David Frederick's | iAIR BLOG

Consulting, Innovation, Strategy, Vision, Education, & Ideation

The End of the Dollars Reign

The end of the U.S. dollar’s reign as the world reserve currency. This issue has been of strong interest to me for the past 5 years. Why? Because of the cataclysmic impact it would have on U.S. Businesses, the U.S. economy, and ultimately you and me and our families. Let me break this down in a very simple way.

  1. The U.S. dollar is currently and for roughly the last 50+ yeas has been the world’s reserve currency.
  2. This means when Non-U.S. businesses want to buy, import, export, or sell things globally, they have to first purchase U.S. Dollars in which to conduct the transaction. this is expensive for them.
  3. When global companies price products for the global markets i.e. OPEC, they do so in U.S. Dollars.
  4. There are many reasons for this – stability of the dollar, the track record of the U.S. of honoring its debt, treasure bonds, U.S. economic strength, etc.
  5. A huge advantage of being the United States is that since our currency is the standard, we do not have to purchase U.S. dollars to conduct business in the U.S. or globally. We don’t have to include huge risk and fluctuations of world currencies in our business transaction, the U.S. consumer is not directly subjected to global currencies fluctuations on a large daily scale. We don’t have to sell dollars to buy Yuan, Peso’s, etc. and absorb the currency difference and then sell or buy in Yuan’s, etc.
  6. This is one of the perks of being the worlds largest economy and economic leader….. until now.

With China and India becoming huge economies, # 2 and #3 respectively behind the U.S.,  it is predicted by many that in the next 10-20 years, China will surpass the U.S. and then in 10 years further, India will surpass China as the worlds largest economy. Already with huge deficits in the U.S., inflation creeping in, the cost of U.S. goods going up across the board, things are already precarious. If the U.S dollar was to be devalued further by say 20% and/or the world decides to use multiple currencies as the currencies reserve i.e. Chinese Yuan’s or Euros instead of OR in addition to the dollar, things could get real bad for a fragile U.S. economy and the impact on U.S. business and consumers could be cataclysmic.

The cost of everything we do, build, buy, sell, earn, etc. would sky-rocket to a proportion unimaginable. No this isn’t a doomsday prediction. Its reality. Already, China, Russia, France, Brasil, the World Bank, OPEC and others are all calling for and openly discussing moving away from the U.S. dollar as the worlds currency reserve. This is real folks and will most likely happen in the next 5-10 years. I personally believe the EURO and Yuan need some time to mature structurally and get its act together, but it’s coming. China and the EU are taking measures to shore up their currencies to be a viable competitor. Even having competition and multiple world currency reserves could have huge impacts for the U.S. and its people and businesses. When you look at a $14+trillion-dollar U.S. deficit, uncontrolled spending, major entitlement issues like social security, medicare, pensions, etc. unresolved and bankrupting the country, states and local governments, etc. we have our work cut our for us in the U.S. The last thing we need is a major impact to our currency status. That could be the one thing that knocks the U.S. over the tipping point of economic collapse i.e. restart and rebuild mode. The impact of that is almost unimaginable. Who will bail us out? China? No way.

Check out this related article from the WSJ where several economists from UC Berkeley discuss this very issues. Personally, I think they understate the impact to the U.S. economy, but it is a good read. Check it out here!

-DF

 

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Written by David Frederick

March 3, 2011 at 10:20 AM

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