Nothing appoints the dollar a reserve currency, it's use makes master. It's 50% of reserve worldwide, the Euro is 20% and a range of currency follows.
It can change. Breton Woods isn't physics, its a social construct.
It can change. Breton Woods isn't physics, its a social construct.
Like theoretically, assume all countries can’t collapse. Should the reserve currency be primarily the countries with the most people? (think China/India/Indonesia/Nigeria) Most natural resources? (think Australia, China or Russia) Historical power? (UK) Linguistic network? (France)
Can we even derive a normative answer?
Do non-national currencies differ to national ones?
I’m not the biggest fan of economists, but I feel like research does need to be done here…
The present situation is one where if one wants oil, which everybody does and has nothing to trade directly with the oil countries, must export something to someone else who either exports or sells something to the oil countries, or who in turn exports or sells something to someone who exports or sells something to the oil countries. I believe that once this ends trade itself will become less important. Today it's mandatory to get oil, but once we don't need oil, the export of goods to acquire dollars to buy oil becomes optional.
Consequently I see the future as one in which people will manufacture what they themselves need or want, instead of what sells abroad.
And even when they can, comparative advantages are still a thing.
That being said, I do agree that with a reduction in the need for oil, the importance and use of a reserve currencies will reduce even if they don’t go away fully.
Personally, my money is on semi-conductors. It’s currently sitting at #4 in total international trade value, behind automobiles (which are increasingly reliant on semi-conductor inputs), refined oil, and crude oil.
Certainly casts a new light on contention over Taiwan.
Secondly, these technologies usually have stages developed by different people. Microchips are a chain: different components from Europe, Japan and the US are put together into actually usable factories in Taiwan, South Korea, the US etc. The whole chain is needed. Obviously the US recently succeded in some bullying against Taiwan, but I think it was mostly about demand, threats of tariffs, that kind of thing, and I think that kind of threat again matters only because exports are necessary because of the oil trade. It'll be harder to bully with tariffs when trade matters less.
I also think bullying countries capable of doing useful semiconductor work is less possible, and I also think countries like China will catch up, so that much will be commoditized.
I see thing as being like the end of the bronze age. With iron there's nothing to control, so there's no path to power, with decentralization and independence as the result.
Foreigners sell you things in exchange for your currency, because they want to hold the currency. Once a currency is usable for payment in taxes, it can be analysed like any other commodity.
There are no 'reserve currencies'. Anybody holding a financial asset in a denomination outside its home physical zone area is a 'reserve'. They are operationally no different from hoarding diamonds or gold bars.
The US can effectively tax the world as long as they use their military power to ensure oil producing countries denominate their oil exports in US dollars.
The reserve currency system is a stealth tribute system.
It's like asking which is the best CPU when you discount speed, price and energy consumption.
Nation states need to be able to make huge transactions without any one else holding the currency feeling it. That is what makes the reserve currency the reserve currency.
That can't be done without a massively liquid bond market and no one else is even close to the US.
Then the network of military bases and military power is just another layer on top of the US bond market.
Then on top of that the top competitor has capital controls.
There is signal under the noise of political and military factors
Political and military factors right now are the primary concerns
But in peace time, or with a long enough view (centuries and millennia) the question of what makes a good reserve currency is a question worth addressing
Exports are more "expensive" for countries with reserve currency status. This is a problem for countries that export many primary and "low-tech" secondary sector products. Countries that export many "high-tech" secondary sector products can usually still thrive.
This leaves us with the usual suspects: US, China, Germany (-> EU) and Japan.
Perhaps none, as Keynes suggested at the actual Bretton Woods conference:
That may not be the complete story, and will likely not hold up forever, but the complexity should not be understated.
Hundreds of US military bases around the world makes sure that no "stupid" leader of some nation makes a decision to switch from US dollar for international trade.
Those who dared to attempt to give up USD for trade, died horrible death like Muammar Gaddafi. It's a direct message to the remaining leaders: "Don't even think about it"
The US reserve currency system allows the US to tax the world, whenever they print more dollars, via oil price inflation. Anyone without sufficient military power who tries to stop denominating their oil exports in US dollars ends up with freedom and democracy being brought to their country. Saddam Hussein switched to denominating Iraqi oil exports in Euros. Gaddafi tried to establish a pan-African gold-back dinar to denominate African oil exports in. And look how it turned out for them.
It’s a stealth tribute system. If you stop paying your tribute, the empire responds accordingly.
I mean the global banking system does, along with lots of treaties that make things conditional on using the dollar.
none of them insurmountable, as we'll soon see when the US experiment gets frustrated by the Fed.