Why the Regime Needs the Dollar to Be the Global Reserve Currency

Last week, Fox News aired a segment discussing the possibility that the US dollar will cease to be the global reserve currency and what that would mean for Americans. The tone of the piece suggested that a “catastrophic” decline of the US dollar was not only possible, but perhaps even imminent. CNN last week also aired its own segment suggesting the US will face “a reckoning like none before” if the “dollar’s dominance” in the global economy falls significantly.

Much of the analysis was framed to stoke the public’s fears of Chinese geopolitical power, and the Fox segment was especially hyperbolic in its predictions of near-total economic devastation resulting from any movement away from the dollar in international trade and reserves.

Yet both segments are correct that events are piling up that point to at least a gradual decline in the dollar’s preeminence in the global economy and that this could lead to serious economic trouble for Washington. Events are not moving as quickly as the pundits are predicting, but they are moving, and if current trends continue, the United States will find itself facing a new and enduring era of stubborn price inflation and weakening US geopolitical power.

Much of the discussion around the decline of the dollar is framed as a matter of the Chinese renminbi (RMB, or yuan) becoming the global reserve currency. This purported imminent replacement of the dollar with the RMB, however, is not going to happen any time soon. There are many reasons for this. China still uses capital controls, its economy is not nearly as open as the US economy, and US government debt still looks less risky than Chinese debt. Yet we are witnessing a growing trend in the world’s regimes of moving away from the dollar as the overwhelming favorite among currencies used for international trade.

First, there is the recent agreement at the Russia-China summit to carry out trade transactions “between Russia and the countries of Asia, Africa, and Latin America,” as Vladimir Putin put it. This would be quite a change from the status quo in which nondollar transactions make up a tiny portion of international trade settlements. This trend is catching on elsewhere as well. Last month, China and Brazil reportedly “struck a deal to allow companies to settle their trade transactions in the two countries’ own currencies, ditching the United States dollar as an intermediary.” Meanwhile, a French company bought sixty-five thousand tons of liquified natural gas (LNG), meaning “Chinese national oil company CNOOC and France’s TotalEnergies have completed China’s first yuan-settled LNG trade.” Oil giant Saudi Arabia has also repeatedly stated that it’s amenable to opening up its oil trade to currencies other than the US dollar, with an eye toward accepting RMB.

None of this threatens to immediately send the dollar into a tailspin or “collapse.” The dollar’s role in the world economy is still huge, and the dollar remains the most used currency by far. This becomes all the more obvious when we look at how much the US dollar still dominates foreign exchange reserves—which are assets in foreign currencies held on reserve by central banks. These reserves are partly an indication of just how much central banks anticipate dollars will be needed to engage in international trade.

Dollars still make up 58 percent of foreign exchange reserves. That’s far above even the second-place currency, the euro, which is at a mere 20 percent. All other currencies are far behind that. The Japanese yen makes up about 5.5 percent of all reserves, and the pound sterling makes up under 5 percent. The RMB is in fifth place at about 2.7 percent.

While the RMB is not about to replace the dollar, general movement away from the dollar—in favor of a mixture of other currencies—is indeed in place. In fact, as of the fourth quarter of last year, the dollar made up the lowest percentage of foreign reserves since 1995, falling from 66 percent of reserves in 2014.

Being the country whose currency enjoys global reserve status brings both domestic and international advantages to the US regime.

Domestically, reserve currency status brings a greater global demand for dollars. This means more of a global willingness to absorb dollars into foreign central banks and foreign bank accounts even as the dollar inflates and loses purchasing power. Ultimately, this means the US regime can get away with more monetary inflation, more financial repression, and more debt before domestic price inflation gets out of hand. After all, even if the US central bank (the Federal Reserve) creates $8 trillion in new dollars in order to prop up US asset prices, much of the world will take those dollars out of US domestic markets, and this will reduce price inflation in the US—at least in the short term. Moreover, the fact the dollar dominates in global trade transactions means more global demand for US debt. Or, as Reuters put it in 2019, the dollar is used “for at least half of international trade invoices—five times more than the United States’ share of world goods imports—fuelling demand for U.S. assets.”

Those assets include US government debt, and this pushes down the interest rate at which the US government must pay on its enormous $30 trillion debt. This also decreases the likelihood of a US sovereign debt crisis. Domestically in the US, reserve status for the dollar mutes inflation, lowers interest rates, and enables more government spending.

