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Foreign Currency Reserve System: The Future of the USD

March 22, 2015

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“It is better to be feared than loved if you cannot be both” Niccolo Machiavelli stated in The Prince.

Mach

The problem the United States faces is in 2015 they are not feared in foreign markets and certainly not loved.  This is most relevant in the currency market where the US Dollar (USD) has been the global reserve currency since 1944.  In basic terminology this means that the USD is held by foreign governments and financial institutions to conduct international transactions.  It represents 5 trillion USD on a daily basis.  Being a global currency has allowed the USD to dominate foreign, military, and economic policy for decades.  It has also allowed the United States to print as much money as they want, go into as much debt as they want due to the massive artificial demand for the US currency.  It has also allowed the United States to keep very low interest rates compared against their counterparts.

As a currency trader, I am amazed at the time we live in.  The reserve system changing.  Things that will be written in history books 50 years from now are happening right now.  That is amazing.  We are going through an unprecedented time with the international currency system.  As a US citizen whom bleeds red, white, and blue…I am worried, shocked, and in utter amazement that consumers don’t understand what is happening to the value of the USD.

The reasons the USD will no longer be the reserve currency are actually quite simple: the global market is demanding it.

1) The IMF is calling for a new global reserve currency backed by a conglomerate of currencies under the Special Drawing Rights (SDR).  The SDR is currently priced in USD and consists of four major currencies including the USD, GBP, JPY and EUR.  In 2015 the Chinese RMB will most likely be included in the SDR.  Currently the SDR is only used by G-7 countries but is in the process of evolving in what many believe could be a international reserve currency.  Many international institutions, foreign governments, and entities such as the United Nations support a reserve system that is backed by multiple currencies and not just the USD.

2) There are five countries that make up the BRICS, Brazil, Russia, India, China, and South Africa.  The BRICS recently established a New Development Bank that was created as a direct competitor to the World Bank which was established during the Bretton Woods Act of 1944.  In conjunction with the New Development Bank the BRICS have established international trading agreements that would use non USD transactions in international trade.

BRICS

3) In 2009 China shifted from their previous monetary policies to one that is starting to use their own currency in international trade.  Recently this has escalated tremendously.  Here is a list of countries China has agreements with to use Yuan related international transactions:

RMB Swap

The list is expanding constantly.  In 2015, 30% of Chinese trade which is the #1 exporter of goods in the world will be settled in RMB.  Prior to 2009, China did not use the RMB in international trade.  The RMB is now the second most utilized currency in the world and the 5th largest reserve currency in the world.  One might wonder that strong economic partners such as Australia and United Kingdom would move away from the USD, the reason is simple, China is a larger exporter than the USD and they are demanding it.

RMB

4) In 1973 Saudi Arabia agreed to use the USD in the sell of oil.  In 1975 all of OPEC agreed to do the same, this became know as the Petrodollar or the Black Gold Standard.  Recently, there has been push back on the petrodollar and within the past few years, Iran, United Emirates and even Saudi Arabia which is the biggest US ally in the region has agree with multiple countries to use non-USD transactions in the purchase of oil.

5) The United Nations is calling for a new reserve system.

As I stated originally, the USD will no longer be the reserve currency.  The reason is simple, the world is not only demanding it, the international agreements are in the process of either being made or have already been made.  They, meaning the World, are simply forcing the issue and it is happening right now.

This will lead to economic stagnation as costs will increase and the US will not be able to finance their debt with world demand of the USD.  However, perhaps there is a light at the end of the tunnel.  Perhaps the US will cease to treat debt like a consumer.  Perhaps the US can get back to what made this nation great in the first place, an economic system that is based on pure capitalistic principles of supply and demand.  Perhaps the US can become the fiscally conservative nation we once were.

I will update this topic as time and opinion changes

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7 Replies to “Foreign Currency Reserve System: The Future of the USD”

  1. check out the new post and let me know your thoughts

  2. When I see Niccolo Machiavelli quoted in the first sentence I’m already hooked.

  3. You know I love me some Machiavelli

  4. Avatar Ali Tahta says:

    This is great subject to talk about. I have a couple of comment. I always wonder why US invaded iraq selling the idea that they hold mass destruction weapon and by the time they got there, they didnt find any and it made the news that secret service gave a wrong information to administration. I wonder if they went there due to oil, to control the source since iraq one of the biggest reserves in the world.
    I heard that the US by 2018 will be an exporter of oil for the first time. And in the last couple of years permits issued by the goverment for oil drilling increased dramatically. So I think they are preparing for something.
    I dont think the US will give up the privilege of being a world reserve currency easily, thats unfair advantage. I think whoever in control have some kinda of plan.
    I think there is more than the eye can see.

  5. Hey Ali, yes the war was about control of the OIL market as Saddam started selling OIL in non USD.

    As for fighting to keep the USD in reserve status, yes the US will fight for that but I am to the point where the USD as reserve is hindering our economic growth as we have to go into massive amount of debt as well as keep a strong dollar which means we export less goods but export more jobs.

    Time for a new reserve system

  6. Avatar STEWGILGIS says:

    I disagree with you about the U.S. going to war in Iraq over oil. Saddam’s WMD were shipped over to Syria.

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