Having a common currency used between nations for trade adds efficiency and stability. Before World War II, the world used the British pound, but since then, it’s been the U.S. dollar. Having the dollar function as the “reserve currency” carries with it both pros and cons. The pros include lower interest rates, higher stock market prices, and easier access to capital. It also bolsters stability for high-savings rate nations with trade surpluses.
On the other hand, the “reserve currency” nation can be negatively impacted by trade imbalances and, if a nation loses its lock on being the “reserve currency” nation, by losing the ability to inflict financial power over those they see as bad actors; from Russia’s perspective, the sanctions against their oligarchs being just one example of the use on this power. It also allows the world’s “reserve currency” nation to accumulate large deficits in terms of international trade and government spending. Biden’s recent stimulus spending has led nations like China to fear negative impacts from a weakening dollar because the dollar’s weakness will erode its own country’s value of dollar-denominated debt (i.e., they fear they will be getting back less value than they spent because the dollar is worth less). For American’s, having the dollar as the currency used around the world essentially exports the dollar’s stability to obtain goods and services at a cheaper price, and in doing so it enhances our wealth.
Several world nations have meet under the acronym, BRICS, with the intent to create their own “reverse currency.” The effectiveness of their efforts is not yet clear, but the group of nations is growing and includes powerhouses, both in population and energy resources. The list includes Russia, China, South Africa, Venezuela, Brazil, India, and Saudi Arabia, among others.
The world’s provider of “reserve currency” must demonstrate an ability for stability, economic strength, and size. With the downgrade of the U.S. credit rating in August of 2023, its massive increase in inflation and wild spending habits, America has recently demonstrated quite the opposite and opened the door for competition for being the world’s “reserve currency.” One writer summed it up this way: ‘We’re the world’s biggest debtor nation. We have record trade deficits, record budget deficits, and inflation that’s about to run out of control. I don’t think the economy has ever been this weak.”
America, particularly in the last two years, chose paths that will diminish the role as the world’s reserve. With this comes significantly less power to influence the world toward true economic freedom. Our worth is likely to diminish with it, yet it may also force us toward a more responsible fiscal policy, self-sufficiency, and less reliance on the rest of the world. But if it doesn’t, it will come with a price including less wealth. Past decisions have consequences. As we approach a major presidential election next year, may this nation chart a better direction than it has been following for the last couple of years.
Mark Mansius, a former resident of Brazoria County, has been a columnist for over ten years including Seeking Alpha which addresses economic and financial issues. He holds a B.S. degree in Chemical Engineering and a JD in Law. He has long had a burden for our nation and ran for Congress in 2012. Among his interests is US history and what things can be learned from it in today’s society. Mark is retired and now lives in Saint George, Utah.