Internationally, the US government enjoys many benefits from reserve status. For example, the US regime is much more easily able to impose economic sanctions on rival states, thanks to the role of dollars in international trade and banking. Dollars are central to the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system, which is the main messaging network through which international trade transactions are initiated. In recent years, this control of SWIFT has enabled the US to largely exclude both Iran and Russia from much of the international banking system. The US has also frequently threatened sanctions on a number of countries that have not been quick to accept US primacy in all regions of the world. This power is further enhanced due to a longstanding agreement in which oil-producing Arab states—primarily Saudi Arabia—use dollars for oil transactions in exchange for certain US military commitments. These so-called petrodollars further secure US dominance in the geopolitical realm.

Often, discussion about the dollar’s reserve status creates a false dichotomy between total domination of the global monetary system on one hand and complete abandonment of the dollar on the other.

A more likely scenario is that the dollar will weaken considerably but will remain among the most often used currencies. After all, even after the pound sterling lost its status as reserve currency in the 1930s, it did not disappear.

For example, let’s say the US dollar sinks to 40 percent of all foreign reserves and is only used in one-third of all international trade invoices—instead of one-half, as is now the case. This would not necessarily destroy the dollar or the US economy, but it would certainly weaken the US regime’s geopolitical position. As global infrastructure around other currencies grows, it will become easier for regimes and private firms to circumvent US sanctions. Perhaps more importantly, a world less awash in dollars will mean a world with less demand for US assets such as US government debt. That means higher interest rates for the US government and less of an ability to finance elective wars by inflating the currency.

In other words, even a weakening of the dollar’s global demand will limit the US regime’s ability to throw its weight around internationally. This is why in a recent interview with Fox News, US senator Marco Rubio worried that if other countries are using their own currencies in trade, “we won’t be talking about sanctions in 5 years . . . because we won’t have the ability to sanction them.”

This doesn’t require the full collapse of the dollar. It just requires a framework for other currencies. It will take a while, and some attempts will fail. But those frameworks are being built now, and not all of them will fail.

For obvious reasons, then, the US regime wants to maintain the US dollar’s status. If the US regime were motivated to ensure economic prosperity and security for Americans, it could easily do so. All that is required is to end the US central bank’s easy-money policies, reduce monetary inflation, and rein in deficit spending. This would immediately buttress both the real and perceived value of the dollar and make the dollar far more attractive as a currency that holds its value. Moreover, the US regime could ensure continued widespread use of the dollar if it stops using the dollar to bully other regimes and wage economic war on every regime that annoys the foreign-policy establishment. Without the dollar’s weaponization—especially with reduced monetary inflation—there is very little motivation to abandon the dollar in favor of other currencies. After all, most other regimes inflate their own currencies at least as much as the dollar and engage in widespread deficit spending. Economically, the dollar remains less turbulent than both the euro and yen. So long as Washington does continue to weaponize the dollar, however, other regimes will have good reason to escape the dollar system.

It’s difficult to see how the US regime will abandon this status quo any time soon, however. Washington is addicted to deficit spending, monetary inflation, and international meddling in the name of US primacy and war. It won’t stop until domestic inflation becomes politically unbearable and foreign states finish building off-ramps from the dollar system.

This purported imminent replacement of the dollar with the RMB, however, is not going to happen any time soon.

Not so sure I agree with his rosy take. Fads have a habit of taking seed and spreading like wildfire. This is especially true when the U.S. has abused the privilege as they have recently, coupled with their out-of-control hegemony around the world.

France is in talks now, and the EU will follow closely behind sooner than later, is my prediction.

It was one thing when America was respected. That respect has totally eroded under Biden.

Stolen elections have severe consequences, and the world knows that the 2020 election was stolen.

As I pointed out on a similar thread: The CCP keeps the Yuan pegged to the Dollar in a range of 6-8 Yuan per Dollar. They will not allow the Yuan to rise more than that, and they will flood the market with Yuan while buying up Dollars to maintain that range. Until China decouples the Yuan from the Dollar, then the Dollar is still underpinning all of the transactions made in Yuan.

My previous post:

“ If China manages to convince the world to trade in Yuan, it will have to decouple the Yuan from the dollar at some point. When that happens the Yuan will rise, and everything made in China will become more expensive by default.

People can talk about how bad it is since the dollar is the world’s reserve currency, but no other nation wants to have that responsibility. The world’s reserve currency will always be at a competitive disadvantage when compared to the other economies. This is why so many American jobs have moved overseas.”

