Lately I've heard U.S. debt is so high we will lose
status as world reserve currency.
Do you know anything about this?
If not can you refer me elsewhere?
Thank you for posing a very interesting question on world reserve currency which has crucial significance for the trading partners in international economy within the context of globalization, especially because globalization today exerts unprecedentedly huge impact on sustainability of a country’s economic development. Your question merits probe into the modalities of world reserve currency in such context.
I would at the outset like to tell you that one can have a plausible answer to this question based on available non-quantitative information enough for satisfying a non-technical query. Again, you may delve much to this deep question, employing the theory of international trade and comparative advantage and taking recourse to econometric methods specifying export-led growth and economic development. As you have not mentioned exactly to what extent you want to come to grips with your question, I presume you are interested in having a well-neigh sophisticated grasp of the problem without getting involved much into econometric complicacy. With that in mind, I try to present my views and hope to guide you on to further investigation on your own.
As you know, after World War II, the international financial system was governed by a formal agreement, the Bretton Woods System [please go through this in detail], under which the United States dollar was placed deliberately as the anchor of the system. The US government was meant to guarantee other central banks that they could sell their US dollar reserves at a fixed rate for gold. As I have already mentioned, this was to the advantage of all the trading partners, because the world had by that time moved on to globalization. [You may read the Munro doctrine and the stance of other countries poised wrongly to status as islands unto themselves, falsely viewing import as a one-way fall guy to be kept at bay, harming themselves in unison –something like endocrine glands in a human body going berserk. They realized, especially after WWII, that exports and imports must go hand in hand for mutual benefits. Read Keynes how he not only explained expenditure would have the multiplier effect on GDP but also how the Bretton Woods system would work. There came also the World Bank and the IMF, thanks to Keynes.]
Much water has flowed under the bridge since the first theory of international trade was propounded. There is now available vast literature of the benefits of international trade. [If you have time, you may have a glimpse of Krugman’s “International Economics: Theory and Policy” (that will also open you to vast references) for a preview to why trade is so important in the context of globalization, and that must be anchored in world reserve currency for sure-footed performance.] The U.S. came up as the main player [By the mid-1930s, many governments introduced tariffs and autarkic policies and the pound sterling lost its dominance as a reserve currency].
It seems like I am presenting the Prince of Denmark rather than Hamlet when I am putting you on to the nexus between international trade and development in our discussion on world reserve currency. There is a ground for it.
We know the U.S. now calls the tune. We also know the U.S. is getting into more and more debt problems. Does that put the U.S. in a position to lose status as world reserve currency? There is no straight answer to this question owing to the complexity of the financial situation of the global economy. In fact, as far as I can foresee, there is ample reason to believe that this is not going to come about any time soon. The U.S. is likely to maintain the status quo, not because she is by herself the financial behemoth, but because there is problem and in-place queasiness in all other partners. An explanation is in order.
First, the very system of world reserve currency rides on mutual interest. A foreign currency held by central banks and other major financial institutions as a means to pay off international debt obligations, or to influence their domestic exchange rate. A large percentage of commodities, such as gold and oil, are usually priced in the reserve currency, causing other countries to hold this currency to pay for these goods. Holding currency reserves, therefore, minimizes exchange rate risk, as the purchasing nation will not have to exchange their currency for the current reserve currency in order to make the purchase. This applies not only to the United States and Europe, two major players in the role of world reserve currency, but also to the developing countries which must follow, and support in following, the modus operandi of the system of world reserve currency that splices the mutual interest of all the countries that act in an economically symbiotic milieu in a global village. To put in other words, the U.S. has its interest to maintain the status of world reserve currency, and even Europe has its interest in going in tandem with the U.S. [I am going to explain this shortly.] On the other hand, all other mid-income and poor countries also have their interests in kowtowing to the U.S. dollar.
Secondly, the U.S. was almost poised to lose its status, but there is a turn of the tide, thanks to troubles across the Atlantic. The trouble with Greece [look into Greek debt crisis vis-à-vis the European Union on the search engine] and its ramifications go to entrench the U.S. dollar in a favored position. The dollar remains the favorite reserve currency because it has stability along with assets such as United States Treasury security that have both scale and liquidity. [The euro is currently the second most commonly held reserve currency, comprising about a quarter of allocated holdings. Please go through the historical table up to 2015 presented on Google. Please also study the prognosis of former U.S. Federal Reserve Chairman Alan Greenspan, made in September 2007, that the euro could replace the U.S. dollar as the world's primary reserve currency. The situation for Europe, as I have already mentioned, is not looking up. Besides, you may know that Greenspan and Harvard president and economics chair Summars were very much wrong on their assumption of deregulation and could not prevent the financial meltdown coming out of the bursts of internet and housing bubbles (look up Brooksley Born on Google).]
Finally, there is something called the economic inertia of motion. As MIT’s Max Plank says, old ideas die hard, and new ideas emerge only when the old stalwarts die. This, in the context of the U.S. status on world reserve currency, does not seem to work any time soon, because of the aforementioned circumstances of globalization.
This, dear Dick, is my view. You may dig deeper into the various facets of the query and come up with your own view. I hope this helps to put you on a footing for getting ahead with your research.
If you have further question, and if I can answer that, I will be happy to attend to you. My best wishes for your research.