Let me know if you heard this one: the USD is dying.
That is conventional wisdom in some circles. Unfortunately, it is hyberhole as well as being wrong. The USD is the world's reserve currency, backed by the largest economy, and part of the most financialized economy in history.
Many feel that the United States will lose this status and I would agree with this sentiment. There are some challenges to that happening, which can be overcome but might take time.
The first is that China is the likely candidate. That economy will surpass the United States, probably within the next 10 years. Thus, it will have the largest economy in the world and should pull away from the U.S. by having a larger growth rate.
This is a similar situation to what happened when the United States took over Britain and the Pound as the reserve currency. To start the U.S. economy eclipsed Britain so this mirrors it.
However, there was something else that took place. The United States banking system became more advanced than that in Britain. It was this point that gave the U.S. the lead. Most major projects started to turn to U.S. banks, something that still holds true today.
China is in an interesting situation on this point. Right now, few trust the Chinese banking system. The secrecy that takes place does not endear confidence on an international scale. Over time, we will likely see this change especially as China further integrates Hong Kong into the equation.
All of this is going to play out over the next decade. There is, however, something that extends even longer term.
The United States economy is an overly financialized one. We never have see anything like this in the history of the world. Part of the problem with the advanced banking system is they just keep creating, basically new forms of debt. This has meant there is a lot of paper out there.
While it is likely that a lot of this will end up in default, not all of it will. And that is the built in protection for the USD.
In short, there are trillions of dollars in debt out there where repayment will be made in dollars. It is part of the contract and will take place over the next 30 years. In fact, the US would be smart to offer out 40 or 50 year bonds to ensure the longevity of its currency.
Looking back at the British Pound, the country lost its lead by 1920 but, 30 years later, more than half the money around the world were Pounds.
The recent crash in March saw something interesting. There was a resounding announcement by the trading community what they feel safety is: the USD. This will not always be the case but it was for now. Even with all the money printing the last few months, there is still a shortage of USD around the world.
We obviously will see the move from fiat currency at some point. However, it is important to remember that not all fiat is created equal. The USD is much different than, say, the Venezuelan Bolivar. In fact, the same is true for the USD and the Euro. They are world's apart.
So while we will see the impact of the USD diminishing, it will be a long time before we see the USD disappear.
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