World GDP/Power/Reserve Currency Chronology

Even exorbitant privileges can be lost and there are a number of factors suggesting that, over time, the US dollar may be at risk of surrendering its lead, if not its role, as the world’s preeminent reserve currency. View the videos below to see how world reserve currency status has evolved in the history from 1450 to 2020.

Note that the shift of reserve currency from one currency to another normally is a gradual and slow process. For example,^[4]

The U.S. economy overtook Britain’s in the second half of the 19th century, but it took until the 1902s before it became a dominant currency in international trade.

Video 1. World GDP (PPP) by Country (YouTube link)

 

Video 2.  World Dominant  Reserve Currency (YouTube link) 

 

Reserve Currency

When you think of the uses of money, you have 

• Store of value
• Unit of account
• Medium of exchange 

If you look at all the currencies that have a reserve status, they are issued by countries that have a lot of soft power. It’s not just economic might — look at India and China, their currencies are nowhere on the list. 

When a currency has a reserve status, it’s difficult to lose that soft power, which would include things — intangible and difficult-to-quantify practices of a country—like:

1. Culture 

2. Rule of law

• If it’s perceived to be fair?
• If it operates without a lot of intervention or controls from the government? 
• If it’s governed by a law which is well understood by the markets and the world?

All of these underpin the support for a currency such as US Dollar, and it’s very difficult to supplant such a status.

Video 3.  World Powers Chronology (YouTube link)

Benefits of Being a Reserve Currency

The greatest power of being a reserve currency comes from being able to:

1. Print the world’s money
2. Own all the operational powers

• For example, influence on the clearing system

However, the United States is at risk of losing some of this power because:^[3]

The US government and the US central bank are increasing the amounts of dollar-denominated debt and money at extraordinarily fast paces that are scary and the amounts will be will be hard to find adequate demand for without the Federal Reserve having to monetize a lot of it.

The United States is testing the limits of how much there can simultaneously be:

1. Enormous amounts of dollar-denominated money and debt created
2. Falling and negative real returns
3. The dollar being used as a weapon (e.g., the usage can be limited via capital controls), and 

4. A fiat monetary system

As Ray Dalio said: 

We won’t know what the limit is and we can’t say it is here until it is reached. At that point it will be too late to fix.

 

References

1. Sterling has not become an emerging market currency
2. The US dollar is in trouble (Seeking Alpha)
3. The Changing World Order - Where We Are by Ray Dalio
4. BOE’s Carney sees the U.S. dollar eventually losing its reserve-currency status 
5. 10 "Big" Things For Stocks In The Coming Decade 
6. Bilateral Digital Currency Payments and the Twilight of the Dollar