LET ME preface this piece by saying that most of the information below is derived from the works of economist Michael Pettis. Also, my knowledge of currency finance is limited to that of a lay person. With that said…
Since the end of the Second World War, the US dollar has enjoyed the status of global reserve currency. In practical terms, this means that the dollar is the most popular and most demanded currency in the world, and has allowed the United States an overwhelming level of influence over the global financial system.
However, after the American government’s economic warfare against Russia in light of its invasion of Ukraine, several countries have once again raised complaints at the dollar’s hegemony. This complaint is nothing new. It has been around for a very long time, and usually pops up whenever the US seems to use its economic power to coerce outside forces.
The trouble with that gripe is that although a lot of countries may complain about the dollar, many are either unable or unwilling to accept reserve currency status. It requires an open economy, which means no capital controls.
It also requires a strong, developed economy, which means it must be developed enough to have resilient capital markets. And it must be large enough to absorb excess global capital demands. So far, only the US and the EU meets these requirements.
The reason why the ruble, the yuan or a combination of several other currencies cannot replace the dollar is that being the global reserve currency has its drawbacks. For a very long time, the US has had to contend with fleeing manufacturing and slower growth, both of which is partially the result of the dollar’s global reserve currency status.
People buy dollars, which are then used to buy dollar denominated assets, which then artificially raise capital demand for the USdollar. This is why the United States typically suffers trade deficits. It’s because the US tends to absorb the excess demand from other countries.
The only way it can solve this problem is by issuing capital controls, effectively putting up a proverbial wall on all the capital flowing into it. Doing that, though, will not only end the dollar’s reserve status, it may also cause far reaching economic problems in the world.
So what can replace the dollar?
Nothing can replace the dollar at the moment, and even if there is, it’s doubtful if they are willing to have reserve status. The only way for the dollar to lose its reserve status is if the global system falls, in which case the notion of a global reserve currency becomes redundant./PN
