the Dutch East India Company––France invaded the Netherlands and then assumed the status. But the French eventually became mired in debt, overwhelmed by a bloody civil war, and eventually lost the WRC status by the end of the Napoleonic Wars in 1815. And as France declined, Britain experienced massive growth and expansion due to the Industrial Revolution. This led to the UK assuming the WRC status.
The End of Britain’s WRC Status & The Beginning of the Dollar’s
Britain’s loss of the WRC status is debatable. Most argue that it was in 1920 after they nearly bankrupted themselves in WWI. Others say the UK lost it in 1944 after WWII, which put them in an even worse financial situation. This aligns with the Bretton Woods and the 1944 Agreement in which the US dollar (FRN) was officially declared the World Reserve Currency.
The Takedown of the Dollar as the WRC
Several factors could end the dollar's reign as the World Reserve Currency, but I suspect a convergence of two or more will put the nail in its coffin.
The US is indebted to the tune of more than $31 trillion. So, there's the potential that the constant money printing Congress endorsed for the last 15ish years could bring down the entire house of cards on its own. Even though the new House of Representatives seems determined to put an end to the relentless spending, I'm not sure they realize it's too little too late.
A second issue is the tenuous state of the financial markets. With an estimated USD 2 quadrillion in derivatives, the house of cards could collapse at any moment. Right alongside that is the Federal Reserve's attempt to get out of "check" by jacking up interest rates to stave of hyperinflation without realizing they're already "checkmated." (More on this in an upcoming article.)
However, one aspect many people fail to look at is the psychological one.
In the first half of 2022, the US, SWIFT, and the BIS (Bank of International Settlements) almost entirely removed Russia from the SWIFT system. In short, Russia could no longer use US dollars and the SWIFT system to trade internationally, except for essential goods. (As a response, Russia simply started demanding payments in rubles, gold and Bitcoin, so their involvement with SWIFT is minimal. As a result, the ruble plummeted for only 2 weeks and went on to become the best-performing currency of 2022.)
Unfortunately, the short-sightedness of Russia's removal caused irreparable damage to how other countries perceive the US dollar as the World Reserve Currency.
For the first time in history, a country (Russia) had been blocked or removed from using the WRC because it didn't behave the way the US and its allies wanted it to. This was a dangerous precedent to set since it has caused other countries to lose faith in the dollar as a World Reserve Currency. It implied that using the current WRC comes with conditions, and ones that aren't even mapped out, so anyone could land themselves on "the chopping block" at any moment. And yet, because the USA holds the WRC status, the government can impose regime change abroad whenever it suits the US, with no one to impose financial sanctions on them. The world sees the hypocrisy, even if those in the US do not.
This, along with a few other factors, may propel countries to make Bitcoin legal tender to avoid the restrictions that SWIFT can impose on them. (Of course, some countries are already doing so due to several factors, but that's another article unto itself.)
What does this mean?
As more and more countries begin trading in currencies other than the US dollar, the dollar's value will decline. For example, Saudia Arabia recently announced that they're open to trading oil for currencies other than the USD and are interested in joining the new asset-backed currency the BRICS are creating. (Another blow for the Petro-dollar.)
I suspect this will converge with the dollar's collapse under the weight of unmanageable debt and cause the US to lose the World Reserve Currency status.
At which point, the comforts Americans have known will no longer be as accessible or available if supply chains continue to crumble and China continues to become more inward-looking in terms of its economy. In a worst-case scenario, this could lead to the US being reduced to the likes of Venezuela, where it cannot import goods because of a hyperinflating, worthless currency.
The best-case scenario? The US pivots towards a debt jubilee, kicks the Fed out—it's a privately owned corporation, after all—and reconstitutes the dollar as an asset-backed currency, freeing US taxpayers from the endless debt-slavery cycle imposed upon them by Congress and the Fed. (More on this in an upcoming money systems article.) That said, even the best-case scenario cannot save the US from losing the World Reserve Currency status. It's just a better financial outcome than the alternatives.
Speaking of jubilees, governments always need an excuse for one, and the most favored of them all happens to be what has historically led to a country losing its World Reserve Currency status: war.
And since we've already "printed" $110 billion for Ukraine in the last 11 months, everything is in place should the US Government decide to proceed with a debt jubilee. Unfortunately, I don't think TPTB in this country are savvy enough to orchestrate a successful reconstitution of the dollar. After all, they're too busy covering up crimes to do something sensible.
Suggested Reading: This recent article from the Financial Times supports and supplements the article you’ve just read that I wrote last year. You may also want to read my piece, Central Bank Digital Currencies: The Wet Dream of Aspiring Tyrants, to make better sense of the FT article.
where's the clap option? I'm confused:) I was only able to offer one heart thingy...and that seems criminal in light of this excellent piece. I wish the gov would get rid of the Fed, but I'm afraid there's so much bribery and, more crucially blackmail going on between the 2 entities, leaving many of the key players compromised in all sorts of ways. tangled webs everywhere. only 2 options as far as I can see: I become Batman and take things into my own hands or you become president. or both:)
The war in Ukraine may prove to be a watershed event for the US and the world, leading not only to the demise of the Dollar as world reserve currency, but also heralding the start of WW III.