Dollar Reserve Currency Status Growing Old

currencyDo currencies die? Yes, and rather routinely when looked at from the long view of history. Is the dollar dying? It is in the sense that it is losing purchasing power and has been since the inception of the Federal Reserve. Does that mean it will die as in disappear? Perhaps, but it is dying at a slower rate than other fiat currencies.

What seems more likely is that the dollar loses its reserve currency status. The idea of either the dollar dying or losing its reserve currency seems implausible, perhaps impossible, to most. In itself that is a reflection of the growing ignorance in society.

Experiential Learning

Man is parochial and self-centered, particularly the less educated among us. Most are experiential learners, the lowest form of learning. Experiential learners comprehend what they have experienced. If something didn’t happen last week, month, year or within their memory, many consider its occurrence impossible. Ancient history is defined as what their parents might have lived through and discussed with them.

The declining quality of education reinforces this parochiality and insularity. “Man-on-the-street” interviews as seen on late-night TV are probably heavily edited and carefully selected. Nevertheless, they are horrifying in terms of the general level of ignorance exhibited. Americans are unable to answer what seems to be the most basic questions:

  • Who fought whom in the Revolutionary War?
  • In what century did World War II occur?
  • What war did Abraham Lincoln preside over?
  • Can you name five presidents?
  • Who is the current Vice President of the United States?
  • How many US states are there?
  • Who was the enemy (enemies) of the US in WW II?

Economics

Lack of literacy in economics is more pronounced. Few understand fiat currency. Fewer of those understand the concept of a reserve currency. The dollar is the reserve currency for the world and has been since WW II if not before. To idea that dollar could be losing its reserve currency status is difficult to accept. For those living today, it has always been the reserve currency of the world.

In an honest world, one not dominated by Statists seeking advantage, wealth and power, expertise in economics would not be necessary. Individuals could pay attention to the things they held dear. Providing for families would dominate most considerations. An honest price system with an honest currency would automatically signal what to buy more or less of. These same signals would guide producers.

There would be no need for artists, lawyers, businessmen or anyone else to be expert in economics. Wealth created would not be subject to bubbles that mysteriously arose and then burst. Time could be spent in pursuit of whatever specialty people were adept at.  Wealth creation would be real and relatively stable. The preservation of this wealth would not be a full-time pre-occupation.

Sadly, that is not what exists. The price system, that great communication device, no longer provides honest signals. Currencies no longer hold their value. Political interventions deliberately distort the pricing of all assets, especially financial assets. To understand and thrive in today’s world has been made impossible for most of the masses as a result. They are easy marks for taking on too much debt, buying overpriced homes, believing their wealth is real when it is based on mis-priced assets and a host of other bubble-related schemes of government.

Currency As An Example

Dollar supremacy has been a recent phenomenon, at least in terms of the history of the world. That may not surprise too many, but the fact that all reserve currencies have finite and rather short lives might. Currently-bankrupt Spain had the world’s reserve currency for a longer period of time than the dollar. So too did England. Both these countries are also-rans in terms of economic influence, wealth or power. France also had a reign as long as the US in terms of world reserve currency. Their currency, the franc, no longer exists and France is an economic (and social)  basket case, a dead man walking.

There are reasons for these results however they involve a level of thinking and concatenation of facts and logic incapable of being understood by the average person. In an effort to present reality in the simplest of experiential terms, the following chart is useful:

fiat currency

HT to Azinonomics

In historical perspective, the dollar appears to be nothing special. If history repeats or rhymes, the dollar appears near its end as a world currency. Economic analysis suggests the US is near the end of its run as possessor of the world’s reserve currency. That means it nears its end as the premier economic power.

Loss of reserve currency status may not be imminent but it will have significant effect on the valuation of assets and wealth around the globe. The effects on wealth will likely show up before the official pronouncement that the dollar is no longer the world’s reserve currency.

For those limited to experiential learning, let your parochial horizons expand with the knowledge that the US is no different than Portugal, at least in terms of once being the world’s greatest economic power.

Other Currencies

At the time of this writing, the dollar appears strong relative to other fiat currencies. That is because the entire world is debauching their currencies. Even in a world where currencies are weakening, on a relative basis something will always appear to be strong. The same can be said for particles floating up and down in a septic tank. Regardless of which one is floating the highest, one knows what floats in septic tanks. That seems an appropriate analogy for floating fiat currencies.

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