President Trump threatens the Deep State and the $$$ faucet. I remember Rush mentioning, during the 2007-8 financial debacle, that the Fed issued trillions of $$, but would not disclose the recipient(s). The current Obama / Biden Regime is printing and stealing as much as possible before the spigot is shut down. Yes, they will do whatever they can to stop President Trump, DeSantis etc, in order to make the $$ faucet neverending. If President Trump manages to win in 2024, the months between election day, and before he takes office Jan 20th will be very interesting, and dangerous. SloJo will be placed back in the basement. Obama and his Deep State, Ruling Class minions will continue to damage everything they can.

Of course they all know, everyone knows except biden.

I wish that were true. Not even sure that is true with all Freepers. I've seen some real doozies bantered around on this board since 2020.

Just as I have seen this topic being bantered around that mirror this article's opinion regarding the loss of the dollar as the world's currency.

They think it's no big deal whatsoever. Now I'm no financial genius, but even I see that a currency backed by only the full faith & credit of a nation in rapid decline, is not exactly a confidence builder. Especially when they also see the leaders have no intention whatsoever to rein in their out-of-control spending habits. We've become just another shithole, and no longer a leader amongst nations.

We sit idly by and let it crumble. Time to take to the streets like they are doing in France, and perhaps even other nations around the world?

With suppression of what is taking place in the world, it's no wonder people are sitting on their rumps. If it weren't for the internet, we wouldn't know a lot of what is happening, and there are many people who don't get their news from the internet. While there are others that refuse to accept some of what is out there because they are afraid to accept the truth, and thus dismiss a lot as nothing more than unfounded conspiracies. They've been conditioned to reject any thing that they haven't heard being told on the mainstream media outlets. If it's not reported there, then they are just a pack of lies, as far as they are concerned.

Every dollar not required for international trade will have to find a place to go.

There are two parts of the equation. The first is the money banks (or money changers) will lose their cut of the transactions. This will hit the money center’s bottom line. A little at first, but then more and more.

The second is that the intermediary banks (central banks or money banks) will not need as many dollars in reserve. They will adjust their reserves accordingly. This means they could sell their dollars for other assets. More dollars flowing right back to the US will cause inflation.

Again…this will happen slowly. But once it gets on a roll, it will be difficult to stop.

While what you say may be true, in reality though it's meaningless.

Here's why.

There is far more at play here than just currency. There is also hegemony at play. Perception also plays a big role in the decision making process.

The perception is that China is on the ascent while the U.S. is in decline, and that the decline is gaining momentum with each passing day.

Staying or going is a risk. Which risk is the safer risk? Which risk is projecting the more dominate stance? Which risk is projecting a hyped stance, but also shows much weakness overall?

I believe most will see China as the stronger of the two for many reasons.

The U.S. has destroyed her infrastructure to create & build, by moving their factories out of the nation. China has built factories and controls the production capabilities. China has also been given access to the intellectual property. Therefore they have they same capabilities in that arena as does the U.S.

China has control over their population, while turmoil rules in western nations. China has not been in a leadership role. The hegemony that the U.S. has ruled over the world for many decades now is perceived as possibly being worse than that China might bring to the world. After all, they abandoned people in Afghanistan with little care for doing so. Now the U.S. has gotten them into another proxy war with Russia. That conflict is also not going as planned, and they are starting to lose support, from their citizens, for continuing down that destructive path. There are many on this board that think all is well in that conflict, but that is not the reality at all. The cracks are beginning to show themselves, and will only increase as the conflict drags on.

You see, not always is the devil you know preferable over the devil you don't know. So, you take a chance. I think the world is tired of taking its marching orders from the the U.S. Not saying they are making the correct move, just saying that the likelihood for seeking change just might be ready to take the risk.

When it does, the damage it will do to this nation will be swift & devastating. The world will ignore the pain the U.S. citizens will experience. For the majority of people will only remember the bad they perceive the U.S. did to the world, not the good that the U.S. did for the world.

It's fashionable now, even within the U.S., to blame the U.S. for all the world's ills. Those now in control are among the biggest cheerleaders of that anti-American belief, and they are the same ones who made that belief believable with their very own actions to denigrate this nation, convincing the world that the U.S. is evil. Because under their control, the U.S. is trending greatly towards evil, and away from goodness.

I respectfully disagree with your fundamental precepts. Having worked along side and lived next door to many Chinese immigrants over the years, I have come to realize there is no way they will ever best the United States.

What they have now is due to theft of our intellectual property, and their basic skills, while deeply honed, are an inch wide and a mile deep. Within the inch, they are excellent, but outside of that, they are lost.

My Chinese neighbor was amazed that I knew how to operate a chain saw … something every American man prides himself on being able to do. Instead, my neighbor has no option but to call and wait for the man. Meanwhile, I have done the job and moved to the next one.

Such people can never lead; they can only follow.

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