Recent headlines posed the question: Is the United States dollar in danger? Corresponding newspaper and cable television reports raised concerns over the possibility the U.S. dollar could no longer serve as the world’s reserve currency.
What does it mean to be the world’s reserve currency? According to “A Primer on Reserve Currencies” by Brent Radcliffe, a reserve currency is a recognized national currency held by central banks and major financial institutions to use for international transactions and global finance.
According to Richard Best, the U.S. dollar became the world’s reserve currency as a result of the Bretton Woods Agreement in 1944, when delegates from 44 Allied countries met in Bretton Wood, N.H., to devise a system to manage foreign exchanges that wouldn’t disadvantage any country. The delegation adopted the U.S. dollar as the world’s reserve currency backed by the world’s largest gold reserves. This resulted in countries accumulating reserves of dollars instead of gold.
That led in turn to countries buying U.S. Treasury securities because they considered them a safe store of money. Demand for Treasury securities coupled with U.S. deficit spending caused the U.S. to flood the market with paper money. Countries began to worry about the stability of the dollar and converted dollar reserves into gold. This demand forced President Richard Nixon to decouple the dollar from gold, resulting in the floating exchange rates of today.
Why is the U.S. dollar challenged as the default global reserve currency?
Dave Manuel explained how the staggering debt of the U.S. and continued deficit spending ruins the credibility of the dollar. When the Federal Reserve continues to print dollars to purchase debt, the value of the dollar drops. Foreign investors wonder if the U.S. will collapse under mounting debt.
A report by Michelle Jones explores the advantages and disadvantages of reserve currencies. As Saudi Arabia threatens to switch from the dollar to the Chinese yuan for oil sales to China, concerns about the dollar come to the forefront again.
After the Russian invasion of Ukraine, the U.S. cut off Russian access to foreign currency reserves. That could lead other countries to question U.S. loyalty to them.
The advantage for the U.S. to have the dollar as the global reserve currency is that transaction costs and exchange rates are reduced. Jones said the biggest disadvantage is the U.S. can borrow in its own currency without having to prop up the dollar to avoid default.
Lawmakers have irresponsibly taken advantage of reduced borrowing costs, contributing to excessive U.S. debt. Interest payments alone exceed $900 million a day. Debt is ruining the lives of Americans.
Admiral Michael Mullen, former chairman of the Joint Chiefs of Staff, said losing the world’s reserve currency status seems to be the least of the U.S. problems. “The most significant threat to our national security is our debt.”
The proverbial elephant in the room is our staggering debt.