by Ben Gardiner
For decades, the US dollar has been the world's primary reserve currency for international trade and investment. However, in recent years, there has been a gradual shift away from the dollar. This change has become a topic of heated debate and has placed the US economy in an alarming position, with potential consequences for its economic dominance.
Prior to World War 2, all major currency was backed by gold reserves. However, in the decades before and after the war, countries spent enormous amounts of money funding their war efforts by buying US imports thus draining their gold reserves. As a result of this the US held almost 2/3 of the world’s gold reserves which ruined many currencies. To combat this, allied forces came together to sign the Bretton Agreement which declare that the USD would be the world’s primary reserve currency. The result of this agreement was that all international trade was carried out in USD and countries flocked to buy up safe and stable US treasury bonds. In the decades that followed, the US experienced incredible stable and economic growth primarily due to the strength of the USD and low cost to borrow money funding government projects.
The Drivers of De-Dollarization
The major threat of de-dollarization could be from China's rise to economic power. As China's economic growth continues to outpace other Western countries, it is becoming the dominant force and trade partner for many countries. In the past 20 years the percent of countries who’ve traded more with the US than China has dropped from 80% to 50% showing a drastic switch in global trade dynamics. For example, Brazil has opted to ditch trading through the USD and wants to trade directly with the Chinese in the yuan since China ($150bn) is a larger trading partner than the US ($90bn).
Implications of De-Dollarization on the US Economy
Reduced demand for US dollars could result in a decline in the value of the dollar, which could have significant consequences for the US economy, including higher inflation and import costs. Additionally, the US has long benefited from seigniorage, the profit made by issuing currency, due to the dollar's role as the primary reserve currency. Studies show that on average this economic effect brings in approximately $7 billion in US revenue. Finally, the dollar's status has allowed the US to exert significant influence over the global economy. The US can decimate political opponents by economically sanctioning them or drastically limiting their trading partners and reduce economic growth. However, this is only possible if the countries are dependent on USDs. A decline in the dollar's prominence could diminish the US's ability to shape international economic policies.
Strategies for the US to Adapt and Maintain Economic Dominance
To maintain economic dominance, the US must focus on strengthening its domestic economy to bring trade back to the US, requiring that countries buy USD. Strengthening the US economy is no easy task, but by investing in infrastructure, education, and innovation, the US remains an attractive destination for investment and trade. Additionally, the US must engage in multilateral diplomacy, working with other nations to create a more inclusive and equitable global financial system, fostering goodwill and cooperation rather than relying on economic coercion. Finally, the US should lead the charge in the development and adoption of digital currencies, ensuring that it remains at the forefront of financial innovation.
De-dollarization poses a significant challenge to the US economy, but it also presents an opportunity for the nation to adapt and maintain its economic prowess. By focusing on domestic strengths, engaging in diplomacy, and embracing financial innovation, the US can navigate the changing global landscape and remain a dominant economic force. The US must recognize the need for adaptation and work proactively to maintain its economic leadership role in the world.