The Dollar as the World Reserve Currency: Voice of a Contrarian
Mass media and some economists report the demise of the dollar as a reserve currency. I don't think so. by James Luko
(centrist)
Wednesday, June 29, 2011
The mainstream media is awash in talk of the dollar losing its “sole” reserve currency status soon. They are wrong.
First, the U.S. dollar is not, and never has been the “sole” world reserve currency. Yes, it has been the “dominant” reserve currency simply because America is by far the largest trading nation- thus obviously the dollar would be in most demand, most needed and most reserved. Some can’t seem to understand this simple logic, if you buy goods from America- and we are the largest exporter- yes- greater than China, you will need dollars to buy those goods- and if you are selling a large amount of goods to America- like the oil countries- then obviously you will receive a lot of dollars- any confusion in that ?
The dollar has represented, since WWII, an average of 55%-70% of all globally held reserve currencies, with the Euro (since its inception) a strong second, with the British Sterling and Japanese Yen also being widely held reserve currencies. But never has the dollar been the “sole” currency as mistakenly reported in the mainstream media.
Second: China and Chinas GDP if they (China) become the largest trading nation will the YUAN (RMB) become the dominant reserve currency? No, not for the time being. Despite the media glamour about China, in real terms, the Chinese economy remains only ONE THIRD (1/3) the size of the American economy. You would need to combine the economies of China, Japan and Germany to equal Americas and if you count NAFTA as an ever growing economic union, you would have to add France, Spain, Russia and Canada to equal NAFTAs GNP of 17.1 Trillion USD!
In real dollar terms the largest economic zones are: (2010) [1]
NAFTA 17.1 Trillion
EU 16.2 Trillion
USA 14.6 Trillion
China 5.8 Trillion
Conversely, if you consider, the EU zone and NAFTA zone with a GDP of 33.3 Trillion versus China with 5.8 Trillion, how can one ignore the logic of economic predominance and which currencies will remain dominant? The trading volume of NAFTA and EU stands at over 10 Trillion versus 2.6 Trillion of China- it is plainly obvious that the Dollar and Euro will remain the dominant reserve currencies for some time to come.
In addition, Chinas RMB cannot become a global reserve currency for two financial reasons- first, the government controls capital conversion and second it is not on an open float as the other reserve currencies. For the short term future I do not see China changing these policies thus, a reserve currency it cannot be.
Third: There is not a big enough known supply of gold, neither below or above ground, to support todays money supply nor enough to allow for elastic increases in money supply. This is the reason why gold had an official price and was illegal to hold bullion in the past. If we rebase or peg the dollar to gold at market prices, the price will soar to unlimited heights.
For now, no matter the American financial, fiscal and banking crisis, there is no way to avoid a 10 trillion dollar trading bloc with avoiding holding those main currencies- the Dollar and the EU.
The views expressed
in this article are those of James Luko only and
do not represent the views of Nolan Chart, LLC or its affiliates.
James Luko is solely responsible for the contents
of this article and is not an employee or otherwise affiliated
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Posted By: Bill Gee
Date: June 29, 2011 08:31:30 AM
True, the US dollar is the dominant reserve currency. Also True, the fact that the US is the world's largest trading nation is the main reason why the dollar is so dominant.
Unfortunately, that's where the truth ends.
Money must meet three standards in order to maintain its legitimacy in an economy. 1) Medium of Exchange, 2) Store of Value, 3) Relative Scarcity
Fiat Currency fails on two out of three of these standards. 1) As a medium of exchange, the dollar still rules. That is because it still has the full faith and backing of the US Government and for now, that's good enough for world markets. However, should debate over the debt ceiling continue or if the Government continues to spend money like crazy, that faith will be questioned (in the form of higher interest rates) and the currency will eventually fail. 2&3) As a store of value, the dollar has completely failed due to the fact that relative scarcity has become a joke in recent years. With the printing of every new dollar or every loan granted by a commercial bank, the dollar loses value. The result is that you have too many dollars chasing too few goods, which leads to hyperinflation.
Take a look at my recent debate with Walt Theissen on Reserve Currency verses Precious Metal Currency. I think you might find it enlightening.
Posted By: jamesluko
Date: June 29, 2011 07:23:36 PM
Bill,
Yes, your points could and would apply to many currencies, including the Dollar and Euro. Regarding gold versus fiat currency, I think gold has had a bad track record in the past regarding basing paper money and I think the effort that it would take to reign in fiscal policy is much easier than trying to re-base the currency or switch to some sort of peg to gold. It's a practical matter. Fiat currency- and namely the dollar, has remained an extremely reliable medium of exchange since WWII and has allowed for a dynamic growing economy with a very high level of stability, delivering the greatest standard of living for the largest amount of people- Americans. That is PROOF in the pudding.
Yes your article with Walt is very good I liked it ! Thanks for your comment.
